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BT - dividend held as fibre investments ramp up

George Salmon | 9 May 2019 | A A A
BT - dividend held as fibre investments ramp up

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BT Group plc Ordinary 5p

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BT's adjusted revenue fell 1% to £23.5bn, with cash profits as measured by EBITDA down 2% to £7.4bn. While both figures are ahead of the mid-point of BT's prior guidance, the outlook for next year is slightly weaker than some had expected.

The full year dividend remains unchanged at 15.4p per share, and while investment in infrastructure is stepping up, BT expects that level to be maintained in 2019/20.

The shares were little moved on the news.

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Our View

New CEO Philip Jansen has made improving Openreach's reach his first priority.

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.

While there's likely to be a fair bit of wrangling with the regulator over the terms of expansion, the new CEO has said spending on the asset base will remain stubbornly high, at around £3.7bn to £3.9bn a year. That's likely to prevent the dividend rising in the short-term.

But that's not as bad as it might seem. There were a few out there who'd feared a cut, and when the shares offer a prospective yield of 6.8%, BT doesn't need to offer much dividend growth.

For long-term investors, the question is, can it sustain that payment, and find a route to growth down the line?

Cost-cutting will be one way the group tries to boost profits. Outgoing CEO Gavin Patterson described the group as 'too complex and overweight'. £1.5bn of annual cost savings and will hopefully see BT emerge as a leaner, more joined up business.

But it won't be as simple as that. While Openreach is getting the lion's share of attention, there are ongoing issues to address elsewhere too.

Tough smartphone and broadband markets are hitting the Consumer division, and Enterprise and Global Services are having to adapt to rapidly-changing environments. All the while, a multi-billion pound pension deficit will soak up funds.

Still there are some reasons for optimism. We think the spending at Openreach can be justified by the profits from providing the fibre infrastructure the UK needs. There's potential for the Consumer businesses too. BT has proven adept at bundling home, TV and broadband, together, and successful marketing could drive further gains.

Given that BT shares currently trade on 8.6 times expected earnings, well below their recent average, there's recovery possibilities.

However, in addition to realising the potential of the Openreach and Consumer divisions, BT will have to transform the business-to-business divisions. That could prove a challenge. Customers are finding more up to date means of communication, and there's no guarantee these divisions can capitalise on new opportunities.

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Full year results:

The Consumer division saw revenue increase 3% despite a slight dip in average revenue per customer, impacted by high levels of competition. Good cost control ensured adjusted EBITDA rose 7% to £2.5bn.

BT's Enterprise division has been impacted by ongoing declines in fixed voice revenue, dragging adjusted revenue down 5% to £6.3bn. However, an improved sales mix and lower operating costs means EBITDA declined just 3%, to £2bn.

In Global Services, EBITDA rose 17% to £505m, despite a 6% fall in adjusted revenues. That came as BT scaled back low margin business, and reduced the operating cost base by 8%. Order intake has dipped 3% to £1bn, as customer shift to more flexible payment models.

EBITDA fell 11% to £2.4bn at Openreach, as price reductions in fibre and ethernet products saw revenue fall 4% and costs rose on account of higher training and recruitment expenses. Capital expenditure increased 22% to £2.1bn as BT steps up the build-out of the fibre network.

Group free cash flow fell 18% on an underlying basis to £2.4bn. That reflects declines in all divisions other than Global Services, in particular increased investment in Openreach.

Net debt rose £1.4bn to £11bn, mainly due to the extra £2bn contribution to the BT Pension Scheme.

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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.