BT Group plc (BT.A) Ordinary 5p

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BT reported a 2% drop in full-year underlying revenue to £20.4bn. The decline was driven by weakness in its Consumer and Business divisions, which more than offset growth in Openreach and price increases.

Underlying cash profits (EBITDA) rose 1% higher to £8.2bn, driven by entirely by Openreach growth and a tight grip on costs.

Underlying free cash flow improved by 25% to £1.6bn, largely due to the favourable timing of receipts and payments. Net debt rose from £19.5bn to £19.8bn.

This year, underlying revenue is expected to decline further to around £20.0bn. Cash profits are expected to land in the £8.2-8.3bn range.

A final dividend of 5.76p per share was announced, taking the full-year total to 8.16p, up 2%.

The shares were broadly flat in early trading.

Our view

BT’s full-year results didn’t send any shocks through the airwaves. The group has continued to see tough broadband and mobile markets. But BT’s not resting on its laurels.

The wider strategy involves significantly modernising and simplifying operations and product lines. This includes switching all mobile products under the EE brand and moving customers onto the new 5G and fibre broadband networks, which have lower running costs than legacy infrastructure. Alongside fewer numbers of repairs, that’s helped benefit the profit line.

Cost cuts remain a long-term focus, and there’ll also be a benefit from reduced investment as the peak spending for the massive infrastructure buildout has now passed. That’s good news for future cash flow and the valuation, which has been under pressure for some time. Once the infrastructure is built and adopted, a much leaner operation is needed to generate long-term growth.

The asset we’re most excited about is Openreach, which is responsible for maintaining and building the new fibre networks. It hopes to reach 25mn premises by the end of 2026 and looks well on track. This technical-heavy business is unique and higher margin. For now, though, legacy broadband lines still make up the bulk of its connections, and increased competition from alternative networks, along with a softer market, are causing Openreach to lose customers.

The Business division continues to be the problem child. A combination of structural changes, higher costs, and a tough competitive landscape are making it a tricky place to operate. Cash flow margins are also a good clip lower than those of the Consumer and Openreach units. We’d like to see BT explore options to get rid of some of the worse-performing areas outside the UK – one to watch.

A major drain on cash is BT's large pension deficit. The current payment plan, which aims to remove the deficit by 2030, cost around £800mn last year. Add to that the debt and lease pile, which cost another £1.7bn to service, and the total drags on cash are hefty.

BT’s future relies heavily on getting through this major buildout phase, and to its credit, progress looks good. We think BT is one of the better-placed names, especially with a great asset like Openreach on the books. The question yet to be answered is whether all that spending is going to generate enough top-line growth to materially offset the decline of legacy products, a challenge for the entire sector to battle with.

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.

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 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.

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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