BT unveils massive network investment and strong final results

Thanks to two months' contribution from EE, the telecoms giant also reported final results that showed a 9% rise in adjusted profits before tax to £3.5bn from a 6% gain in revenue to £18.9bn. Fourth-quarter revenue grew an underlying 1.3% and was 1% ahead of consensus forecasts.

Underlying revenue, excluding transit and specific items, foreign exchange movements and the effect of acquisitions and disposals, was up 2% - the best performance for more than seven years.

EE contributed £261m of operating profit since the acquisition closed on 29 January, helping the group's fourth quarter profits up 14%.

Excluding EE, the results show a more modest growth in annual profits of 1%, helped by performance in the consumer division, in particular sales of BT broadband and TV.

Directors proposed lifting the full year dividend 13% to 14p after adjusted earnings per share rose 5% to 33.2p, with reported EPS up 13% to 29.9p.

Adjusted figures exclude a net £217m worth of items, such as a EE acquisition-related costs and net interest expense on pensions, balanced out by substantial tax credits.

Net debt stood at £9.85bn at the 31 March year end, up from £5.1bn a year before.

"This has been a landmark year for BT," said chief executive Gavin Patterson. "We've completed our acquisition of EE, the UK's best 4G mobile network provider, we've passed more than 25m premises with fibre and we've also delivered a strong financial performance."

EE synergies, outlook and network investment

Patterson said the integration of EE was going so well that management upped their targets for £400m cost savings from £360m and lowered integration costs to £550m from £600m.

Looking forward, he revealed plans for a £200m share buyback in the coming year and supplied new guidance for the coming two year, including expectations for £7.9bn EBITDA and £3.1-3.2bn free cash flow in 2016/17 and at least a 10% increase in the dividend for the next two financial years.

On the new three-year investment plans, Patterson said this would be "subject to regulatory certainty", a reference to rivals' calls for watchdog Ofcom to force BT to spin off Openreach.

The regulator's February review allowed BT to keep hold of the infrastructure business but suggested it would be forced to separate if it does not effectively open up the network to rivals and implement major reforms.

Patterson said the fibre-to-the-premises (FTTP) expansion would ensure Britain remained a "digital leader".

He added: "Networks require money and a lot of it. Virgin and BT have both pledged to invest and we will now see if others follow our lead. Infrastructure competition is good for the UK and so is the current Openreach model whereby others can piggyback on our investment should they want to."

There was criticism of the investment plans, as BT said that while some consumers will receive their ultrafast broadband via FTTP, most will receive it via 'G.fast', a technology that combined fibre and copper wire.

Rival Sky, which uses the Openreach network for its broadband services, was unimpressed and one among a number of carping voices on Thursday.

Sky and TalkTalk have long bemoaned what they see as underinvestment in the Openreach network, which has held back the rollout of superfast broadband while allowing BT to make excessive profits.

"Today's statement shows that BT continues to see copper as the basis of its network for 21st century Britain," Sky said.

"Despite BT's claims, it is clearer than ever that their plans for fibre to the premise broadband will bypass almost every existing UK home. This limited ambition has been dragged out of BT by the threat of regulatory action, demonstrating once again why an independent Openreach, free to raise its own long-term capital, is the best way for the UK to get the fibre network it needs.”

Analyst opinions

Societe Generale said the guidance looked to be 3-8% ahead of 2017 and 2018 consensus forecasts, with scope for a circa-1% rise to consensus EBITDA and circa 5-8% for free cash flow for March 2017, and a 3-5% rise to consensus cash flow for 2018.

Analyst Laith Khalaf at Hargreaves Lansdown said the headline profits were somewhat flattered by the acquisition of EE.

"Taking that out of the equation leaves a more muted picture of the business, which has achieved modest growth in line with the expectations fostered by management," he said, noting that performance was helped by increasing revenues from TV and broadband services, and audience numbers for BT sport that have risen by almost half over the course of the year.

He added that the deal with EE provides BT access to over 30m more mobile customers to which it can sell broadband and TV services under ‘quad-play’ packages which incorporate broadband, TV, and both fixed and mobile phone lines.

"This provides significant growth potential, though both Sky and Virgin will want to challenge BT in this market."