The sell-off today of BT Group PLC (LON:BT.A) shares was warranted but there are some reasons to be cheerful ahead, reckon City scribes.
The closely followed UK telecoms giant was the top loser on Footsie today, as its shares sank almost 2% to 310.0p, on the back of numbers in its first quarter results. Its shares are down around 17% since the start of the year.
READ: BT Group shares down as it posts big drop in headline profits after further Italy charge, underlying fall as expected
Avoiding legal action ...
The group was forced to pay out £225mln to shareholders Deutsche Telekom and Orange in the wake of its purchase of EE in 2015 and the accounting scandal at BT's Italy operation, meaning pre-tax profit for the three months to end June sank 42% to £418mln.
Due to warranty deals and BT's share plunge in January due to the £530mln Italy scandal, it has been forced to pay out £225mln to the pair to avoid legal action. BT did say however that this drew a line under the matter, and the settlement was "better than facing a longer legal process".
Neil Wilson, at spreadbetter etxcapital.com, noted however that today's hit was on top of the £530mln write-off due to the scandal at BT Italia and an expected £300mln 'or so' to compensate rivals relating to its Openreach division.
Charges mounting up ...
READ: Auditor PwC to be investigated over BT 's Italian accounting fraud
"The charges are mounting up – pre-tax profit slumped 42% in the first quarter to £418m, while revenues were up a shade. Basic earnings per share were cut in half," he said.
More alarming, he suggests, is the group's pension black hole - a £14bn deficit in the £50bn pension fund - which represents a "gaping wound" on its balance sheet.
George Salmon, at Hargreaves Lansdown, agreed, noting this morning that with costs relating to sports rights and the group’s pension scheme both rising, adjusted EBITDA (excluding £318mln of specific items) in the first quarter fell 2% to £1.8bn.
But the analyst added it was "probably unfair to paint an entirely gloomy picture".
Some positives ...
READ: BT shares gain after Ofcom forced to revisit rules on broadband market
"BT has shaken off demands to fully separate the higher-margin Openreach division, and assuming there aren’t any more skeletons in the closet, the cash flows from EE and the growing Consumer division are potentially attractive."
Mobile net subcriber additions in the quarter were 210,000, with churn remaining low at 1.1%, while Openreach fibre connections remained high at 437,000, with fibre broadband now passing 26.8mln UK households.
BT’s net cash inflow from operating activities in the first quarter was £1.315bn, down £19mln on a year earlier, although normalised free cash flow of £556mln was up £108mln due to working capital phasing.
Chief executive Gavin Patterson said overall BT had delivered an “encouraging performance”, pointing to the revenue increase and the 9% increase in broadband and TV revenue, fuelled by price rises, and a 4% rise at EE to £1.3bn.
Swiss broker UBS said in a note that the 'modest' expectation beat for the first quarter was 'encouraging' but that BT shares had rallied into today's numbers.
Uncertainty remains over medium-term equity free cash flow with lack of visibility on both pension costs and capex, it suggested.
The costs of securing sports rights also continues to pile pressure on BT.
In March, it paid £1.18bn for Champions League football rights, 32% more than the previous deal, to keep Sky (LON:SKY) out.
Yesterday, Sky itself revealed it paid £700mln for the Premier League, which drove a 14% drop in profits at its UK and Ireland operation.
Upcoming sports rights auctions for BT include the Football League, which is expected to be a high-stakes bidding war with Sky, and the ATP World Tour Tennis.
By mid-afternoon, shares were down 1.8% at 310.25p.