It’s never easy to make a silk purse out of a copper wire, and BT Group PLC (LSE:BT.A) latest quarter does little to change the picture.
The telecoms group turned in numbers that were broadly in line with expectations, according to UBS, but not enough to shift a market that has grown wary of its patchy revenue performance and the structural headwinds facing its core networks.
The Swiss bank has a 'sell' rating on the shares, with a 12-month price target of 135p, about a quarter below the current 180p.
Revenues slipped 3.1% to £4.93 billion in the second quarter, a shade worse than forecast. Consumer sales were the weak spot, down 3.5% as higher network access costs from Openreach took their toll.
Business performance was steadier, with revenue down 2% and profits flat, helped by better cost control. Group earnings before interest, tax, depreciation and amortisation, a measure of operating profit, edged up 0.2% to £2.08 billion, modestly ahead of expectations, thanks to savings in Business and Openreach.
There was little by way of special factors or one-offs, and free cash flow fell sharply, down 43% to £408 million. Cost-cutting remains the story propping up the numbers, but that can only disguise sluggish top-line growth for so long.
Openreach, the division that manages BT’s broadband network, managed a small revenue rise of 0.3%, helped by higher fibre uptake.
Yet the real worry lies in the loss of lines, 242,000 in the quarter, as internet providers such as Sky and Vodafone continue to shift customers to alternative fibre networks like CityFibre and Community Fibre.
To keep pace, UBS notes, BT may need to trim prices, a move that would put further pressure on margins.
The consumer division, which includes EE, remains stuck in low gear. Broadband additions were flat, and average revenues per user continue to slip.
Competition is stiff, particularly from mobile virtual network operators, smaller brands that rent capacity from the big networks, and a new wave of fintechs eyeing entry into mobile services could add to the squeeze.
Management kept full-year guidance unchanged, targeting roughly £20 billion of revenue and up to £8.3 billion of earnings, but investors are unconvinced.
At 180p, the shares sit near the top of their five-year trading range and trade on a modest free cash flow yield of less than 4% for 2025.
With Openreach under pressure, the consumer arm losing momentum and rivals Vodafone and Three pressing ahead with network investment, UBS believes BT faces the familiar dilemma of spending more to stand still.
The group has made progress on costs, but the bank's analysts think it is hard to see how that alone can carry the story much further.