BT Group (LON:) has a clearly visible strategic runway, although this update serves as a reminder that the transformation is far from complete.
Just over two years into her tenure, the CEO’s transformation plans to cut costs, boost efficiency and provide more focus have been at the centre of the group’s recent fortunes. By the same token, changing horses midstream is never an easy task, and the telecoms sector is a tough place to be in normal circumstances, let alone when a group is in the midst of a turnaround as competitors continue to flourish.
The headline numbers from the update could provide a tinge of disappointment, with adjusted revenue of £4.3 billion falling short of market expectations of £4.77 billion, while adjusted earnings at £2 billion were slightly shy of the £2.03 billion estimates. Pre-tax profit declined by 4% to £505 million, attributed largely to an increase in finance costs although mitigated by lower restructuring costs. There is also some stabilisation of service revenue in the Business division, where new connectivity contracts were signed with both Royal Mail and Scottish Water.
Meanwhile, the group has clearly decided to refocus its efforts on its domestic market. At the end of June, a particularly interesting development came in the telecoms sector, underlining the importance of the technology in a rapidly evolving communications world. BT announced that it would be forming a joint venture with Verizon of the US – a company previously intertwined with Vodafone – in a move which would represent some $4 billion of combined annual revenue, serving 3000 customers in around 180 countries and which is expected to complete next year. The move should also provide the JV with greater scale and operational efficiencies as the two units combine.
Elsewhere, the Openreach division has been doing much of the heavy lifting in the meantime and is seen by many as being a future potential jewel in the crown. Following several record build rates of over a million FTTP (fibre to the premises) connections, Openreach has now reached 23.4 million premises, over half of those in the UK, including 514000 in the last quarter alone. It also leaves the plan of increasing the number to 25 million in total by December 2026 well on track. In addition, the roll out of 5G+ is now reaching 77% of the UK population.
Perhaps equally importantly is the fact that peak capital expenditure on this roll-out has passed, which is an important inflection point. Indeed, all things being equal this should free up substantial amounts of capital in due course which, given the group’s strong levels of cash generation, can be steered towards what is still an uncomfortably high level of net debt and a pension deficit which has been something of an albatross around the neck for some considerable time. BT estimates that cash flow will grow to £2 billion by the end of this financial year and to £3 billion by the end of the decade. This could also free up some capital for a strong increase in the dividend, where the current yield of 4.3% is a decent attraction.
This is also reflected in the outlook guidance, where capital expenditure this year of £4.2 to £4.3 billion would be more than £1 billion less than the previous year. The adjusted revenue and earnings figures have also been restated to exclude the departing International business between ranges of £17.1 to £17.6 billion and £8.1 to £8.2 billion respectively.
BT’s aims are for a marathon not a sprint, but the early signs have been encouraging indeed. After a 40% rise in the share price over the last two years, heightened expectations have begun to weigh slightly, with the shares drifting by 2% over the last year as compared to a gain of 18.3% for the wider . It may prove increasingly difficult for BT to positively surprise investors until the target is more obviously in sight, such that for the time being the share price is seen as being up with events as reflected by the market consensus which stands at a hold.