ii view: BT pushes profit estimates higher

Is a focus on investment at the expense of the dividend beginning to work?

First-half results to 30 September 2020

• Revenue down 8% to £10.6 billion
• Adjusted profit (EBITDA) down 5% to £3.72 billion
• Dividend payment previously suspended

Guidance

• Now expects 2020/21 adjusted profit between £7.3 billion to £7.5 billion, up from £7.2 billion to 7.5 billion
• Expects full-year 2022/23 adjusted profit of £7.9 billion  

Chief Executive Philip Jansen said:

"Customer demand during the pandemic has shown how critical our networks have become, and our significant network investments have helped us double the number of Openreach's Fibre-to-the-Premises (FTTP) orders compared to this time last year and have seen our leading 5G network expand. We continue to invest to make BT more competitive and I'm pleased to see the quality of our products and services improving. 

"This performance has given us confidence to raise the lower end of our Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) outlook range for this year and publish an EBITDA expectation of at least £7.9 billion for 2022/23, with sustainable growth from this level forward. The growth in EBITDA underpins the planned reinstatement of our dividend next year whilst ensuring that we can continue to drive value-creating investments in our networks and products."

ii round-up:

UK fixed line and mobile operator BT Group (LSE:BT.A) today edged higher its full-year profit estimates for both this year and next as its investment programme gained momentum. Lower sales and profits for the pandemic-hit first half broadly matched city expectations.

BT shares rallied by more than 7% in early UK trading having fallen by over 40% year-to-date. Earlier in the year BT suspended its dividend payment in favour of required investment for the ongoing rollout of both its fibre broadband and 5G mobile networks. 

Shares for rival Vodafone (LSE:VOD) are down by around 30% in 2020 while shares for TalkTalk (LSE:TALK) and Telecom Plus (LSE:TEP) have fallen almost 20%. 

Its fibre broadband customer base rose by 60% year-over-year. Rollout reached record levels in the second quarter, averaging 40,000 premises per week and taking the number of premises passed to date to 3.5 million. Its 5G network is now live in 112 towns and cities, up from an earlier 80, with a ready customer base of over a million.  

The group’s modernisation programme has generated just over £350 million of annualised savings. BT’s own current full year adjusted profit estimates rose to between £7.3 to £7.5 billion from £7.2 billion to £7.5 billion. Next year’s guidance of £7.9 billion compares to current city estimates of £7.6 billion. 

Sports rights rebates left adjusted profit down only 2.9% in the second quarter compared to a fall of 7.4% in the first quarter. Third quarter results are scheduled for 4 February. 

ii view:

Government pressure and the huge expenditure required to roll out its fast fibre network to the whole of the UK by 2025 weighed heavily in 2019. Add in the cost of both upgrading its mobile phone network to 5G and already high net debt, and speculation regarding the dividend began to grow.

Then the arrival of Covid-19 forced just such a decision. Full-year results to the end of March saw BT both suspending the dividend for the current financial year while rebasing or halving a planned dividend for next year. 

For investors, the previous dividend decision is clearly a major blow. BT’s cash generating qualities have over the years made it appealing to income seeking investors. But today’s profit upgrades look to offer early tentative hope that the tough dividend decision could be paying off.

Progress on its fibre broadband and 5G mobile network expansions is being made. For now, while there is still much for BT to achieve, more speculative investors might begin to accumulate holdings.  

Positives

• Government previously pledged £5 billion to assist fast broadband rollout
• Modernisation programme annual cost savings of £352 million

Negatives

• Dividend payment suspended
• Revenue or sales down 8%

The average rating of stock market analysts:

'Buy'