Cube UK Report (13 May 2021) – BT spends more despite earning less
Good morning, it’s Roland here with today’s UK share report.
Overnight, Elon Musk has continued to play games with crypto by suspending Tesla’s plans to accept bitcoin payments. As I write, the bitcoin price is down by around 10% in 24 hours.
Back in the real world, there are updates from a number of FTSE 100 companies this morning. I can’t cover them all, but plan to look at:
- BT: Share price down on final results. CEO Philip Jansen plans to ramp up the fibre broadband rollout, despite cash forecasts slipping below previous guidance and a hefty pension settlement.
- Burberry: FY21 results have disappointed the market – the luxury fashion group is the FTSE’s biggest faller this morning.
- Stock data should display here.
|Writer disclosure||No position|
Operating a capital-intensive business in a mature, competitive market is never going to be easy. BT’s results in recent years have highlighted the problems faced by the group.
Revenue has fallen each year since 2017. Operating margin has fallen from 20.3% in 2015 to just 12.1% last year. The dividend was cancelled last year. And BT’s monster pension deficit continues to absorb cash.
The surprise retirement in March of chairman Jan du Plessis perhaps gives us an idea of the scale of the challenge involved in turning around BT. Mr du Plessis is a City heavyweight with some high profile roles behind him. After his appointment in 2017, I didn’t expect him to leave so early in the group’s turnaround process.
So what can we learn from today’s results? The numbers are in line with previous guidance but still somewhat downbeat:
- Revenue down 7% to £21,331m
- Adjusted EBITDA down 6% to £7,415m
- Reported pre-tax profit down 23% to £1,804m
- Adjusted earnings down 20% to 18.9p per share
- Net cash from operating activities down 5% to £5,963m
- Normalised free cash flow down 27% to £1,459m
- Capital expenditure up 6% to £4,216m
- Net debt stable at £17,802m (FY20: £17,969m)
- Dividend suspended
Without in-depth analysis, I’m finding it a little hard to understand the cause of the revenue decline. There are a lot of moving parts and BT’s commentary doesn’t make it easy to allocate blame:
Revenue £21,331m, down 7%, primarily due to the impact of Covid-19 on Consumer and our enterprise units, ongoing legacy product declines and divestments, partly offset by higher equipment revenue and Openreach bases in fibre and Ethernet; adjusted2 revenue down 6% in line with expectation
The decline in EBITDA, profit and cash flow all stem from lower revenue. When the top line is falling, the impact of operating leverage tends to mean that the bottom line falls faster.
To be fair, I don’t see any major surprises in BT’s FY21 numbers. I think today’s share price fall is mostly linked to today’s forward-looking news.
Pension deficit: BT has completed the triennial valuation of its pension scheme and agreed a new deficit reduction plans. The actuarial deficit has fallen from £11.3bn to £7.98bn since June 2017.
(Note that the actuarial deficit is calculated differently to the accounting (IAS 19) deficit, which rose from £1.1bn to £5.1bn over the 12 months to 31 March 2021. This volatility reflects the massive size of the scheme — the 2020 report showed pension assets of £53.5bn and liabilities of £54.6bn. A small change in the value of these assets and liabilities can cause a big change in the accounting deficit)
BT and its pension trustees want the scheme to be full-funded on an actuarial basis by 2030. To achieve this, the company has agreed a new deficit funding plan.
In short, annual cash payments will start at £1,080m this year and taper to £780m over the next 10 years. There will then be a further three years of contributions at £180m. A total of £2bn of these contributions over 13 years has been secured on the EE business. I guess this may limit dividend disbursements from this part of BT and perhaps dividend growth for the wider group, given the planned increase in capital expenditure.
Fibre rollout to accelerate: BT will accelerate its FTTP (fibre to the premises) rollout to target 25m premises by the end of 2026. Its previous target was 20m. Annual installations will rise from 2m to 4m. This decision seems to be linked to the government’s “cash tax super-deduction” which will provide a tax relief of 130% of qualifying capital expenditure until 2023. BT was already expected to take advantage of this Covid-19 recovery measure.
CEO Philip Jansen believes the extra capital expenditure can be funded without threatening BT’s BBB credit rating — the minimum needed to maintain an investment grade rating. The company will consider joint ventures to limit incremental costs from accelerating the FTTP rollout.
- Revenue: “broadly flat”
- Capital expenditure will increase to £4.9bn in 2021/22, around £500m above previous guidance
- Normalised free cash flow in FY 2022 is expected to be £1.1bn-£1.3bn, below previous expectations of £1.4bn.
- Dividend of 7.7p in FY22, in line with previous guidance
I can think of worse places to put my money than BT shares. This business isn’t going to disappear and will probably remain a (reasonably) reliable dividend payer. Although the stock has risen by c.50% since November, it still offers a forecast yield of nearly 5%.
However, I can’t get too excited about the idea of owning BT shares, due to the multiple headwinds the group faces. BT operates in a competitive sector and must continue to invest in mobile and fixed network upgrades. Debt and pension burdens are also high, limiting flexibility.
In my view, it will remain difficult for BT to achieve more than minimal levels of revenue or margin growth for the foreseeable future.
I suspect BT shares are fairly priced at current levels, but if I was buying a big UK telecoms stock today, I would buy Vodafone instead.
- Stock data should display here.
|Writer disclosure||No position|
Luxury fashion group Burberry is the biggest faller in the FTSE 100 as I write, down by around 8%.
At first glance this seems an unreasonably subdued reaction to the company’s numbers for the year to 27 March, which look quite solid to me:
- Revenue down 11% to £2,344m
- Adjusted operating profit down 9% to £396m
- Adjusted operating margin up 50bps to 16.9%
- Free cash flow up from £66m to £349m
- Dividend reinstated at the 2019 level of 42.5p per share
Sales were obviously impacted by store closures, making meaningful comparisons difficult. However, full-price comparable store sales are said to have risen by 7%, suggesting new product has been well received.
In the past, I’ve viewed Burberry shares as reasonably valued when they’ve fallen below 2,000p, as they are today. Does this view still hold? Probably. But I do expect consensus forecasts for FY22 to be trimmed after today’s results, for a couple of reasons:
- The company warns that it will stop discounting products in mainline stores from FY22. This is expected to have a “mid-single digit percentage” on like-for-like store sales over the year.
- Margins will also remain under pressure this year, due to “operating expense normalisation” (?) and increased investment in growth.
As a broad estimate, I’d guess that Burberry stock is now trading on around 25 times possible FY22 earnings after today’s fall. The dividend yield stands at around 2.2%.
For a business with a valuable brand, strong balance sheet and historical ROCE in excess of 20%, I don’t think this price tag is unreasonable. I might consider buying Burberry shares at this level.
That’s all I have time for this week. Thanks for reading. I should be back with you at some point next week.