Rising costs and underperforming businesses have left BT struggling to convince investors to wait on hold.
The former monopoly has few delay tactics at its disposal. One of the few is swingeing job cuts, the latest attempt by Philip Jansen, BT boss, to prove that the telecoms group can emerge from spending billions on upgrading its network to full-fibre and rolling out 5G technology, as a lighter, more cash-generative business.
The telecoms group plans to cut its workforce by more than 40 per cent, taking between 40,000 and 55,000 people out of the business by the end of the decade. About half of the culling will come as the group comes to the end of its £15 billion new broadband build and the operating efficiency associated with the shift away from copper lines.
Plans to net an annual £1.9 billion in cost savings by the end of 2025, in the face of painful component and wage inflation, had already been sketched out. The lumbering giant needs to modernise, but making incremental savings is no fix for the challenges facing BT’s cashflows.
Adjusted free cash, which strips out pension deficit payments, generated last year came in at £1.3 billion, at the bottom end of a guidance range that stretched up to £1.5 billion. What’s more, management expects adjusted free cash generation to fall again to between £1 billion and £1.2 billion, which at the midpoint, is 15 per cent less than analysts had been looking for.
Higher-than-expected capital expenditure is the usual suspect, coming in roughly £100 million higher than investors had been braced for, at £5.1 billion. Ploughing cash into connecting more properties to full-fibre broadband means BT is set to spend a similar sum this year.
Openreach, the broadband network it owns but is legally separate from, is aiming to bring faster full-fibre to 25 million homes and businesses by the end of 2026, from just over ten million at present, and push the take-up of the network by customers from 30 to 40 per cent. By the end of the decade, it hopes heavy spending falls away and amps up cash churned out by the business.
But BT isn’t the only operator in on the act, even if it has scale advantages to boast. Virgin Media and a number of so-called alt-nets, particularly CityFibre, backed by the Goldman Sachs infrastructure investment arm, are in a race to roll out their own fibre networks. The fear is that rivals will steal some of the rewards to be gleaned from BT’s costly investment.
The loss of 68,000 broadband customers in the fourth quarter, an acceleration on the 10,000 decline the quarter before, hardly helps assuage those concerns. BT blamed customers using older, copper lines for the fall, a phenomenon that it expects to continue.
Like other legacy telecoms groups, BT is balancing multiple demands on its capital. Even putting its heavy infrastructure investment programme aside, it has a £3.1 billion pension funding gap to help fill and a policy to maintain or increase generous dividends to shareholders. Not surprisingly, the latter was kept flat at 7.7p a share for last year.
Add back pension payments of almost £1 billion and an annual dividend costing £753 million, and free cash generated by the business after capex and tax payments came in at £1.4 billion last year, not enough to cover the next chunkiest of outlays. If the pension scheme remains underfunded, BT is on the hook for £780 million in contributions a year until the end of the decade.
Sluggish revenue across the business makes heavy cost burdens even less palatable. In the UK, the group operates in the ultra-competitive consumer mobile and broadband markets under the EE brand. Meanwhile its B2B business has struggled to push forward the top line, suffering another decline in mobile and fixed-line revenue.
The shares remain at less than half the level they were a decade ago. While questions remain over whether it can revive revenue and if heavy capex can come good, a slumbering share price will offset the benefit of beefy dividend returns.
ADVICE Avoid
WHY The shares will struggle to move higher while revenues are stagnant and free cashflows are coming under pressure
Burberry
Burberry’s woes have done a 180, but not for the better. Just as the reopening of the lucrative Chinese market has spawned a recovery in sales hammered by tight lockdowns, the US is faltering.
A tougher macroeconomic backdrop has accelerated the fall in same-store sales in the Americas, which fell 7 per cent during the fourth quarter, worse than a 1 per cent decrease three months earlier. Tellingly, demand for lower value “entry level” items is the source of the decline.
This market will continue to drag on sales over the first half of this year, as third-party stockists run down their inventories of Burberry goods while confidence remains weak. That is set to cause revenue from the wholesale channel at a group level to weaken by somewhere in the low double-digits.
The pressure on wholesale is unhelpful but given it accounts for only 18 per cent of group sales, there are greater potential rewards on offer from a recovery in the core retail channel within China and the Asia Pacific region. During the fourth quarter, sales in mainland China rebounded 13 per cent, which pushed up like-for-like sales in the latter region, a key beneficiary of the removal of Beijing’s restrictions, by 19 per cent. There should be more to come, as the return of travel takes root. Before the pandemic, roughly half of purchases by Chinese customers were made while overseas.
The collapse in Chinese sales has not been the only impediment to earnings, a style drift away from the fashion house’s British roots has also hamstrung growth.
Jonathan Akeroyd, Burberry boss, hopes to tackle this by bringing the focus of the brand back to more recognisably British designs. He has replaced Riccardo Tisci, the creative chief, with Daniel Lee, the British designer. Within that, the aim is to lift sales of more profitable handbags, belts and scarves to more than half of sales and to boost the operating margin to 20 per cent this year and even higher over the next five years. Akeroyd hopes to lift revenue by £1 billion to a record £4 billion over the next three to five years.
If he can do that, the discount attached to Burberry’s shares versus titans such as LVMH, Prada and Hermès, should start to narrow.
ADVICE Buy
WHY Good progress on sales should inspire confidence in turnaround plans
