BT Group plc (BT.A) Ordinary 5p
HL comment (31 July 2020)
BT's first quarter revenue fell 7% to £5.2bn as COVID-19 hit BT Sport and the Enterprise division. Adjusted cash profits also fell 7% to £1.8bn thanks to the fall in revenue and continued investment, partially offset by cost savings. Normalised free cash flow was negative, at -£49m, compared with a £323m cash inflow last year, primarily due to the timing of payments.
BT expects full year revenue to fall 5-6% and cash profits to be between £7.2bn and £7.5bn.
The shares were broadly flat following the news.
BT has decided to shelve dividends for now. When the dividend resumes next year it will be at half the current 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. However, we'd expect BT Sport revenue to recover now that sport is getting going again and pubs are starting to reopen.
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 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
- 12m forward Price/Earnings ratio: 5.4
- Ten year average 12m forward Price/Earnings ratio: 10.5
- Prospective yield: 2.3%
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First quarter results (figures on an underlying basis)
Consumer revenue fell 7% to £2.4bn as the sporting drought during lockdown reduced revenue from both pubs and households. Lower store revenue was partially offset by a rise in digital sales and lower customer churn. The fall in revenue and increased investment caused cash profits (adjusted EBITDA) to fall 15% to £501m.
In Enterprise revenue fell 9% to £1.4bn due to ongoing declines in legacy products and lower small business activity thanks to COVID-19. Cash profits fell 13% to £406m as a result, partially offset by some cost savings. BT expects further challenges in this division as small business insolvencies rise and large businesses slow down their decision making.
The Global segment saw revenue fall 9% to £990m as management pivoted away from low margin business and COVID-19 reduced activity. However, cash profits rose 1% to £141m as cost saving actions more than offset the fall in revenue.
Openreach revenue rose 1% to £1.3bn thanks to growth in the rental base, particularly fibre, partially offset by price reductions. Cash profits rose 2% to £729m as rising costs partially offset revenue growth.
Net debt rose £0.2bn to £18.bn during the quarter. Excluding lease liabilities net debt rose £0.4bn to £11.7bn. Capital spending was down marginally to £927m.
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 Thomson Reuters. 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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