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BT cuts costs to fight inflation

The telecoms giant is trying to boost cash flow as inflation pushes up the cost of its capital expenditure
November 3, 2022
  • Price rises boost revenue
  • Half-year dividend unchanged

BT (BT.) is increasing its cost-cutting ambitions in the face of rising inflation. Carrying out lots of infrastructure investment just as an energy-led inflation crisis hits is not good for business. Normalised free cash flow has dropped from last year and the telecoms company is now guiding towards the bottom end of its 2025 cash flow forecasts of between £1.3bn and 1.5bn.

To counter inflationary pressures, cost-saving targets have been raised. Management is now targeting £3bn of gross annualised saving by 2025, up from £2.5bn previously. It is consolidating property, slimming its footprint from 400 locations to just 30. Back-office processes are also increasingly being automated, including customer service and billing. Recent worker strikes will have increased urgency in this area.

As well as cutting costs, consumer and Openreach pricing is being linked to inflation. This is around two-thirds of total revenue, and BT has already hiked consumer prices by CPI plus 3.9 percentage points earlier this year. Adjusted cash profit for the consumer division rose 20 per cent, on 3 per cent higher revenues. As internet is essential, it is likely to be one of the last household costs to be cut. Churn rates have yet to rise, but the company will be keeping a close eye.

The fibre optic service Openreach was another bright spot. Revenue increased 5 per cent and operating profit increased 8 per cent. However, The Financial Times reported that BT is offering customers price discounts to stop them defecting to alternative networks (Altnets). Broker Numis thinks this competition will hinder returns for its expensively constructed fibre optic network. However, if BT is struggling  to make the economics work – then the smaller Altnets will be in a similar position.

If consumer and Openreach are the (modest) sales growth drivers, then both enterprise and global are a drag, with revenue falling 5 per cent and 2 per cent, respectively – although combined they make up just 38 per cent of revenue. Consumer is the biggest business followed by Openreach.

The positive take is this is the trough for BT. Inflation could be peaking as a recession in China lowers the price of commodities. For example, BT said copper-related investment was 27 per cent cheaper than this time last year. The mass of Altnets are in running now but could quickly go out of business, as inflation makes it harder for them to compete in the short run. In the meantime, BT’s dividend yield of 6 per cent looks appealing.

Overall, our conviction in BT is weakening – especially considering the expansion of satellite-driven telecom networks such as Starlink. In the long term, all this investment in fibre optics could be for nought if the mode of communication networks moves mainly to satellites. However, we don’t like to buy and sell on volatile inflation figures so, for now, we stay invested. Buy.

Last IC View: Buy, 118p, 12 May 2022

BT (BT)    
ORD PRICE:118pMARKET VALUE:£11.7bn
TOUCH:118.8p - 118.9p12-MONTH HIGH:210pLOW: 117p
DIVIDEND YIELD:6.5%PE RATIO:14
NET ASSET VALUE:160p*NET DEBT:148%
Half-year to 31 AugTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
202110.31.09.102.31
202210.40.84.402.31
% change+1-20-52 
Ex-div:6 Feb   
Payment:29 Dec   
*Includes intangible assets of £13bn, or 131p a share