BT raises guidance despite profit dip

The Covid-19 pandemic has proved a double-edged sword for BT (BT.A). On the one hand, demand for its broadband services has increased as we all spend a lot more time at home. The number of customers signed up for its ‘fibre to the premises’ (FTTP) swelled from 86,000 to 598,000 between June and September. But that has been offset by lower activity from enterprise customers and the cancellation of sporting events hitting revenue from its broadcasting business, BT Sport. As such, the telecoms giant saw its adjusted cash profits (Ebitda) dip by 5 per cent in the six months to 30 September to £3.7bn.

BT has indicated that the Covid-19 squeeze is likely to continue. On the consumer side of the business, it is flagging ongoing pressure on BT Sport, more price-conscious customers and lower mobile roaming activity. Meanwhile, it expects to see more insolvencies among its enterprise customers. But despite the challenging outlook, it has nudged up its guidance for full-year adjusted cash profits from £7.2bn-7.5bn to £7.3bn-7.5bn. The upper end of this range would represent a 5 per cent decline from last year, but BT is expecting adjusted cash profits to bounce back to at least £7.9bn – which was their pre-pandemic level – in 2022/23.

Maintaining, upgrading and expanding the UK’s telecoms infrastructure is a capital-intensive business and the group ploughed £1.1bn into its fixed and mobile networks in the first half of year – a 9 per cent increase from a year earlier. BT intends to spend £12bn to bring ‘full fibre’ broadband to 20m premises by the mid-to-late 2020s which is on top of plans to extend its 5G network. The latter has been complicated by the government’s decree that all Huawei equipment be removed by the end of 2027 – a move that BT estimates will cost it £500m to implement. In the meantime, it has signed a deal with Swedish company Ericisson (SE:ERIC-B) to help deploy 5G across major UK cities.  

Despite higher capital expenditure, the group managed to keep its net debt (excluding lease liabilities) level with the March year-end position, although it still sits at a staggering £11.3bn. Balance sheet pressures have been somewhat eased by the suspension of dividend payments although BT still has to contend with a £4bn net pension deficit. While it does plan to reinstate the dividend next year at 7.7p per share, this is half the level it paid out in 2019. BT has long struggled to balance its capital expenditure obligations and shareholder rewards and Covid-19 arguably gave it the perfect excuse to cut its payout.

The market responded well to BT’s revised guidance, bidding the shares up by 6 per cent. But this must be set against a five-year downward slide that has left the shares languishing at just 108p and made BT vulnerable to a takeover. That potential outcome and the revived dividend means the shares are (just about) worth hanging onto. Hold.

Last IC View: Hold, 111p, 22 Aug 2020