BT, which has seen its share price grow over 160 percent in the last two years, said it expects to return to underlying revenue growth by 2013 after a period of grinding out profit growth by cost cuts alone.
Those cuts combined with an improving sales outlook and investments in the business mean it now expects core earnings to be above six billion pounds ($9.9 billion) by 2012/13, compared with a forecast of 5.9 billion pounds from Reuters I/B/E/S data.
“We have delivered profits and free cash flow ahead of expectations ... while making significant investment in the business for the future,” chief executive Ian Livingston said.
“Free cash flow has nearly trebled compared with two years ago.”
The growth in free cash flow has enabled the group to invest in a new fiber network for fast broadband, make payments in to its pension scheme, reduce debt and increase the dividend.
“The turnaround story at BT continues,” said analyst Keith Bowman at Hargreaves Lansdown Stockbrokers.
“The group’s Global Services IT division has cut unprofitable contracts whilst pushing into Asia, while broadband customer numbers continue to be expanded. Costs continue to be cut, while uncertainties surrounding the company’s staff pension scheme have eased.”
BT had been hampered in recent years by concerns over its pension deficit which ballooned as asset prices slumped, but on Thursday it showed a huge improvement.
Pension trustees now estimate that the funding deficit, on a prudent valuation basis, had reduced to around 3.2 billion pounds at the end of 2010, compared with a figure of 9 billion pounds from the end of 2008.
The company also pointed out that if worked out on a median valuation basis, which reflects the expected returns from the assets held and likely liabilities, it estimates that the scheme was in surplus of 3.2 billion by the end of March this year.
In further good news, it also said the pensions regulator had put on hold a review into its scheme repayments, which had worried investors.
BT launched a 17-year scheme to fund its deficit despite the pensions regulator having “substantial concerns” with certain features of the plan, which weighed on its shares.
On Thursday the group said a review in to the plan had been put on hold and would not restart until the end of this year, by which time BT will have started another triennial funding valuation which will likely show the deficit to be much smaller.
“We had expected the pensions regulator to show his teeth in the next few months,” Execution Noble analyst Will Draper said. “But he now clearly won’t. They’re off the hook entirely until next year.”
The pension news added to an improving overall picture at BT, which posted fourth-quarter core earnings up three percent despite total revenues being down 6 percent, due to better than expected cost cuts.
Pretax profit nearly doubled in the last three months of its year to end-March, also ahead of forecasts, after the removal of a spate of one-off costs and it proposed a final dividend up nine percent.
