View from City Road: Wrong number bolsters BT

IN A market eager for good news of any kind, BT's first-quarter pre-tax profits of pounds 596m, despite being down by 28 per cent, were enough to push the share price 13p higher to 346p. Market estimates were for about pounds 560m but the fact that the higher outcome stems from a lower-than-expected first-quarter restructuring charge of pounds 56m, which may well be made up in later quarters, did not dampen enthusiasm.

In addition, news that BT's generous voluntary redundancy offer will enable the company to cut 9,000 more employees than planned this year was well received, as always, by the stock market. The redundancies will cost BT pounds 580m, but the charge to profits will be only pounds 460m since pounds 120m has already been provided.

The extra job losses should save BT another pounds 180m in the next financial year and more than offset the impact on profits of the revised Oftel pricing regime.

Tough action on costs is badly needed. First-quarter turnover was down 2 per cent and operating costs were up by 2 per cent, which left pre-tax profits, before a pounds 135m exceptional hit mostly from the recent Mitel disposal, down 11 per cent.

The prospect now is for more or less stable operating costs for the next couple of years, which will greatly improve BT's gearing to an upturn in call volume.

On this score the fall in inland call volumes during the first quarter and static overseas calls are not very encouraging. In previous recessions the telephone business has held up relatively well but this time its performance is not so good.

In a squeezed market there is more pressure than ever on BT to cut costs to the minimum but also to resist losing market share to newcomers.

BT is taking a stronger marketing approach under the guidance of Michael Hepher, the group managing director who was brought in from Lloyds Abbey Life by Iain Vallance, chairman, last autumn. For investors this may mean little unless BT survives the current price negotiations with Oftel without a reference to the Monopolies and Mergers Commission, but the signs are that it will.

Meanwhile, a yield of 6 per cent this year and more real dividend growth thereafter underline BT's defensive virtues.

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