First-quarter underlying revenue was broadly flat at £4.3bn (as expected). UK service revenue fell 1% to £3.8bn, with growth at Openreach offset by declines in Consumer and Business.
Underlying cash profit (EBITDA) fell 1% to £2.0bn, as cost savings and higher Openreach profit helped offset weaker performance elsewhere.
Openreach added a record 574,000 full-fibre customers, taking total connections to 9.4mn. Total broadband lines (fibre & legacy lines) fell by 192,000 (198,000 losses expected).
Full-year guidance was unchanged, with BT continuing to target around £2.0bn of underlying free cash flow. The full-fibre network now reaches 23.4m premises and remains on track to hit 25m by December 2026.
The shares were broadly flat in early trading.
Our view
BT’s first-quarter results offered a little more encouragement on revenue, while keeping the wider investment case largely unchanged. UK service revenue came in slightly ahead of expectations, and broadband line losses were a touch better than feared, while full-year cash flow and fibre targets remain on track.
The wider strategy involves significantly modernising and simplifying operations and product lines. That includes bringing the BT brand back into parts of the consumer offering, while continuing to move customers onto the new 5G and fibre broadband networks, which have lower running costs than legacy infrastructure. Fewer repairs, better customer journeys and network efficiencies are also helping to support profits.
Cost cuts remain a long-term focus, with management targeting a leaner workforce by the end of the decade. There should also be a further benefit from lower investment as the heaviest phase of the fibre build passes. That’s good news for future cash flows, with BT reiterating its target for free cash flow to rise to around £2bn this year and around £3bn by the end of the decade.
The asset we’re most excited about is Openreach, which is responsible for maintaining and building the new fibre networks. Full fibre is now available to 23.4mn premises, though that doesn’t mean they’re all using it. Around 9.4mn are connected, giving a take-up rate of roughly 40%, up 10 percentage points in three years. BT remains on track to make the network available to 25mn premises by the end of 2026, but further growth in actual connections will be key if the investment is to deliver attractive returns.
This technical-heavy business is unique and higher margin. Broadband line losses improved from the previous quarter and were slightly better than expected. But competition remains fierce, and legacy broadband lines still make up a large part of the base, so Openreach needs to keep proving that better fibre take-up can offset pressure from older services.
The Business division showed encouraging revenue momentum, and management noted a strong order book. However, some of that upside is being reinvested in marketing, meaning the improvement didn’t flow through to profit this quarter. Structural changes and a competitive market still make this a tougher area to fix.
All in, we think BT is one of the better-placed names in the sector. But the balance sheet is still stretched, meaningful earnings growth could take time, and the valuation is now above its longer-term average, which could limit the scope for further upside.
Environmental, social and governance (ESG) risk
The telecom industry is low/medium in terms of ESG risk. Data privacy and security is the most significant risk driver, not only because customers are increasingly concerned about privacy, but also because cybersecurity breaches can be costly. Product quality is another key risk, particularly given the networks they manage are considered critical infrastructure. Carbon emissions, human capital and business ethics are also risks worth monitoring.
According to Sustainalytics, BT’s overall management of material ESG issues is strong.
BT follows strict security measures to protect personal data and has 3,600 cybersecurity employees. Greenhouse gas reduction policies are strong, including net zero alignment, emissions reduction coverage, audits and verification. BT scores well on board structure, shareholder rights, remuneration, audit and financial systems, and stakeholder governance.
BT key facts
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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 LSEG. 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.
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