ii view: BT upgrades estimates and sends share price skyward

First-half results to 30 September

• Adjusted revenue up 0.5% to £10.41 billion
• Adjusted profit (EBITDA) up 4% to £4.01 billion
• Interim dividend unchanged at 2.31p per share
• Net debt up 3% to £19.7 billion

Chief executive Philip Jansen said:

“These results show that BT Group is delivering and on target: we’re rapidly building and connecting customers to our next generation networks, we’re simplifying our products and services, and we’re now seeing predictable and consistent revenue and EBITDA growth.”

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ii round-up:

BT Group (LSE:BT.A) today flagged lower-than-expected costs in relation to its fibre broadband rollout, allowing the telecoms giant to increases its full-year estimate for free cashflow, an important metric for the dividend payment. 

A focus on lower cost areas for its fibre broadband investment plan now sees expectations for annual capital expenditure reduce to £5 billion from up to £5.1 billion previously, with free cashflow now potentially hitting £1.2 billion from a prior estimate as low as £1 billion. 

Shares in the FTSE 100 company rallied over 5% in UK trading having come into this latest news little changed year-to-date. That’s similar to Spanish telco Telefonica SA (XMAD:TEF) and compares to 10% declines at both Vodafone Group (LSE:VOD) and US giant Verizon Communications Inc (NYSE:VZ). 

BT operates across the three divisions of Consumer, Business and Openreach, with the latter managing its networks including mobile phone masts, and physically connecting homes and businesses across the UK.

Overall adjusted profit during the first half rose 4% year-over-year to £4.01 billion, aided by fixed line and mobile phone bill increases and a strong focusing down on costs. 

Customer broadband line losses totalled 129,000 during the second quarter, up from cancellations of 126,000 in Q1 and 68,000 in Q4 last year. Group net debt rose to £19.7 billion from £18.9 billion in late March, largely due to required staff pension contributions. An interim dividend payment of 2.31p per share is unchanged from last year.

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results. A third-quarter update is likely early February.  

ii view:

Brands for BT’s Consumer division include BT itself, EE and Plusnet. Its Business division connects companies and public sector organisations along with managing IT infrastructure networks for them, while Openreach manages both its existing copper phone line network and its ongoing fibre broadband rollout across the UK.

BT aims to be the market leader in both fibre and 5G mobile communication networks. Its fibre broadband service is now available to 11.9 million premises against its target of 25-30 million. A 5G mobile phone customer base of 9.9 million compared to a target of 13-14.5 million. 

For investors, competition across the sector is intense, and BT is having to swallow hefty fibre broadband and 5G investments costs. Day-to-day costs such as energy and staff pay are also high, corporate customers are looking to reduce their own costs including those for communications and IT services, while group net debt of £19.7 billion compares to a current stock market value of around £11.8 billion.  

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On the upside, the rollout of its own fast speed fibre and 5G mobile networks continues. Costs remain a high focus, with job cuts planned following its fibre rollout, and investments in artificial intelligence are expected to help decrease outgoings. The new pending chief executive will likely look to inject renewed vigour back into the firm's strategy, while a major share stake held by telecoms dealmaker Patrick Drahi arguably generates speculative interest.  

In all, and with analysts estimating a fair value price of over 180p per share and the stock sat on a forecast dividend yield of over 6%, the shares will likely remain popular among income investors and speculators alike.

Positives

• Expanding fibre broadband and 5G network
• Attractive dividend yield (Not guaranteed)

Negatives

• Intense industry competition
• Subject to regulatory rulings

The average rating of stock market analysts:

Strong hold