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BT - lower revenue and higher costs hit profits

Emilie Stevens, Equity Analyst | 30 January 2020 | A A A
BT - lower revenue and higher costs hit profits

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BT Group plc Ordinary 5p

Sell: 160.25 | Buy: 160.35 | Change 3.35 (2.14%)
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BT's third quarter results showed adjusted revenue down 3% on last year to £5.8bn, reflecting the impact of regulation, competition and the decline of old products.

Cash profits fell 4% to £2.0bn on increased spectrum fees, operating costs and investments.

The shares fell 4.7% on the news.

View the latest BT share price and how to deal

Our View

BT's not only the UK's leading communications company, it's got a significant global presence too. It operates through four main business units: Consumer, Enterprise, Global and Openreach.

The largest segment, Consumer, sells mobile and broadband directly to nearly 30 million people through the BT, EE and PlusNet brands. Enterprise does something similar for businesses, and Global is (unsurprisingly) BT's international segment. Openreach (a legally separate but wholly owned company) looks after the copper wires and fibre cables that connect our homes and businesses.

BT's CEO, Philip Jansen, has made expanding 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.

Tough smartphone and broadband markets are hitting the Consumer division, and Enterprise and Global are having to adapt to rapidly-changing environments. Customers are also increasingly plumping for more up-to-date means of communication. All the while, the group's multi-billion pound pension deficit is soaking up funds.

Still there are some reasons for optimism.

While it will take investment, Openreach has a chance to profit 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 help mitigate the intense price competition and heavy investment requirements that plague the sector. That's been paired with an ambitious cost cutting programme.

But there's only so far cost reduction and marketing can take you, and there's no guarantee BT will be able to simultaneously bring its B2B units up to speed, effectively navigate the tricky world of mobile & broadband provision and strike good terms with the regulators.

We think the extensive to-do list explains why the shares currently trade on 7.2 times expected earnings and offer a dividend yield of 7.3%. A turnaround could deliver significant gains, but it would be no small feat, and we'll need to see signs of progress before turning more positive.

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Third Quarter Results (figures on an underlying basis)

Third quarter Consumer revenue declined 2% to £2.7bn, and cash profits fell 4% to £620m. BT primarily attributed the declines to regulatory headwinds, but also drew attention to increased investment and spectrum licence fees. In November, BT Sport secured the exclusive rights to show certain European club football leagues, including the UEFA Champions League, until 2024.

Enterprise revenue fell 6% to £1.5bn as customers used less of BT's fixed phone lines and some assets were sold. However, declines were partially offset by growth in mobile and other internet services. Lower revenue caused cash profits to fall 4% to £490m, but both revenue and cash profits would have declined just 2% if asset sales are excluded.

BT's Global business continued to move away from lower margin and legacy products, resulting in 10% lower revenue of £1.1bn, and 10% lower cash profits of £155m. BT has agreed to sell its Spanish operations, and the deal is subject to regulatory approval.

Openreach revenues grew 2% to £1.3bn thanks to a higher rents in fibre-enabled products and Ethernet. However, this growth was offset by both regulated and commercial price reductions and higher compensation payments. Cash profits fell 1% to £722m, due to higher business rates and salary costs.

Underlying net debt was £1.1bn higher than at the start of the year, at £18.2bn, reflecting payments to the pension scheme, capital expenditure and dividend payments.

BT estimates that the government's recent decision on the role of certain vendors in UK's 5G and gigabit-capable network will cost them around £500m.

CEO Philip Jansen described the results as "slightly below expectations", but confirmed that the group remains on track to meet full year guidance.

Find out more about BT shares including how to invest

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.

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