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BT continues to haemorrhage cash

The telecoms giant’s first-half results have pleased investors, but we’re concerned by the rising costs of the network, dividend sustainability and hefty pension deficit
November 1, 2018

‘Cut jobs, spend cash’ seems to be the parting instruction from BT’s (BT.A) outgoing chief executive, Gavin Patterson. In the first half of the year to March 2019, the beleaguered telecoms giant trimmed operating costs by 3 per cent, but reported an 8 per cent increase in capital expenditure. Admittedly, restructuring-related savings and sales of higher-end smartphones in the consumer business helped boost adjusted cash profits by 2 per cent to £3.7bn, prompting management to guide towards full-year profits at the upper end of the £7.3bn to £7.4bn range. The shares rose by as much as 10 per cent on the morning these figures were released.

IC TIP: Sell at 265p

But shareholders shouldn’t get too comfortable with Mr Patterson’s plans. Come February there will be a new chief at the helm and Philip Jansen – who is leaving digital payments group Worldpay to take up the reins at BT – has a track record of rejigging companies.

It remains unclear exactly what can be done to restore BT’s fortunes at a time when the network costs and the pension deficit are eating into the group’s cash. In the first half, the group spent £988m on its mobile and broadband networks, up 15 per cent on the previous year. Network costs are unlikely to let up as competition intensifies across all reaches of the telecoms market. Meanwhile, the pension deficit swallowed £2bn, which resulted in a free cash outflow of £982m. Even after stripping out the pension contribution, free cash flow was down more than a fifth to £974m.

Then there are the continued problems in the global services division, where revenues dropped 7 per cent to £2.3bn in the first half. Management says that’s a result of its plans to move away from low-margin business (and adjusted cash profits did rise 35 per cent to £208m), but global services remains far and away the group’s lowest-margin business.

Numis expects adjusted cash profits of £7.3bn for the year to March 2019, giving EPS of 26.1p, down from £7.6bn and 28.6p in 2018. 

BT (BT.A)    
ORD PRICE:265pMARKET VALUE:£26.3bn
TOUCH:265-265.4p12-MONTH HIGH:279pLOW:201p
DIVIDEND YIELD:5.7%PE RATIO:15
NET ASSET VALUE:110p*NET DEBT:109%
Half-year to 30 SepTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201711.81.088.24.85
201811.61.3410.64.62
% change-2+24+29-5
Ex-div:27 Dec   
Payment:4 Feb   
*Includes intangible assets of £14.6m, or 147p a share