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BT Group - strong fibre demand, outlook reaffirmed

BT Group reported revenue of 15.6bn pounds for the nine months to 31 December 2022, down 1% year-on-year.

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BT Group reported revenue of £15.6bn for the nine months to 31 December 2022, down 1% year-on-year. The decline was largely driven by a fall in sales from the Global and Enterprise divisions, somewhat offset by robust Consumer performance and gains from Openreach.

The Enterprise and Global divisions are being merged to create BT Business. Cost synergies are expected to contribute to the broader cost cutting programme, expected to deliver £3bn in savings by the end of the 2025 financial year.

Underlying cash profit (EBITDA) rose 3% to £5.9bn, as cost controls more than offset revenue declines and inflationary pressures.

Net debt was £1.2bn higher than at the end of March 2022, at £19.2bn. Underlying free cash flow fell from £900m to £100m due to an increase in capital expenditure and the timing of cash flows.

The full year outlook has been reaffirmed, with underlying free cash flow expected to be heavily weighted towards the fourth quarter.

The shares fell 2.5% in early trading.

View the latest BT share price and how to deal

Our View

Cost cuts remain the aim of the game as BT battles with higher costs from a host of angles. To be fair, management look to be doing a decent job and synergies from the newly created BT Business should help.

Nonetheless, a £3bn savings programme is a mammoth task and frankly one the market needs convincing that BT is up to.

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 and huge spending over the first 9 months of this year means 38% of that target's already been met. This technical-heavy business is unique and higher margin, and an asset to the business.

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, especially in the current higher-interest rate, 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. We were also pleased to see an agreement reached with the union over worker pay, but strike action toward the back end of last year didn't do performance any favours.

Ultimately, while BT is a strong player, 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.

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
Matt-Britzman
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 2nd February 2023