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BT punished for missed expectations

The telecoms giant’s shares were down 8 per cent following the release of poor full-year results and disappointing guidance
May 10, 2018

Major digging is required to locate anything positive in BT’s (BT.A) annual results. But search hard enough and there is quality to be found in the consumer and EE divisions, both of which reported an uptick in annual revenues and an acceleration in adjusted cash profits in the final quarter. The problem is that these two divisions are hidden beneath a pile of low-margin, capital-intensive, poorly managed businesses, which have distracted management’s attention from the parts of the group that could be thriving.

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In fact, the Business and Public Sector, Global Services and Openreach divisions performed so badly that BT missed its heavily discounted expectations for the year to March 2018. An 11 per cent increase in reported pre-tax profits may have created a nice headline, but extract the multitude of one-off costs – which were greater in the 2017 financial year – and pre-tax profits slipped by 2 per cent to £3.4bn.

The problems have reached such a pitch that management has decided it’s time for a complete revamp of the strategy. To “drive leadership in converged connectivity and services”, BT will remove 13,000 back-office and middle management jobs, exit its London headquarters and invest £3.7bn in fibre and mobile infrastructure annually over the next three years. This means capital expenditure will accelerate from the £3.5bn recorded in the 2018 financial year, while free cash flow (excluding pension scheme contributions) will collapse from £3bn to between £2.3bn and £2.5bn.

And talking of the pension scheme, the triennial valuation has revealed that the deficit has risen to £11.3bn. To plug that gap, BT will contribute £2.1bn annually until 2020 and then £900m in every one of the following ten years. Alasdair McKinnon, fund manager at the Scottish Investment Trust, thinks that visibility means “the pension fund has almost become a non-issue”, but it remains a major capital drain, even if shareholders hopefully won’t have to endure any nasty surprises, but the pension remains a major capital drain. Considering free cash flow isn’t expected to cover the 2019 dividend even after excluding potential costs of mobile spectrum, investor income remains on rocky ground, although was held this time.

BT GROUP (BT.A)   
ORD PRICE:203.9pMARKET VALUE:£210.2bn
TOUCH:203.85-203.9p12-MONTH HIGH:318pLOW: 203.9p
DIVIDEND YIELD:7.6%PE RATIO:10
NET ASSET VALUE:104p*NET DEBT:93%
Year to 31 MarTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201418.302.3125.710.9
201518.002.6526.512.4
201619.002.9128.514.0
201724.062.3519.215.4
201823.722.6220.515.4
% change-1+11+7-
Ex-div:9 Aug   
Payment:3 Sep   
*Includes intangible assets of £14.4bn, or 146p a share