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BT shares surge despite dividend cut as it expects earnings to hit top end of guidance

Regulated price reductions in the Openreach network and a poor performance in its enterprise businesses dragged revenue lower in the first half
BT reduced its interim dividend by 5% as cash flows plunged

BT Group PLC (LON:BT.A) said it expects full-year earnings to reach the top end of its guidance range after first-half profits rose 24%, supported by cost savings and the sale of high-end smartphones.

Shares jumped 6.9% to 257p in morning trading.

In the first six months of the year, reported pre-tax profit increased to £1.3bn from £1.1bn a year ago and adjusted earnings (EBITDA) edged up 2% to £3.7bn from £3.6bn as the telecoms giant cut costs as part of its restructuring and saw a higher volume and mix of high-end smartphones in the consumer business.

However, regulated price reductions in its Openreach network and a poor performance in its enterprise businesses dragged revenue lower.

Revenue fell 2% on a reported basis or 1% on an adjusted basis to £11.6bn with declines across all divisions apart from the consumer arm, which grew 3% to £5.3bn as newly launched mobile phones boosted sales. 

Consumer fixed average revenue per user (APRU) rose 1% to £38.3 with a higher proportion of SIM only customers leading to a reduction in postpaid mobile APRU by 0.5% to £22.0

Mobile churn remained at 1.2% while fixed churn rose to 2.6% due to recent price increases. 

Openreach price cuts, legal separation and broadband upgrade

Openreach, which runs most of the UK’s telecoms infrastructure, reduced the wholesale price it charges providers such as Sky, TalkTalk and Vodafone to use superfast and ultrafast broadband after Ofcom announced new controls earlier this year.

The price controls were not as bad as feared with Ofcom backing off amid complaints from BT that its ability to spend billions on upgrading the UK’s broadband infrastructure would have been undermined by the regulator’s earlier plans.

READ: BT expects hit to Openreach earnings as it offers discounts for faster broadband

Last year BT agreed to bow to regulatory pressure and legally separate Openreach. In the final stages of the separation, BT transferred 31,000 employees to Openreach last month.

“Openreach has signed up the majority of its major and a number of its smaller communications providers to its new volume-related discounts which should increase average broadband speeds across the UK,” said outgoing chief executive Gavin Patterson.

Patterson said Openreach was making progress on its plans to bring faster and more reliable broadband to households, with plans to expand the programme to 10 million premises “if the conditions are right”. Openreach has delivered ultrafast broadband to nearly two million premises to date.

Outlook unchanged but dividend lowered 

Patterson, who will be succeeded by Worldpay boss Philip Jansen in February 2019, said the group’s strategy to simplify the business and improve efficiency was delivering benefits.

READ: BT Group appoints Worldpay boss Philip Jansen as new CEO

“Despite increasingly competitive fixed, mobile and networking markets and continued declines in legacy products there is no change in our overall outlook for the full year,” he said.

Based on current trading, BT expects EBITDA to be in the upper half of its £7.3-£7.4bn range.

However, BT lowered its interim dividend to 4.62p from 4.85p last year as the net cash inflow from operating activities plunged 71% to £754mln.  Normalised free cash flow fell 22% to £974m as capital expenditure increased 8% to £1.8bn while net debt rose to £11.9bn from £9.5bn.

Richard Hunter, head of markets at Interactive Investor, said while the dividend decrease was an "unwelcome surprise", it may be a prudent move given the decline in net cash and believes it "should not take too much sheen on a dividend yield, which previously stood at an attractive 6.4%".

Hunter added: "A new direction of travel may be beginning to emerge, and the initial share price reaction is one of extremely positive relief. This folds into what had been a disappointing year for the shares, which had fallen 7.6% as compared to a 4.8% decline in the wider FTSE100. "

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