BT rings in TV and broadband gains

BT's (BT.A) transformational £12.5bn deal to acquire EE, the UK's largest mobile carrier, was always going to be a tough act to follow. The telecom titan's third-quarter results won't blow away investors: sales were down in four of its five divisions, and a 16-year plan to pay off the £7bn pension deficit could put a dent in BT's war chest ahead of this month's Premier League rights auction. But there were positives as its consumer division continues to run rampant.

Underlying sales were flat for the nine months to end-December 2014, as BT's global services, business and Openreach divisions suffered from, respectively, a one-off uplift in contract milestone payments, lower call and line volumes as customers moved to data and voice-over-internet services, and regulatory price changes. Nonetheless, the group's adjusted pre-tax profits rose a healthy 11 per cent to £2.14bn, in part because of a trenchant cost-cutting scheme.

The key bright spot was a 43 per cent increase in third-quarter cash profits from BT's consumer division as TV and broadband revenues climbed 15 per cent. BT attracted 209,000 fibre broadband customers and 45,000 TV customers as it introduced several price-competitive bundles and added new services such as video streaming site Netflix and Sky Sports 1 and 2. But that didn't stop average revenue per user rising 7 per cent to £410.

Morningstar says…

Sell. Currency volatility weighed on BT's third-quarter sales, but its consumer business continued to perform well, driven by broadband and television revenue. We're bullish on BT's broadband ambitions: it has already connected nearly three-quarters of the UK, and it's planning the most extensive fibre deployment in Europe, which should help it compete better against cable operators. But we expect the turnaround elsewhere to be slow, and the shares look overvalued.

Jefferies says…

Buy. BT's pension agreement with its trustees is a good outcome given the low-rate environment - although the timeframe is longer than we had hoped. Annual payments will average £690m over the next decade, but that could fall if interest rates rise. The stable net TV additions in its consumer division show no impact yet from new offerings such as Netflix, Sky Sports and TV Everywhere. We forecast full-year sales of £18.2bn in the year to end-March 2016, and EPS of 29.4p.