ii view: buying opportunity after BT shares slump to three-month low?

Despite headwinds this telecoms major is laser focused on cutting costs and expanding its ultrafast data networks. Buy, sell, or hold?

Full-year results to 31 March

• Revenue down 1% to £20.7 billion
• Pre-tax profit down 12% to £1.73 billion
• Final dividend of 5.39 per share
• Total dividend for the year unchanged at 7.7p per share
• Net debt up £0.85 billion to £18.9 billion 

Chief executive Philip Jansen said:

“Openreach is competing strongly and it's clear that customers love full fibre. The Openreach Board has reaffirmed its target to reach 25 million premises with FTTP (Fibre-to-the-Premises) by the end of 2026 and plans to further accelerate take-up on the network.

"By continuing to build and connect like fury, digitise the way we work and simplify our structure, by the end of the 2020s BT Group will rely on a much smaller workforce and a significantly reduced cost base. New BT Group will be a leaner business with a brighter future."

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ii round-up:

Telecoms giant BT Group (LSE:BT.A) today increased expected near-term investment following previous government tax changes reducing its free cash availability, as its pushes the rollout of its fibre broadband and 5G mobile phone networks.

The eventual completion of its ultrafast data networks and the expected use of artificial intelligence (AI) across its customer service operations, will leave BT requiring fewer staff, with up to 55,000 jobs to be cut by 2030.  

Shares in the FTSE 100 company fell by more than 7% in UK trading, with expected capital expenditure for the year ahead of £5.05 billion reducing its expected year ahead free cash flow to £1.1 billion. That compares with City forecasts nearer to £1.3 billion. 

BT revenue fell 1% year-over-year to £20.7 billion, hindered by the loss of a further 68,000 broadband customers in the final quarter of its financial year. Pre-tax profit fell 12% to £1.73 billion as it settled staff strike action with pay rises and battled increased energy costs. 

BT shares have now fallen by close to a quarter over the last year, in contrast to a 4% rise for the broader FTSE 100 index. News of job cuts follows rival Vodafone Group (LSE:VOD)'s recent decision to axe 11,000 staff over the next three years to improve its financial performance. Vodafone shares are down by almost a third in a year. 

A further 702,000 premises were reached by BT’s fibre broadband during the latest quarter, leaving its total coverage of 10.3 million at 41% of its targeted 25 million. 5G connections rose 62% year-over-year to 8.6 million, with its 5G network now covering 68% of the UK population. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, flagging its belief that the tax aided investment spend could be seen as positive, given its potential to speed up the completion of its ultrafast networks and increase BT’s competitive position.  

ii view:

BT operates across what is soon to become three divisions. Brands for its consumer division are made up of BT itself, EE and Plusnet. Its Openreach division manages its fixed network and physically connects homes and businesses across the UK. Both its Enterprise business connecting businesses and public sector organisations and its Global division managing IT infrastructure networks for companies in over 180 countries are to merge. 

For investors, competition across the sector remains intense, with rivals such as Comcast’s Sky, Virgin and Vodafone fighting hard to win custom. Fibre broadband and 5G investment costs are huge, elevated costs generally such as energy provide a headwind, while group net debt of £18.9 billion compares to a stock market value of around £13 billion.  

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On the upside, BT's push to cut costs has seen savings of £2.1 billion made since April 2020 on an annualised basis against a target of £3 billion. Customer demand for its fibre broadband is strong, with record net adds in the final quarter taking its customer base to 3.1 million. Investment, or capital expenditure in its product offering continues to be pushed, while a large share stake held by telecoms dealmaker Patrick Drahi arguably generates speculative interest.  

On balance, and with the BT shares sat on a forecast dividend yield of over 5%, income orientated investors will likely remain interested, while others might appreciate the valuation multiple which sits well below the 10-year average. 

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:

Buy