BT Cuts Costs But Fails to Boost Sales

The UK remains one of the most competitive markets in the world, with more than 100 firms offering telecom or Internet access services - can BT emerge on top?

Allan C. Nichols, CFA 14 December, 2015 | 3:29PM
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While BT (BT.A) struggles to increase its revenue, it is doing a fantastic job of improving efficiency. The firm continues to reduce costs, enabling its margins to improve despite revenue declines, which we think is very impressive. Additionally, the declines are diminishing. The separation of the consumer and business divisions shows that consumer is growing along with the Wholesale and Openreach division's external business thanks to the higher take-up of its fibre service. We think BT's fibre service will mostly provide growth in the Openreach division.

We are not enthusiastic about BT's taking on Sky in television by launching its own sports channels

Fibre is now available to 24 million premises in the United Kingdom with around 3.4 million customers. The firm has also won 44 regional bids in the Broadband Delivery U.K. project and we expect it will win all of the remaining ones. While this should provide some revenue growth, we project it will be at lower margins than the Openreach division's other revenue.

We are not as enthusiastic regarding BT's other new venture of taking on Sky in television by launching its own sports channels. The firm has spent or has contract commitments to spend about £2 billion for content and launch costs. While the business won the exclusive rights to the UEFA Champions League and UEFA Europa League and now has more than three million direct customers and 5 million including wholesale, Sky continues to add broadband customers.

We are pleased to see the firm charge £5 per month for the Europa League matches, but it continues to show the Premier League for free despite the increased cost for the next three seasons. We think BT will struggle to earn a decent return on the capital it has invested.

Elsewhere, BT's global services division's revenue declines have eased, but we project it is still two years away from returning to growth. The division is fighting both a weak global economy and the headwinds of corporations moving to lower-cost Internet-based services. Finally, BT continues to struggle with its pension deficit. Despite making extra payments the deficit remains at £5.6 billion after tax. We think the market forgets to adjust its valuation of BT for this deficit.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BT Group PLC157.45 GBX-0.85Rating

About Author

Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.

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