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BT - 2023 goals on track

Underlying revenue of £20.9bn was down 2% for the full year, reflecting declines in Enterprise and Global.

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Underlying revenue of £20.9bn was down 2% for the full year, reflecting declines in Enterprise and Global. Cost savings meant underlying cash profits (EBITDA) rose 2% to £7.6bn.

BT said it's on track to meet its targets for the new financial year, including underlying EBITDA of at least £7.9bn.

The group's also finalised its 50/50 joint venture with Warner Bros. Discovery. This will see the operating businesses of BT Sport transferred to Warner Bros. Discovery. The deal is expected to complete at the end of 2022, and this isn't expected to affect 2023 EBITDA.

The full year dividend has been reinstated, with a payment of 7.7p announced.

The shares rose 2.1% following the announcement.

View the latest BT share price and how to deal

Our View

The most attention-grabbing news from BT is its plan to join BT Sports with the US-based Warner Bros. Discovery, who will take over operations. This will combine sports rights including the Uefa Champions League, Premier League football, Premiership rugby, the Olympic Games, tennis and the Tour de France.

BT is set to earn hundreds of millions of pounds if the joint venture meets certain conditions. But more importantly, it gives BT a potential path to exit the business entirely. Such a move has been hinted at before, and highlights BT's desire to focus efforts on rolling out 5G mobile networks and fibre broadband.

We think this is a good area to be in. The internet and mobile networks are an essential business. BT's biggest asset is the reliability of demand, while it's a shame to see revenue going backwards - recent declines could have been much worse.

The wider plan for BT involves significantly modernising and simplifying operations and product line. This includes digitising customer journeys and moving customers onto the new 5G and fibre broadband networks, which have lower running costs than legacy infrastructure. The real workhorse for this is the group's infrastructure arm, Openreach, which is responsible for maintaining and building out the new fibre networks. It hopes to reach 25m homes by 2026. This technical-heavy business is unique and higher margin, and an asset to the business.

The wider efforts mean management were aiming to reduce costs by £1bn a year by 2023, but BT's smashed this target a massive 18 months ahead of schedule. The next phase will see cost savings of £2.5bn by the end of 2025.

However, substantial improvements aren't free. Constant investment is one of the realities of the telecoms business, as infrastructure needs to be maintained and upgraded. We worry that despite the progress, BT will have to keep shelling out to keep itself on the cutting edge. It doesn't help that telecoms is an inherently difficult sector in which to deliver attractive margins. Both regulators and customers will always want more for less.

Another drain on cash is BT's large pension deficit, and the latest Triennial Review makes for sobering reading. The new payment plan is going to cost hundreds of millions of pounds every year for most of the next decade. Add to that the debt pile, which cost £755m in interest payments last year, and the demands on cash are considerable.

BT has its attractions. Its mobile networks are broad and generally high quality, while Openreach is unique and higher margin. But 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 sustained dividend growth.

BT key facts

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.

Full Year Results (figures are underlying)

The Warner Bros. Discovery deal will see both it and BT ''directly contribute, sub-license or deliver the benefit of their respective sports rights and distribution agreements for the UK & Ireland''. BT will receive £93m, and a further c.£540m, if certain conditions are met.

Revenue was flat in the Consumer business at £9.9bn, reflecting declines in older communication products and fewer mobile contracts. This offset improvements in broadband and Sports. Cash profits (EBITDA) rose 6% to £2.3bn.

Continued declines in older products and contracts meant Enterprise revenue fell 5% £5.2bn, which fed into a 4% decline in EBITDA. That was despite ''tight'' cost control. There was also a 16% increase in capital expenditure to £569m, as BT invests in new products and the ongoing modernisation programme.

Global revenue was held back by difficult market conditions and the sale of some businesses last year. Revenue fell 10% to £3.4bn, and EBITDA was down 23% at £456m. Ignoring the effect of foreign exchange movements and disposals, EBITDA was down 14%.

Openreach benefitted from improved trading in fibre and ethernet products, and total revenue rose 4% to $5.4bn. Lower costs, including reduced repair costs, meant EBITDA rose 8% to £3.2bn.

Underlying free cash flow fell 5% to £1.4bn. Net debt, including leases, rose £0.2bn than the same time last year, and stood at £18.0bn at the end of the period.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 12th May 2022