Interactive Investor

BT shares sink ahead of CEO handover

The shares are near a five-month low and these results are no prop, warns our head of equity strategy.

31st January 2019 11:02

Lee Wild from interactive investor

The shares are near a five-month low and these results are no prop, warns our head of equity strategy. 

In his last period in charge before handing over to Philip Jansen tomorrow, BT Group (LSE:BT.A) chief Gavin Patterson oversaw a "sound quarter of operational and financial performance". Crucially, full-year profit is still expected to make the top of guidance for £7.3-£7.4 billion.

That's a relief given the long list of banana skins that could make life increasingly difficult for BT. In the short term, expect BT to have its hands full dealing with increased regulation, fierce competition, rising costs and a drop off in contribution from legacy products. Add the threat of a no-deal Brexit to that list.

For now, though, a pick-up in trading and heavy cost-cutting is offsetting headwinds, and restructuring put in place by Patterson continues to feed through. 

Third-quarter revenue fell a little under 1% to £5.98 billion when one-off items are stripped out. BT's vast consumer business did the heavy lifting. Last September's price increases and passing higher handset costs onto customers nudged sales up 4% to over £2.78 billion and underlying profit up 15% to £643 million. It's welcome, but a broadband price war, tougher regulation and higher annual licence fees for radio frequency spectrum are just some of the problems Patterson leaves Jansen to tackle.

It's a different story at Openreach where both revenue and profit fell sharply in the third quarter. BT blames regulated price reductions among other things, plus an accounting benefit the previous year, but here, too, the list of threats is significant.

Source: TradingView (*) Past performance is not a guide to future performance

There's a lot for BT to cope with both near and long-term, and questions about the dividend will not go away. Profit is steady over the past nine months at £5.55 billion but huge investment in its fibre network reduced free cash flow by 11%. 

BT shares underperformed the wider market heading into these results and, despite appearing cheap and offering an attractive yield, the market may wish to see what Jansen has up his sleeve before backing the new man.

Under Patterson, BT took some painful decisions, axing thousands of jobs and making huge cost cuts. And it's hacking away at this unwieldy business that will focus much of Jansen's attention. He's unlikely to spin off the Openreach network division as many demand, but further cost reductions are inevitable. 

That Deutsche Telekom (XETRA:DTE) is now free to buy BT is no prop either. A few years ago, a bid might have made sense, but BT is struggling, and any sustainable recovery depends very much on new chief Jansen. The Germans have owned a 12% stake since selling EE to BT in 2015, and are unlikely to be in any rush to own the entire business at such an early stage in its turnaround. Political and economic turmoil also means there's little logic to the idea of a huge telecoms merger in Europe right now.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.

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