EUR 850.00 For Business Accounts Only

Morningstar | BT Reports In-Line Fiscal 1Q Results; Margin Increased Despite Revenue Declines; Shares Undervalued

BT reported fiscal first-quarter results in line with our expectations on both revenue and margins, and we expect to maintain our GBX 360 per local share fair value estimate. Our narrow moat rating remains intact, and we believe the shares are undervalued. Reported revenue fell 2% year over year versus our full-year estimate of a decline of 1.9%.

This was the first time BT reported a scaled-down report for its first and third fiscal quarters. Also, starting this quarter, EE, its wireless business, is included within the consumer division, making consumer at least twice the size of all other divisions. The consumer division was the only segment that increased revenue, improving 2%. Consumer and EE have been the main growth drivers for some time, and we expect that to continue. However, we do anticipate some help from Openreach in fiscal 2020 and the other divisions by 2022 or 2023. The firm launched its first converged product, BT Plus, during the quarter and it’s already gained more than 100,000 subscribers. We expect this product to do well, as it is the only converged offering in the country, where all networks are owned by the same company. The consumer division also benefited from all broadband customers being charged for watching BT Sport, its sports channels.

Overall, BT’s EBITDA increased 1% from the year-ago period and its EBITDA margin was 31.5%, versus our full year projection of 31.4%. We expect the firm can continue to increase its margins even without much revenue growth. The firm also reduced its gross pension deficit by GBP 1.8 billion, but this was due to contributing bonds worth GBP 2 billion, which then become a liability to BT.

The other divisions continue to struggle, and their order intake continues to reduce. However, BT stated that the worst of the public-sector decline is past, which should reduce future declines within that division. Importantly, much of global services 8% revenue drop is from intentionally reducing its exposure to low-margin business. This led to a 30% increase in its EBITDA. The Openreach division’s revenue fell 2% due to mandatory price cuts from Ofcom, the telecom regulator, on several products, but these cuts were expected as previously telegraphed to the market.