Cash profits at BT (BT.A) are due to be significantly lower than previously expected in both the current financial year and next, thanks to a major accounting scandal at its Italian business and a slowdown in UK public sector spending. Shareholders - already on edge due to BT's Openreach battle with regulator Ofcom - sent the shares down a fifth on 24 January.
It was a whistleblower who first flagged the problems in the Italian division of BT's global services business last summer. But an external investigation has found "a complex set of improper sales, purchase, factoring and leasing transactions", leading to writedowns of £530m against a previous estimate of £145m.
Analysts are at a loss to understand why the cash profit hit has been so great when the Italian business generated less than £100m of cash profits last year out of the £6.58bn total. "The result of the improper accounting was to understate costs in the business," explained group finance director Simon Lowth. BT said it doesn't believe these issues exist in any other of the group's global services markets.
Management has been quick to place blame on the Italian senior executives - all of whom have been replaced - but it's not the first time that BT has had problems with its global services division. A large accounting write-down in 2008 cost the group nearly £2bn.
The business and public sector division is having its own difficulties. Public sector spending has slowed down and some larger contracts have closed earlier than planned, meaning the division will report a double-digit percentage decline in its fourth-quarter cash profit numbers. This, alongside a £350m cash profit hit from Italy over two years, means flat profits this financial year, but a £400m drop compared with a previous forecast of £7.6bn for 2018.
The good news is dividend growth of "at least" 10 per cent is still guided in both this and the next financial year and the rest of the business is performing well, according to chief executive Gavin Patterson. To what extent this is the case will become apparent on Friday when BT releases its third-quarter numbers.
