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BT - another positive quarter

George Salmon | 31 January 2019 | A A A
BT - another positive quarter

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BT Group plc Ordinary 5p

Sell: 134.50 | Buy: 134.60 | Change -1.05 (-0.77%)
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BT's adjusted revenue (-1% to £6bn) and cash profits measured by EBITDA (-3% to £1.9bn) have dipped slightly but the results are ahead of consensus forecasts.

The group confirmed it expects cash profits to come in at the top end of previous guidance of £7.3bn-£7.4bn, but some potential headwinds, including around regulation and competition in Consumer have been highlighted.

The shares fell 1.6% in early trading.

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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. BT's targeting £1.5bn of annual cost savings. It will hopefully emerge as a leaner, more joined up business.

Its focus will be twofold. Running the consumer-facing operation we all recognise as BT, and operating the infrastructure behind the increasingly digital and communication-led economy.

Competition is a problem in phone, TV and broadband, but BT has bundled these services together successfully. That means part one of the plan is coming together nicely. It's the second bit where we've seen a few false starts.

Openreach is an attractive, high-margin business, but the regulator will always want more for less. More high speed internet connections at lower prices is great for the consumer, but limits the returns available for investors.

The business-to-business divisions are struggling, with public sector revenues falling away. The net effect is revenues and profits are both likely to trend down in the short-term.

All the while, the need to plug the multi-billion pound pension deficit will soak up funds, and spending on the asset base will remain stubbornly high - around £3.7bn a year for the foreseeable future. This means investors probably won't get any dividend increases for at least two more years.

But seeing as the recent share price weakness has pushed the prospective yield over 6%, BT doesn't need to offer much dividend growth. As ever, remembered dividends are variable and not guaranteed.

The weaker share price also means BT trades on 9.1 times expected earnings, well below its recent average. That opens the door to recovery potential.

Recent updates have been more encouraging, and that cost-cutting plan is significant. There's a couple of reasons for longer-term optimism too. Openreach should remain profitable despite government meddling and the consumer business is an attractive, cash generative asset.

Still, it remains early days in the BT turnaround and there are of course no guarantees. We'll be interested to hear what Philip Jansen's plans are, and we could find out in May.

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Third quarter trading details (figures on an underlying basis)

A price rise in BT's Consumer business helped divisional revenue rise 4% to £2.8bn, with EBITDA (earnings before interest tax, depreciation and amortisation) up 15% to £643m. However, the group says the mobile and broadband markets are tough, and expects headwinds around regulation to impact 2019/20 results.

While a volume discount offer has delivered strong fibre upgrade levels, together with regulated price reductions, it saw Openreach revenue fall 9% to £1.3bn. Higher recruitment and training costs led EBITDA down 19% to £603m.

Revenue at business and public sector division Enterprise fell 6% to £1.6bn as fixed voice and legacy product declines were only partially offset by growth in networking, IP and messaging. Cost savings limited EBITDA declines, down 2% to £501m.

The strategic decision to step back from low margin business saw Global Services revenue fall 5% to £1.2bn. However, margin improvements, boosted by savings from restructuring, saw EBITDA rise 4% to £147m.

Year to date free cash flow is 11% lower at £1,737m, mainly driven by a £239m rise in capital expenditure, which includes the fibre roll-out.

Net debt is £11.1bn, with the pension deficit at £5bn.

Find out more about BT shares including how to invest

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. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.