Telecommunications group BT (BT.A) appears to need a lesson in messaging. Management delivered a muddled trading update for the third quarter to December 2018 – revealing consensus-beating sales but seemingly urging caution about the year ahead. The shares fell by as much as 6 per cent in reply, before retracing as the day wore on and as management offered some reassurance.
Adjusted revenues and cash profits came in at £5.98bn and £1.88bn – down 1 per cent and 3 per cent, respectively, year on year, but up 0.9 per cent and 3 per cent against consensus forecasts. Outgoing chief executive Gavin Patterson hinted at an improved outlook for FY2019 – now anticipating cash profits “around the top end of our guidance”.
True, Openreach and the enterprise segment saw revenues fall 9 per cent and 6 per cent, respectively, with cash profits down 19 per cent and 2 per cent. The former was hindered by £180m of regulated priced reductions on BT’s fibre-to-the-cabinet (FTTC) and Ethernet products, along with Openreach’s volume discount offer and a one-off accounting benefit in the prior year. The latter stemmed partly from a faster-than-expected reduction in calls per fixed line.
However, the dominant consumer business enjoyed revenue growth of 4 per cent and cash profit growth of 15 per cent – albeit supported by BT’s price increase last September, and higher handset costs for customers.
Altogether, this news might have constituted a veritable last hurrah for Mr Patterson. Yet management caveated third-quarter figures with expectations of “regulation, market dynamics, cost inflation and legacy product declines to impact in the short term”, which it expected to be “more than” mitigated by better trading and cost transformation in FY2021. Is next year's outlook more uncertain?
Mr Patterson noted that BT’s transformation programme is delivering “marginally ahead of our expectations”. Chief financial officer Simon Lowth added: “If we weren’t satisfied with consensus, well we’d say so.”
Former Worldpay (US:WP; LSE: WPY) boss Philip Jansen replaced Mr Patterson the day after these numbers were released. Many will hope that he forges an amicable relationship with the various regulators, due to the cited pressures facing BT – and, inevitably, its peers – as 2019 unfolds.
As we noted in our recent ‘tip of the year’, BT has considerable net debt (£11.1bn as at 31 December) – not to mention its pension liabilities, which might not enjoy the benefits of higher bond yields after US Federal Reserve chairman Jerome Powell suggested the argument for raising interest rates had “weakened”.
Broker Numis said that it did not expect to “meaningfully” change its forecasts after these results. Its latest underlying free-cash-flow forecast for FY2019 sat at £1.82bn, healthily covering an anticipated dividend cost of £1.52bn. Strip out spectrum costs, pension top-ups and other exceptional items, and free-cash-flow sits at a rather more diminutive £245m, although it expects the dividend to be fully covered on this basis by 2021. The pressure will be on Mr Jansen to help drive continued cash generation.
