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BT - full year expectations unchanged

Underlying revenue rose 1% to £5.1bn in the third quarter

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Underlying revenue rose 1% to £5.1bn in the third quarter. Improved trading in Consumer and Openreach was offset by the loss of a Wholesale customer, the continued decline of older-generation products, and "challenging" market conditions which are impacting large corporate customers.

Underlying cash profits (EBITDA) rose 2% to £1.9bn.

Full year expectations are unchanged, including EBITDA of £7.9bn.

The shares fell 4.8% following the announcement.

View the latest BT share price and how to deal

Our View

BT's focus is 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 revenue growth is sluggish - things 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.

To that end, it makes sense to see BT planning to join BT Sports with the US-based Warner Bros Discovery, who will take over operations. 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. This would allow BT to be more focussed and streamlined.

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 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.

Third Quarter Trading Statement (figures are underlying)

In Consumer, revenue rose 5% £2.5bn, led by fixed and mobile service revenues - which are approaching pre-pandemic levels. Together with cost control, that meant cash profits (EBITDA) rose 20% £625m.

Enterprise revenue fell 7% to £1.2bn as challenging market conditions weakened demand from large corporate companies, and legacy products continued to decline. EBITDA fell 27% to £315m, with declines compounded by a less lucrative mix of products sold.

Last year's divestments contributed to a 1% fall in revenue to £774m in Global. EBITDA fell 6% to £96m. Price increases helped Openreach revenue rise 5% to £1.4bn, while EBITDA was 10% higher at £851m.

Capital expenditure, excluding Spectrum costs, rose 24% £1.3bn, due to cost inflation and increased infrastructure spending. Higher Capex meant normalised free cashflow fell to negative £205m, from negative £43m last year.

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: 28th July 2022