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BT - poor sports results continue to hurt

Nicholas Hyett, Equity Analyst | 29 October 2020 | A A A
BT - poor sports results continue to hurt

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BT Group plc Ordinary 5p

Sell: 199.75 | Buy: 199.90 | Change 0.00 (0.00%)
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BT's first half results were in line with management's expectations. Second quarter adjusted revenue fell 7% to £5.4bn, bringing half year revenue to £10.6bn - also down 7%. The fall primarily reflects lower BT Sport revenue and reduced activity among business customers. Second quarter cash profits (adjusted EBITDA) fell 3% to £2.0bn.

After successful cost control measures and "robust" demand BT has tightened its full year guidance range for adjusted cash profits to £7.3bn to £7.5bn from £7.2bn to £7.5bn. Guidance for revenue, capex and free cash flow is unchanged.

The board intends to resume dividends next year at 7.7p per share.

The shares rose 8.8% following the news.

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Our View

BT has decided to shelve dividends for now. When the dividend resumes next year it will be at half the previous rate. Management has taken this step because it needs to invest heavily in the next stage of its transformation process - disruption caused by COVID-19 is secondary but may have contributed to the size of the cut.

BT Sport revenue fell as live sport was put on hold during the lockdown, which is hurting pubs & clubs and advertising revenue. We'd expected BT Sport revenue to recover now that sport is going again and many pubs are back open. But the recovery wasn't as strong as we'd hoped and it looks like the second wave will halt progress. If widespread lockdowns are reintroduced à la France, BT Sport could be in for another rough patch. Premier League fans' resistance to Pay Per View won't help either.

BT's also worried about insolvencies among its smaller corporate customers, and Openreach trading is forecast to suffer as upgrades are put off. Generally though the group's key revenue engines should keep humming, and we doubt coronavirus will disrupt management's plans too dramatically.

The current plan involves significantly modernising and simplifying BT's operations and product line. This includes things like digitising customer journeys and moving customers onto new 5G and fibre broadband networks. Management are aiming to reduce costs by around £1bn each year by 2023, rising to £2bn each year from 2025.

However, substantial improvements don't come free and BT will need to invest an additional £1.3bn, spread over five years. Constant investment is one of the realities of the telecoms business, as the massive infrastructure spending involved needs to be consistently maintained and upgraded. We worry that even if the new plan is completely successful, BT will keep needing to shell out more to keep itself on the cutting edge.

Another drain on cash is BT's large pension deficit, which has been soaking up available funds for some time. We see that trend continuing too. Add to that the debt pile, which cost £736m in interest payments last year, and the demands on cash are considerable.

On the other hand, BT does have its attractions. Its mobile networks are broad and generally high quality. Openreach is attractive, unique and higher margin. And BT Sport offers something that customers can't get elsewhere. However, telecoms is an inherently difficult sector in which to deliver attractive margins, and both regulators and customers will always want more for less.

Ultimately, while BT is a strong player, it's in a really tough industry. It needs to leverage all of its advantages if it's to satisfy the never ending investment demands and return to dividend growth.

BT key facts

  • Price/Earnings ratio: 5.4
  • 10 year average Price/Earnings ratio: 10.4
  • Prospective dividend yield (next 12 months): 4.4

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Second Quarter Results

Revenue in the Consumer division fell 5% in the second quarter to £2.5bn, reflecting lower sport revenue (especially from pubs), significantly lower roaming revenue and the delayed launch of the new iPhone. Cash profits for the division fell 3% to £574m as some sports rights rebates and tight cost management partially offset lower revenue and increased provisions for bad debt.

Enterprise revenue fell 10% to £1.4bn largely due to divestments, declines in legacy products and fierce competition in mobile. BT expects more business customers to go insolvent thanks to the pandemic, although the extent will depend on the level of government support. Adjusted cash profits were down 13% to £427m.

Global revenue was down 17% to £926m, reflecting divestments, the impact of COVID-19, declines in legacy products and adverse foreign exchange movements. Management expects the situation to deteriorate further in the second half. Cash profits for the division fell 10% to £148m as cost savings partially offset the fall in revenue.

Openreach revenue rose 2% to £1.3bn as the rental base grew. Cash profits rose 3% to £724m, reflecting higher operating costs as BT invested in its people.

Capital expenditure during the first half was £2.0bn, up from £1.9bn last year, primarily driven by a 9% rise in spending on the fixed and mobile networks. Normalised free cash flow fell from £604m to £422m, reflecting lower cash profits, the timing of tax payments and movements in working capital. Net debt fell £0.4bn to £17.6bn, almost entirely due to lower lease obligations.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.