BT Group plc (BT.A) Ordinary 5p
HL comment (29 July 2021)
BT's first quarter underlying revenue fell 3% to £5.1bn, reflecting declines in the Corporate and Public Sector segments in the Enterprise and Global divisions.
Underlying cash profits (EBITDA) rose 3% to £1.9bn. All business areas saw growth except for Global. Reported profit after tax fell £446m to just £2m thanks to a one-off tax charge following the change to a new 25% corporation tax rate.
Overall, trading is in line with expectations and management is not making any changes to guidance.
The shares fell 4.8% 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, the division is recovering - 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% 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: 9.2
- 10 year average Price/Earnings ratio: 10.3
- Prospective dividend yield (next 12 months): 4.1%
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.
First quarter trading update
Revenue in the Consumer division rose 1% to £2.4bn. This was mainly due to BT Sport and higher direct handset sales as pubs and retail stores have reopened, although store footfall has not yet fully recovered. Underlying cash profits (EBITDA) for the division rose 4% to £523m, reflecting revenue growth, tight cost management and the end of a retail agreement with Dixons Carphone.
Enterprise revenue fell 5% to £1.3bn, reflecting the continuing decline of legacy products (especially reported fixed voice revenue which fell 8%) and the decline of lower margin equipment sales. Revenue was flat for SME customers, but fell in Corporate, Public Sector and Wholesale. Cash profits for the division rose 6% to £429m, mainly thanks to ''strong delivery'' on an Emergency Services Network contract, asset sales and cost control.
The impact of divestments, COVID-19 and adverse foreign exchange movements meant Global revenue fell 21% to £785m. Excluding divestments and currency movements revenue fell 12%, mainly due to lower business activity. Cash profits for the division fell 28% to £102m, or 19% if divestments and currency movements are excluded.
Openreach revenue rose 5% to £1.3bn and cash profits rose 6% to £773m. Revenue growth was primarily due to increased fibre and Ethernet sales, partially offset by declines in legacy copper products. Operating costs rose due to increased staff costs, repair volumes and provision activity.
Capital expenditure was £1.5bn, up 63% on last year. This was primarily due to a £496m investment in spectrum. Normalised free cash flow improved by £6m to a £43m outflow, as higher cash profits were offset by higher capital spending. Net debt excluding leases rose £0.8bn to £12.5bn, and stood at £18.6bn at the end of June if leases are included.
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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Previous BT Group plc updates
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