With the use of the internet still surging, the need for better and faster connections is increasingly important for internet users. And BT has taken notice. It has been buttressing its broadband base by improving speeds and bandwidth, and is now grabbing broadband customers faster than its chief rivals BSkyB and Virgin Media. It has also been rolling out its superfast broadband - BT Infinity - at superfast rates and this has been helping boost market share.
- Nicely placed in superfast broadband
- Cost savings coming through
- Global business improving
- Dividend uplift expected
- Substantial pensions deficit
- Fierce competition
In the third quarter of 2011-12, BT signed up 146,000 new broadband customers, representing an impressive 56 per cent of new broadband users in the UK in the period. This has taken BT's customer base to 6.1m, a 29.5 per cent market share. Of the new customers, two-thirds signed up to BT Infinity, taking the number of customers on the superfast broadband service to more than 400,000. City analysts expect BT's broadband assault to continue, and forecast that BT will have about a third of the UK's broadband market by 2013. BT's emerging strength as a serious broadband player should also be helped by acceleration of its plans to extend its fibre-optic network to cover two-thirds of the UK by 2014.
The expansion of superfast broadband also bodes well for BT's subscription TV service, BT Vision. While BT Vision still lags behind its rivals (it had 639,000 subscribers in September), it should make up ground following the launch of its new set-top-box, BT Vision 2.0, which will bring social media to its menu. Analysts at Morgan Stanley expect BT Vision's subscriptions to increase by 12 per cent this year, and 16 per cent in 2012-13.
The growth in BT Vision subscriptions is essential for BT to shore up its customer base for the so-called triple play, where customers take a bundled package of TV, telephone and broadband. This package is fast becoming the key battleground for telecoms and television providers, as it locks customers into lucrative contracts, driving up average revenues per unit (ARPU). BT's ARPU is already benefiting from its broadband popularity, rising from £309 in 2010 to £337 in 2011.
BT (BT.A) | ||||
|---|---|---|---|---|
| ORD PRICE: | 214p | MARKET VALUE: | £16.6bn | |
| TOUCH: | 213.8-214p | 12-MONYH HIGH / LOW: | 217p | 158p |
| DIVIDEND YIELD: | 3.7% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 4p | NET DEBT: | £7.7bn | |
| Year to 31 Mar | Revenue (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 20.7 | 1.98 | 21.5 | 15.8 |
| 2009 | 21.4 | -0.24 | -2.5 | 6.5 |
| 2010 | 20.9 | 1.01 | 13.3 | 6.9 |
| 2011 | 20.1 | 1.72 | 19.4 | 7.4 |
| 2012* | 19.5 | 2.42 | 24.2 | 8.0 |
| % change | -3 | +41 | +25 | +8 |
Normal marker share: 12,500 Matched bargain trading Beta: 1.0 *Morgan Stanley forecasts | ||||
Meanwhile, the group's once troubled global services business, which prompted a series of profit warnings in 2008 and 2009, is recovering. Revenues from global services slipped by 4 per cent in the quarter to £1.89bn due to the impact of an earlier-than-expected recognition of a £60m contract in the previous quarter. But cost-cutting meant the division still narrowed its losses from £35m to £25m in the three-month period. In the first nine months of 2011-12, BT slashed £700m off the division's operating costs and further cuts are in the offing. For example, another £60m in savings has been identified through changing the development and delivery processes of products and reviewing the consumer sales team. Contract wins have also gained pace, with total order intake in the first nine months valued at £1.6bn. Expansion into the Asia Pacific and Latin America is starting to bear fruit, too, with a 50 per cent uplift in the order intake from these two regions. As a result, global services may well be profitable in 2012-13.
However, management must also address the issue of the £4.1bn deficit in BT pension funds. BT has confirmed its pensions contributions for the next three years; despite this, some analysts think BT could make an early payment into the scheme to offset the effect of a high rate of corporation tax on last year's profits. But that should not stop the dividend rising by 25 per cent to 10p in 2012-13, producing a pretty useful 4.7 per cent yield.
