Third-quarter results show that BT's pre-tax profits stabilised since June on an underlying basis, excluding redundancies and exceptionals, with a 1.3 per cent rise in the three months to 31 December. Inland volume rose 1 per cent but costs, surprisingly, did not continue to fall. BT partly blames phone box vandalism. This is possibly a temporary phenomenon, preparing the ground for a buoyant fourth quarter.
BT may have been presented by Oftel, the industry regulator, with an excruciatingly tight price cap to wear for the five years starting in July. But at least it knows where it is for a reasonable period, unlike British Gas or indeed the regional electricity companies, which face an impending MMC report on the one hand and pricing reviews on the other.
Telephone tariff cuts of 4 per cent a year in nominal terms look likely, depending on inflation. On top of that, competition from Mercury and, increasingly, the cable TV companies are almost certain to take large chunks out of growth in new telephone lines over the next few years.
But BT has scope to use its fledgling marketing skills. Most importantly, it has huge inefficiencies to clear out of the company. So far this financial year it has reduced its head count by 38,300 - 33,100 redundancies and 5,200 through disposals.
You ain't seen nothing yet. By 1998 the head count should be down to 90,000, a further reduction of almost 50 per cent.
The cumulative impact on BT's costs of this redundancy programme - pounds 500m-plus in the current financial year, falling to pounds 200m or more in subsequent years - will provide the mechanism for a steady rise in future reported pre-tax profits, after a dip from pounds 3.07bn to perhaps pounds 2.55bn in the year to March, despite the painful price cap.
Analysts also expect a gearing position of 17 per cent to be transformed to hefty cash balances as a result of a pounds 1bn a year net cash inflow, barring major investments such as the much rumoured EDS purchase in the US.
A prospective yield of 5 per cent, at the premium end of the utility range, with a dividend likely to rise in real terms at 4-5 per cent, will comfort private investors and others who doubt the power of cyclical recovery.
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