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BT cost-cutting program ahead of schedule

Lowering broadband installation costs has enabled it to lower peak capex forecasts.
BT cost-cutting program ahead of schedule
  • Half-year dividend has returned
  • Delivered annualised savings target 18 months early

BT (BT.A) is in the midst of its turnaround story, a process that may have been hastened by the spectre of its largest shareholder, billionaire Patrick Drahi. The central plan is to invest in Openreach, its full fibre broadband offering, while cutting costs in the rest of the business. To strengthen the balance sheet during this process, it has also floated the idea of offloading BT Sport, which up to this point had been sucking up cash through expensive Premier League television rights.

In the event, the group has revealed that it reached £1bn of gross annualised savings 18 months ahead of target, enabling it to it to bring the 2025 target of £2bn savings forward to 2024. Indeed, midway through the year the group was exploring the creation of a joint venture to fund the roll-out of fibre to an additional 5m premises, but it has decided not to proceed due to progress on costs and the speed of the take-up. Based on its half-year results, the plan seems to be on track. Openreach has been rolled out to 6m homes and will span 25m by 2026, as incremental build cost continues to fall, while the programme to expand super-fast internet connectivity has been aided by government rebates.

Normalised free cash flow was down 15 per cent because of a 30 per cent increase in capital expenditure to £2.56bn. However, there has been a cut to the expected capital expenditure peak in full-year 2023 from £5bn to £4.8bn driven by a 15 per cent reduction in the cost of connecting a home to full fibre.

After Openreach is rolled out in 2026, capital expenditure is expected to fall by £1bn, resulting in a corresponding increase in normalised free cash flow. Together with a further c.£500m savings from lower operating costs, this equates a to £1.5bn improvement in cash flow by the end of the decade.

A rise in interest rates could have a negative impact on BT's share price. A lot of its value currently derives from the £1.5bn of extra cash it will generate in almost a decade. The Bank of England just announced that interest rates will remain at 0.1 per cent for now but if they do rise above 1 per cent in 2023, as the market expects, then future cash flows could come under pressure through funded obligations.

The turnaround program is picking up momentum and the 8 per cent rise on the morning of the results shows the market was pleased with the ahead of schedule costs savings, not to mention the resumption of dividends. But the end of the decade is a long way away. Enjoy the dividend and hold.

BT GROUP (BT.A)   
ORD PRICE:149pMARKET VALUE:£14.8bn
TOUCH:149-149.6p12-MONTH HIGH:207pLOW: 99p
DIVIDEND YIELD:1.8%PE RATIO:14
NET ASSET VALUE:121p*NET DEBT:£22.4bn
Half-year to 30 SepTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
202010.61.068.60nil
202110.31.014.402.71
% change-3-5-49-
Ex-div:30 Dec   
Payment:7 Feb   
*Includes intangible assets of £13.9m, or 140p a share