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BT cash flow under pressure with consumer market 'significantly more aggressive'

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Chief executive Philip Jansen said the group was “on track” to meet its full-year guidance.

BT Group PLC (LON:BT.L) reported pressure on cash flow from the telecoms group's high-speed broadband roll-out and a consumer market that is “significantly more competitive and aggressive than last year”.

Normalised cash flow in the three months to 30 June was down 36% year-on-year to £323mln as capital investment increased 11% to £931mln.

BT's cash pipe is expected to remain squeezed in coming years as its Openreach division rolls out full fibre broadband across the UK, which will keep up pressure on the former state-owned monopoly’s ability to pay a dividend, with the board admitting recently that the payout could be reduced in the future.

But chief executive Philip Jansen, who joined at the start of the year, assured on Friday that the group remained “on track” to meet its full-year targets, which include free cash flow of £1.9bn-£2.1bn.

Pressure from competition comes as Virgin Media and other rivals plan expansion of their superfast broadband networks, while mobile competition is seeing a red hot promotional backdrop.

At group level the financial results were mixed, with adjusted revenue falling 1% year on year to £5.6bn, but the consumer, business and global divisions all slipping.

The consumer division was below expectations, with mobile average revenue per user (ARPU) down and fixed line flat, as management told analysts the market is “significantly more competitive and aggressive than last year”.

Restructuring and regulation

Lower revenues combined with higher spectrum fees and content costs to hit underlying earnings (EBITDA), which were down 1% to £1.96bn as this was partly offset by a reduction in costs from restructuring programmes, which included the sale of its headquarters in London for £210mln.

But Jansen insisted that the regulatory winds are moving in favour of the sector, pointing to the government's reiterated ambition for full fibre broadband across the country, saying he was confident there will be “further steps to stimulate investment”.

He added: “We are ready to play our part to accelerate the pace of rollout, in a manner that will benefit both the country and our shareholders, and we are engaging with the government and Ofcom on this.”

No let-up

But Deutsche Bank analysts warned that the consumer business would remain tough, with the potential for higher customer churn in fixed line telecoms as rivals build out their networks.

JPMorgan Cazenove was focused on the capex requirments, believing “build pressures have increased notably of late” but “do not anticipate a near-term dividend cut despite expectations for elevated capex and capped ratings for the foreseeable”.

“The overriding challenge for the group from here,” said George Salmon, analyst at Hargreaves Lansdown, “is to deal with a culture of customers wanting more, but for less.

“This is evident in the consumer unit, home of BT’s TV and broadband as well as the EE mobile business, where BT is having to cut prices at the same time as increase its content spend, and in Openreach, where the government continues to push for a better, but cheaper service.”

“Cost cutting plans are in full swing and the odd asset sale is boosting the coffers,” Salmon said. “But neither are long-term solutions. BT will need to find a way to build revenue and profits organically.

“For now though, with guidance maintained for the year, and the new CEO outlining his commitment to the dividend in May’s full year results, it looks like investors will be paid to wait and see if BT can deliver the required improvements.”

BT shares were down 4% to 185.84p on Friday afternoon.

Source - Reuters

About the author

Philip Scott

Head of Equities, Director

Philip has worked as a Private Client Stockbroker for nearly 20 years, commencing his career in Operations with Rensburg Sheppards (now part of Investec plc) before spending 9 years with Killik & Co advising on and directly managing portfolios. He joined SI Capital in 2006 to head up the Private Client Advisory desk.

Philip is a regular contributor to local media commenting on stock market dynamics and is a Chartered Member of the Chartered Institute for Securities & Investment (MCSI). His RDR qualification gained special recognitionfrom the CISI for achieving the highest combined pass mark in the country for the Investment Advice Diploma in 2012.

“At SI Capital I enjoy being part of a talented team who collectively share the same desire to provide excellence in service.  My focus is to ensure that each client receives effective and optimal management of their assets.”

Philip lives locally, is married with 2 daughters and is an avid sports fan (if now predominantly from the sidelines).  His other interests include music and film.

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