ii view: BT’s big investment spend nears completion

First-quarter results to 30 June

• Revenue down 3.4% to £4.88 billion
• Adjusted profit (EBITDA) down 1% to £2.05 billion
• Net debt of £19.8 billion as of late March

Guidance:

• Continues to expect full-year revenues of £20 billion versus £20.36 billion last year
• Continues to expect full-year adjusted profit of £8.2-8.3 billion versus £8.2 billion last year
• Continues to expect full-year cash flows to remain flat at around £1.5 billion
• Continues to expect cash flows to grow to £2 billion by 2027 and to £3 billion by end of the decade

Chief executive Allison Kirkby said:

"We're seeing strong customer demand for our next-generation broadband and mobile connectivity across all our brands, with record Openreach fibre take-up again this quarter. And we're delivering on our transformation, as we radically simplify our business while improving customer experience.

"BT is investing more than anyone else in the nation's networks, we're connecting customers faster, and we're on track to deliver our targets for this year, next year, and the end of the decade.”

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ii round-up:

BT Group (LSE:BT.A) operates across three divisions. The Consumer division highlights itself as the UK’s largest provider of consumer mobile and fixed broadband communications services. It serves more than 25 million customers through its brands BT, EE and plusnet and via a network of over 400 UK high street stores.  

The Business division connects companies and public sector organisations along with managing IT infrastructure networks for them in both the UK and overseas. 

BT Openreach manages the group’s fixed networks including mobile phone masts and physically connects homes and businesses across the UK. It manages both the copper phone line network and is rolling out fast full fibre broadband across the UK. 

For a round-up of these latest results announced on 24 July, please click here. 

ii view:

BT’s full fibre broadband (FTTP) network now passes more than 19 million homes and businesses, with 7.1 million premises now connected. BT is working to extend that to 25 million premises by December 2026 and up to 30 million premises by 2030. Its 5G mobile phone network is now available to over 87% of the UK population. 

Openreach generated the company’s biggest chunk of adjusted profits during its last financial year at almost half. That was followed by the Consumer division at close to a third and Business the balance of almost a fifth. Group competitors include Vodafone Group (LSE:VOD), O2 owner Telefonica SA (XMAD:TEF), Comcast Corp Class A (NASDAQ:CMCSA) owned Sky, TalkTalk owned by Toscafund, and Gigaclear, principally owned by Infracapital, the infrastructure equity investment arm of M&G.

For investors, intense competition continues to see BT forecasting line losses of 900,000 for the year ahead. A potential sale of TalkTalk could see its connections provided by BT going to a competitor. A forecast price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap, while group net debt of £19.8 billion as of late March compares to a stock market value of around £20.5 billion.    

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On the upside, management’s predicted decline in capital expenditure over the medium term is expected to boost group cashflows, increasing financial flexibility and potentially enabling a paying down of debt or an increase in the dividend, or even both. Although volatile, growth in mobile and broadband customers plus a smaller-than-forecast drop in Openreach line losses are not to be ignored. Reductions in staff and energy usage and a push to use AI in customer services continue to underpin a targeted £3 billion cost reduction programme by 2029, while a major share stake held by Indian conglomerate Bharti Enterprises adds some speculative interest. 

On balance, and while investment expenditure remains an overhang, the bulk of the spending is nearing a conclusion and investors will also like a forecast dividend yield of close to 4%.

Positives

• Expanding fibre broadband and 5G network
• Attractive dividend yield (Not guaranteed)

Negatives

• Intense industry competition
• Subject to regulatory rulings

The average rating of stock market analysts:

Strong hold