BT Group plc (BT.A) Ordinary 5p
HL comment (13 May 2021)
BT's full year underlying revenue fell 6% to £21.4bn and underlying cash profits (EBITDA) fell 6% to £7.4bn, both in line with prior expectations. Management attributed the revenue fall to Covid-19, declining legacy products and asset sales. Reported profit before tax fell 23% to £1.8bn.
In the coming financial year, BT expects underlying revenue to be flat and underlying cash profits to be between £7.5bn and £7.7bn.
BT is not declaring a final dividend for this financial year, but dividends are expected to return next year at 7.7p per share.
The shares fell 3.5% following the news.
The internet is an essential service, so even during a pandemic most of BT's key revenue engines kept humming along. However, the dividend was suspended, and when it returns next year it will be much smaller than in the past.
BT Sport revenue fell initially when sport was cancelled, but couldn't really recover without pubs reopening. Now they are, we expect the division to recover into the next season - although BT is holding talks "to explore ways to generate investment" in the division, which may mean a sale is on the cards. Covid also impacted a lot of BT's smaller corporate customers, which management expects to persist in the next financial year, and store closures meant equipment revenue suffered too.
Despite this, underlying revenue only fell 6% in the last year, which isn't nothing but could have been a lot worse and highlights the reliability of demand. This means we need to look forward at BT's plans to profit from the rollout of fibre broadband and 5G.
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 the new 5G and fibre broadband networks, which have lower running costs than the legacy infrastructure. Management are aiming to reduce costs by around £1bn each year by 2023, rising to £2bn each year from 2025.
However, substantial improvements aren't free and the savings will cost £1.3bn, spread over five years. Constant investment is one of the realities of the telecoms business, as the massive infrastructure 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. 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. We see that trend continuing too. Add to that the debt pile, which cost £770m 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. And BT Sport offers something that customers can't get elsewhere. 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 dividend growth.
BT key facts
- Price/Earnings ratio: 8.4
- 10 year average Price/Earnings ratio: 10.3
- 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.
Full year results
Revenue in the Consumer division fell 5% £9.9bn, which management attributed to the closure of retail stores and pubs (which reduced BT Sport revenue) and lower roaming data charges. Cash profits for the division fell 12% to £2.1bn, reflecting lower revenue, continued investment and bonuses to frontline staff.
Enterprise revenue fell 8% to £5.4bn, reflecting the decline of legacy products (especially reported fixed voice revenue which fell 13%), Covid-19 and asset sales. Cash profits for the division fell 12% to £1.7bn. Management expects Covid-19 to continue to impact the division in the coming year, especially with regard to SME customers.
The impact of divestments, COVID-19, declines in legacy products and adverse foreign exchange movements meant Global revenue fell 14% to £3.7bn. Excluding divestments and currency movements revenue fell 9%. Cash profits for the division fell 6% to £596m, but rose 3% if divestments and currency movements are excluded, as cost savings offset the fall in revenue.
Openreach revenue rose 3% to £5.2bn and cash profits improved by the same amount to £2.9bn. Revenue growth was primarily due to increased fibre and Ethernet sales, partially offset by declines in legacy copper products. Operating costs rose due to pay inflation, frontline bonuses and higher service costs.
Capital expenditure was £4.2bn, up 6% on last year, primarily driven by a 12% rise in network investment to £2.3bn. Normalised free cash flow, which includes interest and lease payments, fell 27% to£1.5bn, reflecting the lower cash profits and higher capital expenditure. Net debt excluding leases rose £0.3bn to £11.7bn, and fell £0.2bn to £17.8bn when leases are included.
BT has also released its Triennial Pension Valuation, which put the deficit as of June 2020 at £7.98bn. The group has agreed to plug the gap with £2bn payed over 13 years, secured against the EE business, £2.7bn paid in instalments between July 2020 and June 2023, and £600m in annual payments between July 2023 and June 2030. The group has also agreed a further £200m in annual payments to meet any increase in the deficit of more than £1bn.
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.
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