MARKET COMMENT
There Is Nothing Bland About BT

By David Kuo (TMFDragon)
November 7, 2002

The two words 'profit' and 'soared' are seldom use together when we talk about the telecom industry. But that is precisely what has happened at BT Group (LSE: BT.A)(NYSE: BTY). First-half profits at the UK's biggest fixed line telecom operator soared 55% to £496m. Sales were up just a smidgen, or 2% better to £4.7b, and free cash to the tune of £552m was generated. Debt was reduced to £13b and that level of borrowing could fall by a further £2.5b once BT's stake in Cegetel is sold to Vodafone Group (LSE: VOD)(NYSE: VOD). That reduction in debt has led to a fall in interest payments. Furthermore, with lower interest rates in the offing, those borrowing costs could decline even further. This morning's good interim results from BT led the company to declare an interim dividend of 2.25p. It added that the final divided would be around 3.40p, suggesting a dividend yield of 2.9%.

BT's much-improved performance has been brought about not through revenue growth but by prudent management and cautious cost cutting. In fact revenues are unlikely to grow any faster, according to the company. That 6% to 8% target for annual revenue growth, which the company was aiming at, now seems unlikely to be reached. Growth of 3% is perhaps a more tad more realistic. Nevertheless, as the old saying goes -- revenue is vanity, profit is sanity and cash is reality. As investors, it is perhaps reassuring to see a company choose sanity and a whole heap of reality in these less than certain times. There is time aplenty to reassess the various options for revenue growth once the company's balance sheet is restored to health. There is also that niggling problem of the hole in the company's pension scheme that will need plugging.

The stewardship of Sir Christopher Bland has had a steadying effect on BT. He has overseen the disposal of Yell, the sale of BT's interests in Japan and the mega-rights issue in June 2001. He has watched over the spin-off of mmO2 (LSE: OOM), the sale of numerous other non-core assets that included the messy unwinding of Concert. However, Bland's objectives have been clear from the start, namely to pare down debt. There is still a little way to go before BT can boast a healthy balance sheet. Until then anything audacious or spicy will perhaps be off the menu. The main strategic focus will be consolidation and rationalisation leading to an improvement in bottom line profit. And there nothing unexciting, unappealing or indeed bland about that.