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The cracks are showing at BT

The cracks are showing at BT

Does "extensive investment in customer service" justify BT's (BT.A) dismal set of results? Not really. Sure, the British telecoms giant has attracted more customers to its mobile platform EE and repatriated its call centres. But, other than that, there's very little to commend these full-year numbers to investors. Management has also slashed its normalised free cash flow guidance for the year to March 2018 and revealed that the 10 per cent dividend growth rate will not be maintained going forward.

In 2016, BT was plagued by a series of events which have blighted these numbers. The write-down of assets in the group's Italian business following the accounting irregularities there cost £245m, plus an additional fee of £15m. Openreach incurred a charge of £342m for breaching contractual and regulatory requirements in 2013 and 2014. And EE - which was acquired mid-way through the 2016 financial year - added integration costs of £123m. But, even after stripping out the one-offs, foreign exchange movements and assuming a full comparative year from EE, revenue was flat and adjusted pre-tax profits down 6 per cent to £1bn.

The underlying problems are in the public sector division where revenue fell 14 per cent in the final quarter. A handful of new deals signed in the period has not been enough to offset the high number of large deals which have come to an end, with more set to conclude in the current financial year. Management and employees are set to pay the price for BT's tribulations. Around 4,000 jobs will be lost in a bid to cut costs, the head of global services has been replaced and chief executive Gavin Patterson has taken a £4m pay cut.

The saving grace is that BT has managed to keep hold of Openreach and its excellent operating cash flow, which stood at 107 per cent of operating profits in these numbers. This was, however, 5 per cent down on last year, following the increased investment in customer service. With the capital requirements of Openreach, TV and mobile due to ramp up this year, management expects adjusted cash profits to remain flat at £7.5bn, to £7.6bn.

Analysts at JP Morgan think adjusted EPS will fall to 28.4p a share in the year to March 2018 (28.9p in FY2017).

BT (BT.A)
ORD PRICE:307.5pMARKET VALUE:£30.6bn
TOUCH:307.4-307.6p12-MONTH HIGH:453pLOW: 298p
DIVIDEND YIELD:5.0%PE RATIO:16
NET ASSET VALUE:83.7p*NET DEBT:107%

Year to 31 MarTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201318.32.3224.89.5
201418.32.3125.710.9
201518.02.6526.512.4
2016 (restated)19.02.9128.514.0
201724.12.3519.215.4
% change+27-19-33+10

Ex-div: 10 Aug

Payment: 4 Sep

*Includes intangible assets of £15m, or 151p a share

IC VIEW:

The cracks are showing in BT and the question lingers: is a lumbering giant able to thrive in an era of innovative, fast moving media and telecoms? It's certainly fair to be weary of BT, but on a forecast PE of 11 we think the are worth holding for now.

Last IC View: Hold, 338p, 13 Mar 2017

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By Megan Boxall,
11 May 2017

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