BT shows signs of progress and unveils £3bn in cost cuts

It isn’t a major surprise that BT Group (BT.A) remains one of London’s most shorted shares. 

The company has been through a fair amount of bosses in recent years who have looked to make meaningful changes at the lumbering telecoms giant. However, it has remained a serial underperformer, with sales and operating profit flatlining over a 10-year period and earnings per share shrinking. The huge capex commitment involved in rolling out full fibre broadband to the UK through its Openreach arm and its legacy pension deficit haven’t helped.

Yet the latest incumbent in the top job, Allison Kirkby, made the case that things are improving. Although the company reported a 31 per cent decline in pre-tax profit for the year ending in March, this was largely due to a £488mn writedown on the carrying value of its business division, an acknowledgement of its “decline in profitability in recent years”. The business arm continued to underperform, with adjusted cash profit falling by 16 per cent, but this was offset by higher profitability in both its larger consumer and Openreach operations.

The company also incurred restructuring costs of £388mn, but these arose from its programme to generate £3bn of annualised savings – a milestone achieved a year earlier and at a lower cost than initially expected. Kirkby also set a fresh target of shaving a further £3bn off annualised costs by 2029.

On top of this, she said the company has now “passed peak capex on our full fibre broadband rollout", meaning spending commitments should start to ease. It is forecasting annual capex of “less than £4.8bn” until its 2026 financial year, after which it should fall away by around £1bn a year. 

This means it should eventually be able to generate more free cash. Although normalised free cash flow fell by 4 per cent last year to £1.3bn, the company is targeting an increase to £1.5bn this year, £2bn by 2027 and £3bn by the end of the decade.

BT has some other hefty commitments, most notably its yawning pension deficit which, despite the company making an £800mn contribution to it, rose by £1.7bn to £4.8bn. Net debt also increased by £600mn to £19.5bn. 

Still, there are enough signs of progress to be encouraged, and with the shares trading at just 6.8 times FactSet forecast earnings and at a discount to their book value, we remain optimistic about its prospects. Buy.

Last IC view: Buy, 120p, 2 Nov 2023