Interactive Investor

Big-spending BT justifies rally

5th May 2016 11:56

Lee Wild from interactive investor

Chief executives are prone to hyberbole, especially at results time. But Gavin Patterson's claim that this has been a "landmark year" for BT is fully justified. It's spent £12.5 billion on EE and now thinks it can make even bigger savings from the deal and for less money. Winning rights to show Champions League football was a massive coup, and group revenue is up by the most in over seven years. Latest results are better than expected, too.

A 22% increase in fourth-quarter revenue to over £5.6 billion is about 2% higher than BT-compiled consensus estimates. Underlying pre-tax profit of £1.14 billion is up 11% and 13% better than forecasts for the quarter. It's over £100 million ahead of forecasts for the year ended 31 March 2016 at almost £3.5 billion, up 9% on the year before.

And BT, named today as the most likely UK firm to buy Channel 4 for £500 million, has also committed to forking out an extra £6 billion over the next three years to extend superfast broadband and 4G coverage beyond 95% of the country by 2020.

In fact, things are going so well that Patterson is confident enough to set out financial and dividend guidance for the next two years.

For 2016/17, BT pencils in "growth" in underlying revenue excluding low-margin transit traffic - charges for carrying calls between to telecoms operators. In the year just gone it was up 2%.

Look for underlying cash profit (earnings before interest, tax, depreciation and amortisation) of about £7.9 billion compared with 5% growth last year to nearly £6.6 billion. That's about what the market had expected. An increase in normalised free cash flow to £3.1-3.2 billion is a positive surprise, and promising to raise the dividend by at least 10% is welcome news.

BT commits to further "growth" in revenue, profit and the dividend (double-digits again) in 2017/18, and for an improvement in free cash flow to £3.6 billion. All good stuff.

But even these estimates could be conservative, according to John Karidis, an analyst at Haitong Securities.

"We think the risk to this guidance is on the upside and material," he says. "We believe today's guidance encompasses management's estimates of BT+EE revenue and cost synergies, but it is too early for it also to include upside from the sum of Ofcom's initial conclusions from the Strategic Review of Digital Communications (published in February 2016). We continue to believe the latter is significant."

Still a "top pick", Haitong says 'buy' and puts fair value at 600p, implying 32% upside.

Upgrades to consensus estimates are inevitable after these results. Full-year underlying earnings per share of 33.2p were way ahead of the market's guess of 31.6p. Even on Haitong's original estimates and with the shares up 3% Thursday, BT trades on a modest 13.6 times earnings for the current year, dropping to around 12 times for 2018. Remember, too, there's a prospective yield of an average 4% for the next two years.

Across the divisions, BT Global Services, BT Business, EE and BT Wholesale all easily exceeded profit expectations. Infrastructure maintenance unit Openreach did what was expected, and the consumer business, which provides customers with broadband, phones, TV and mobile services, was just £3 million light both for the quarter and full-year.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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