BT Group plc (BT.A) Ordinary 5p

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BT has reported a 2.7% drop in first-half revenue to £10.1bn. Falling revenue from the Consumer and Business divisions (weighted to the latter) were somewhat offset by growth at Openreach, which benefitted from higher average prices.

Underlying cash profit (EBITDA) rose 1% to £4.1bn, with the dip in revenue more than offset by cost initiatives. Underlying free cash flow rose 57% to £0.7bn, and net debt was £20.3bn at the end of the period.

Full-year revenue is now expected to fall 1-2% (previously flat). There was no change to guidance for underlying cash profit of around £8.2bn or underlying free cash flow of around £1.5bn.

An interim dividend of 2.40p was announced.

The shares fell 3.9% in early trading.

Our view

BT is continuing to see a tough broadband and mobile market, specifically in areas where it doesn’t yet have a presence with next gen technology. But there are signs that the future could get brighter.

The wider strategy involves significantly modernising and simplifying operations and product lines. This includes switching all mobile products under the EE brand and moving customers onto the new 5G and fibre broadband networks, which have lower running costs than legacy infrastructure.

Cost cuts remain a long-term focus, and there’ll also be a benefit from reduced investment as the peak spending for the massive infrastructure buildout has now passed. That’s good news for future cash flow and the valuation, which has been under pressure for some time. Once the infrastructure is built and adopted, a much leaner operation is needed to generate long-term growth.

The asset we’re most excited about is Openreach, which is responsible for maintaining and building the new fibre networks. It hopes to reach 25mn premises by 2026 and looks well on track. This technical-heavy business is unique and higher margin. For now, though, legacy broadband lines still make up the bulk of its connections, and increased competition from alternative networks along with a softer market are causing Openreach to lose customers.

The Business division continues to be the problem child. A combination of structural changes, higher costs, and a tough competitive landscape are making it a tricky place to operate. Cash flow margins are also a good clip lower than those of the Consumer and Openreach units. We’d like to see BT explore options to get rid of some of the worse-performing areas outside the UK – one to watch.

A major drain on cash is BT's large pension deficit. The current payment plan, which aims to remove the deficit by 2030, cost c.£800mn in the first half. Add to that the debt and lease pile, which cost another c.£800mn to service over the half, and the drags on cash are hefty.

BT’s future relies heavily on getting through this major buildout phase, and to its credit, progress looks good. We think BT is one of the better-placed names, especially with a great asset like Openreach on the books. The question yet to be answered is whether all that spending is going to generate enough top-line growth to materially offset the decline of legacy products, a challenge for the entire sector to battle with.

Environmental, social and governance (ESG) risk

The telecom industry is low/medium in terms of ESG risk. Data privacy and security is the most significant risk driver, not only because customers are increasingly concerned about privacy, but also because cybersecurity breaches can be costly. Product quality is another key risk, particularly given the networks they manage are considered critical infrastructure. Carbon emissions, human capital and business ethics are also risks worth monitoring.

According to Sustainalytics, BT’s overall management of material ESG issues is strong.

BT follows strict security measures to protect personal data and has 3,000 cybersecurity employees. Greenhouse gas reduction policies are strong, including net zero alignment, emissions reduction coverage, audits and verification. BT scores well on board structure, shareholder rights, remuneration, audit and financial systems, and stakeholder governance.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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