- BT has announced an extension to its full-fibre roll-out schedule and is now aiming to target 80 per cent of the population by 2026
- Capital expenditure is rising but revenue and profits should follow in the long-term
- Management has suggested that the dividend will be resumed at the end of the current financial year (March 2022)
When residents of rural Yorkshire get super-fast fibre internet connectivity in 2026 - many years earlier than they may have previously expected - they can thank the government’s super deduction. It is the 130 per cent rebate on capital expenditure which has given BT (BT.A) the ability to expand its full fibre rollout from 20m to 25m homes and fund it from its own coffers - “as long that spending is in the interest of the shareholders,” chief executive Philip Jansen hastened to add when speaking on the Today programme.
The costs of providing super-fast internet connectivity are plain to see in BT’s financial results statement for the year to March 2021. Capital expenditure was £4.2bn - driven higher by a 12 per cent increase in network costs to £2.3bn - and is expected to rise again to £4.9bn in the next financial year. But the benefits of this investment are also evident. The rent which BT’s Openreach can charge broadband providers for fibre connectivity is significantly higher than what it can charge for ordinary cables - revenue from fibre enabled products was up 15 per cent in the year.
Openreach is the only division to have reported growth in FY2021
Revenue by division | MAR '16 | MAR '17 | MAR '18 | MAR '19 | MAR '20 | MAR '21 |
External Revenue (£m) | ||||||
Consumer | 4,533 | 4,871 | 5,000 | 10,588 | 10,286 | 9,788 |
Enterprise | 1,038 | 5,053 | 5,257 | 5,933 | 5,789 | 5,340 |
Global | 6,501 | 5,479 | 5,013 | 4,735 | 4,361 | 3,731 |
Openreach | 2,042 | 2,062 | 2,145 | 2,200 | 2,359 | 2,488 |
Other | 24 | 10 | 8 | 3 | 29 | 23 |
Total | 18,909 | 24,082 | 23,746 | 23,459 | 22,824 | 21,370 |
Source: Factset and BT |
The rest of the business continues to bear the scars of an industry in flux. Demand for copper wires - which still contribute the bulk of the county’s connectivity - is dropping rapidly, average revenue per user is falling as broadband providers continue to undercut each other on price, and fixed telephony services have all but disappeared. The pandemic has also caused its problems, especially in the enterprise arena where businesses are less willing to sign up to big broadband contracts now that most of their staff are working from home.
It is also impossible to talk about BT without mentioning the pension deficit, which cost the company £955m in cash payments in the 2021 financial year. Even with a whopping 5G spectrum auction, which ended up costing the company £702m, the pension funding is the single biggest drain on free cash flow, which fell from £2.4bn last year to £1.1bn in these numbers.
Consolidation of cash flows (£m) | 2020 | 2021 |
Net cash generated from operations | 6271 | 5963 |
Total capital expenditure | 3889 | 4818 |
Interest received | -30 | -6 |
Interest paid | 736 | 770 |
Pension deficit payments | -1274 | -955 |
Tax benefit of pension deficif payments | 434 | 181 |
Dividends from associates | -1 | -5 |
Net cash flow from specific items | -112 | -390 |
Net sale of non-current investments | -33 | 11 |
Spectrum licence auction | -702 | |
Lease liabilities | 651 | 782 |
Capital expenditure - operating activities | 2011 | 1459 |
Free cash flow | 2382 | 1145 |
Source: BT |
But BT’s list of woes is significantly smaller than it was a few years ago when Philip Janson took the helm. The total size of the pension deficit has been trimmed to just under £8bn from £11bn at the last triennial valuation. Funding obligations will be partly satisfied by an asset-backed financing deal secured against mobile division EE and partly through regular cash contributions of £900m, which will fall to £600m in 2024. The numbers are still painful, but at least they provide shareholders with some much-needed clarity.
Elsewhere, the rollover of the £4.5bn Premier League broadcasting deal which is shared between BT Sport, Sky, Amazon and the BBC is useful as the company begins the sale process of its sports division. And the spectrum required to connect British mobiles to the ever-expanding 5G network has been completed, at a lower cost the BT had first feared.
Questions, no doubt, still remain about the dividend, which is expected to be resumed at 7.7p per share in the 2022 financial year (up from 4.64p in FY2019). Until then, investors should seek comfort in capital gains, which should continue if BT pursues this streamlined approach to business. Buy at 164p.
Key Performance Metrics
MAR '16 | MAR '17 | MAR '19 | MAR '18 | MAR '19 | MAR '20 | MAR '21 | |
Income Statement | |||||||
Sales | 18,909 | 24,082 | 23,494 | 23,746 | 23,494 | 22,811 | 21,370 |
EBITDA | 6,365 | 7,458 | 7,176 | 7,505 | 7,176 | 7,659 | 7,415 |
Net Income | 2,581 | 1,907 | 2,156 | 2,028 | 2,156 | 1,732 | 1,472 |
Balance Sheet | |||||||
Cash & Short-Term Investments | 3,415 | 2,048 | 4,880 | 3,747 | 4,880 | 6,641 | 4,652 |
Net Debt | 10,854 | 10,665 | 11,996 | 10,528 | 11,996 | 17,969 | 17,802 |
Total Shareholders' Equity | 10,380 | 8,335 | 10,167 | 10,304 | 10,167 | 14,763 | 11,679 |
Cash Flow | |||||||
Net Operating Cash Flow | 4,648 | 5,554 | 3,748 | 4,379 | 3,748 | 6,271 | 5,963 |
Capital Expenditures | -2,466 | -3,145 | -3,678 | -3,522 | -3,678 | -3,960 | -4,216 |
Free Cash Flow | 2,182 | 2,409 | 70 | 1,499 | 70 | 1,145 | 2,382 |
Source: Factset and BT |