BT Group plc (BT.A) Ordinary 5p
HL comment (4 February 2021)
BT's revenue for the nine months ending 31 December fell 6% to £16.1bn, following a 5% fall in the third quarter. Underlying cash profits EBITDA) fell 5% to £5.6bn for the nine months as a whole.
EBITDA guidance for the full year remains unchanged, at £7.3bn to £7.5bn. The lower end of the cash flow guidance was raised, and the group now expects £1.3bn to £1.5bn in free cash.
The shares rose 2.2% following the news.
BT has decided to shelve dividends for now. When the dividend resumes it will be at half the previous rate. Management has taken this step because it needs to invest heavily in the next stage of its transformation process - disruption caused by COVID-19 is secondary but may have contributed to the size of the cut.
BT Sport revenue fell as live sport was put on hold during the lockdown, which is hurting pubs & clubs and advertising revenue. We'd expected BT Sport revenue to recover now that sport is going again and many pubs are back open. But the recovery wasn't as strong as we'd hoped and it looks like the second wave will halt progress. Premier League fans' resistance to Pay Per View won't have helped either.
BT's also worried about insolvencies among its smaller corporate customers, and Openreach trading is forecast to suffer as upgrades are put off. Generally though, the group's key revenue engines should keep humming and we doubt coronavirus will disrupt management's plans too dramatically.
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 new 5G and fibre broadband networks. Management are aiming to reduce costs by around £1bn each year by 2023, rising to £2bn each year from 2025.
However, substantial improvements don't come free and BT will need to invest an additional £1.3bn, spread over five years. Constant investment is one of the realities of the telecoms business, as the massive infrastructure spending 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.
Another drain on cash is BT's large pension deficit, which has been soaking up available funds for some time. We see that trend continuing too. Add to that the debt pile, which cost £736m in interest payments last year, and the demands on cash are considerable.
On the other hand, BT does have its attractions. Its mobile networks are broad and generally high quality. Openreach is attractive, unique and higher margin. And BT Sport offers something that customers can't get elsewhere. However, telecoms is an inherently difficult sector in which to deliver attractive margins, and both regulators and customers will always want more for less.
Ultimately, 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: 6.6
- 10 year average Price/Earnings ratio: 10.4
- Prospective dividend yield (next 12 months): 5.4
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.
Third quarter trading update (figures for total nine-months unless otherwise stated)
Revenue in the Consumer division fell 5% £7.5bn, after a 3% fall to £2.6bn in the third quarter. Sales were put under pressure by the closure of retail stores and pubs (which reduced Sport revenue) and lower roaming data charges. Cash profits for the division fell 11% to £1.6bn.
Enterprise revenue fell 8% to £4.1bn. Management attributed the decline to Covid-19 and declining legacy products. The group also warned about the potential for higher insolvencies among small business customers in Q4. Cash profits for the division fell 12% to £1.3bn.
The impact of divestments, COVID-19, declines in legacy products and adverse foreign exchange movements meant Global revenue fell 14% to £2.8bn. Management expects continued caution from overseas customers to negatively impact results going forward. Cash profits for the division fell 4% to £440m for the first nine months, as cost savings partially offset the fall in revenue.
Openreach revenue rose 2% to £3.9bn and cash profits improved 3% to £2.2bn.
Capital expenditure was £3.0bn, up from £2.9bn last year, primarily driven by a rise in network spending. Free cash flow, including interest payments and leases, fell by £170m to £830m, reflecting the lower cash profits and higher capital expenditure. Net debt excluding leases fell £0.3bn to £11.0bn, and fell £0.7bn to £17.3bn when 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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