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BT - A better quarter

George Salmon | 27 July 2018 | A A A
BT - A better quarter

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BT Group plc Ordinary 5p

Sell: 156.45 | Buy: 156.55 | Change 0.00 (0.00%)
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BT's first quarter profits are slightly ahead of expectations, with Global Services, Consumer and Business & Public Sector surprising on the upside.

The shares rose 3.5% on the news.

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Our View

Outgoing CEO Gavin Patterson describes the group as 'too complex and overweight'. This explains why cost-cutting is a major theme. A net 7,000 jobs are going, with a target of £1.5bn of annual cost savings.

BT will hopefully emerge as a leaner, more joined up business. It's focus will be twofold. Running the attractive consumer-facing operation we all recognise as BT, and operating the infrastructure behind the digital and communication-led economy we all want.

The group is starting to bundle TV, internet and mobile contracts together successfully, so the first part of the plan is coming together nicely. It's the second part where we've seen a few false starts.

There's constant pressure to roll out more high speed internet and drive prices down. That's great for the consumer, but regulatory moves to reduce prices mean potentially lower returns for investors.

The business-to-business divisions are also struggling, with public sector revenues falling away. All the while the group's pension scheme remains a major drag on cash flows.

Revenues and profits are both likely to trend down in the short-term, while capital spending will remain stubbornly high - around £3.7bn a year for the foreseeable future.

BT can legitimately point to external factors for most of the above. However, other problems are clearly of its own making. Misdemeanours at Openreach (essentially BT unfairly delaying Ethernet installations) have led to fines and compensation payments, while improper accounting in Italy has made a few dents too.

The net effect is that hopes for 10%+ annual dividend growth have been reined in. Investors probably won't get any increases for at least two more years. But seeing as the recent share price weakness has pushed the prospective yield to almost 7%, the shares don't need to offer much dividend growth.

Openreach should remain profitable despite government meddling. The consumer business is an attractive, cash generative asset, and there's no reason cost-cutting can't be effective. That's before any potential upside from the new CEO getting the engine firing again.

Over the long-term then, we think BT should be OK. But investors shouldn't rule out things getting worse before they get better.

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First quarter trading details

Underlying revenue fell 2% as regulated price reductions in Openreach and declines in the group's business-to-business divisions offset growth in BT consumer.

Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose 1% to £1.8bn, mainly due to stronger margins in the consumer business and restructuring related cost savings.

BT's consumer business saw revenues rise 2%, driven by higher sales of top-end smartphones and increased take-up of BT Sport. With little extra cost attached, the increase flowed through to profit, bumping EBITDA up 10%, to £610m.

In the Business & Public Sector division, revenues fell 2%, as tighter regulation on EU roaming. Legacy systems is still a headwind, but the group's IP migration service is gaining traction. Profits increased slightly to £350m.

Price reductions in Openreach ensured revenue fell 2%, with profits dropping 9% to £567m as recruitment and training costs rose.

In Global, order intake fell, but most business to have fallen away was of low margin. Lower staff costs helped EBITDA rise 30% to £95m. BT is working with Cisco and Microsoft to offer more flexible, cloud-based solutions.

Wholesale & Ventures saw revenues fell 8%, dragging profits down 11% to £154m. BT says customers are moving to move modern services, but the Ventures business is delivering growth.

Net debt has increased by £2.4bn. This largely reflects a £2bn bond issue, which was used to help plug BT's pension deficit.

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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.