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BT - broadband investment stepping up

George Salmon | 2 February 2018 | A A A
BT - broadband investment stepping up

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BT Group plc Ordinary 5p

Sell: 156.45 | Buy: 156.55 | Change 1.45 (0.94%)
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BT's third quarter underlying revenues fell 1.5% to £6bn. With higher business rates and pension costs only partly offset by cost savings, EBITDA (earnings before interest, tax, depreciation and amortisation) dropped 2% to £1.8bn.

The shares fell 2.3% on the news.

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Our View

BT remains confident of hitting full year guidance for flat revenues, a small decrease in EBITDA to £7.5-£7.6bn, and adjusted free cash flow of £2.7-£2.9bn.

With last year's dividend expense at just £1.4bn, on first glance there's little reason to think the progressive dividend policy would be in doubt. Especially since the acquisition of EE gives BT a cash generative mobile offering of substance to go with an impressive TV package.

However, over the last year or so several trees have been felled in its path.

Misdemeanours at Openreach (essentially BT unfairly delaying Ethernet installations) have led to fines and compensation payments, while a few areas of the group are being shaken up in a £400m restructure. We've also seen a dramatic profit warning that revealed improper accounting in Italy and detailed a material slowdown in the Business and Public Sector division. All told, the damage is well north of £1bn.

While these costs are hopefully one-offs, there are other factors in play. Profitability in most divisions is falling while capital expenditure looks set to keep rising. There'll be costs attached to maintaining this higher asset base, and this will only add to the burden of servicing its £8.9bn of net debts and £7.9bn pension deficit.

We won't know how much BT will need to contribute to plug the pension gap until the results of the triennial pension review are announced later this year. Uncertainty also hangs over the outcome of the next Premier League rights auction and exactly what role BT will need to play in funding the government's fibre broadband revolution.

These uncertainties and headwinds mean that, having targeted dividend growth of 10%+ not so long ago, it now looks like the pace of any increases in the coming years will be more dial up than superfast.

Nonetheless, recent falls in the share price have pushed the prospective yield up to 6.3%. If BT can weather the storm ahead, this starting yield will be an alluring prospect if BT can get things back on track.

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Q3 trading details:

BT Consumer revenue was flat at £1.3bn as voice line losses offset the addition of 35,000 new broadband customers and a 5% increase in average revenue per user, which now stands at £41.30 per month. A 1% increase in operating costs saw EBITDA fall 4%.

Similarly, an increase in costs at EE saw EBITDA fall 6% despite higher postpaid and fixed broadband sales helping revenue rise 4% to £1.4bn. The BT Group mobile base ended the quarter at 29.8m, down slightly on last year as the loss of 299,000 prepaid customers more than offset the 235,000 postpaid mobile additions.

Within Global Services, total order intake was £1.1bn in the quarter, down 11% in the quarter and by 25% to £3.7bn on a rolling 12-month basis, reflecting ongoing challenging market conditions. However, a 17% fall in operating costs ensured adjusted EBITDA was broadly level with last year at £120m.

Openreach revenues were flat at £1.3bn, with strong growth in fibre broadband offset by lower copper line rental and regulatory and commercial price changes. EBITDA fell 5% to £641m. The group says it's on course to deliver 3m fibre to the premises connections by 2020. Capital expenditure of £477m in the quarter represents the majority of the £878m spent across the group.

Revenues in the Business & Public Sector (£1.1bn) and Wholesale & Ventures (£506m) divisions both saw mid-single digit percentage declines, with EBITDA falling 8% and 10% respectively.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.