Inflation, cost pressures and soaring energy prices. No, not the Bank of England, but BT, which is providing in miniature an illustration of how the squeeze from many directions has intensified at pace. A share price that was 195p in mid-July is now 116p, down 9% on Thursday’s half-year update. The chief executive, Philip Jansen, talks bullishly about how BT’s Openreach subsidiary is building its fast-fibre broadband network “like fury”, but there is a strong sense here that the financial part of the job has suddenly become harder and more complex.
In the form of more expensive fibre, inflation will play a role in bumping up BT’s capital expenditure bill this financial year from £4.8bn to £5bn. Energy costs will also be up by £200m, contributing to cashflow arriving “towards the lower end” of the previously advertised £1.3bn-£1.5bn range. Jansen has ordered more cost cuts and efficiencies, and the hint of job losses in the offing won’t improve the mood around the pay dispute with the Communication Workers Union. The new savings target for the end of 2025 is £3bn, up by a cool half a billion; great if achieved, but the last mile tends to be hardest.
The good news, of a sort, is that the overall vision of digging furiously in expectation of fat cashflows from fibre is intact. Almost 9m premises have been passed and a take-up rate of 27% may even be slightly better than expected at this stage. There is an open question of how much work is being done by introductory offers but, given that the new kit is meant to last a generation or more, that’s not yet a big concern.
One can, then, sketch a scenario in which BT stays within its financial framework, maintains its “progressive” dividend policy and makes it through to 2026, when the heavy capital spending bills will fall away. There is, though, a greater sense of uncertainty about it all.
Six months ago, the terms of BT’s “fair bet” on fibre, secured after years of regulatory wrangling, looked excellent; the presence in the wings of the 18% shareholder Patrick Drahi, the Swiss-based French telecoms tycoon, also encouraged the idea that a national broadband upgrade could be an excellent long-term investment story. The long term is probably still the correct way to view things, but, amid inflation, the next couple of financial updates now feel more critical than they should be.
Sainsbury’s shows how close UK came to crisis
It’s all ancient history (we hope), but Sainsbury’s made a startling revelation alongside its half-year numbers: amid the wild moves in gilt prices that followed the former chancellor Kwasi Kwarteng’s mini-budget in late September, the supermarket group made a £500m loan facility available to its pension fund.
The purpose was to avoid having to sell assets at distressed prices to meet demands for collateral on liability-driven investment strategies. In the event, the loan wasn’t needed. Kwarteng was sacked, Jeremy Hunt became chancellor, the policy U-turns began and a degree of calm returned to the gilts market.
But the episode underlines how close the UK came to a proper financial crisis in which corporate coffers would have had to be raided for emergency pension loans. Sainsbury’s, one strongly suspects, will not have been the only corporate sponsor to make a loan offer to its pension fund (and Serco injected £60m); the full tale of that frantic fortnight is yet to emerge.
Back on the day job, Sainsbury’s sounded almost upbeat about trading. Underlying pre-tax profits of £340m represented a fall of 8%, but that’s a decent outcome when last year included a whoosh from the Covid lockdown. Unlike Tesco recently, Sainsbury’s didn’t tweak its full-year forecast (£630m-£690m). The tone was confident and the shares rose 7%. The reaction would have been different if the pension fund trustees had actually taken the massive loan.
Bailey baffles with jargon
Communication is not Andrew Bailey’s strong point, say his critics, but at least the governor of the Bank of England tries. Alongside Thursday’s hike in interest rates, he recorded a video for social media explaining the monetary policy committee’s thinking to the nation. Unfortunately, he immediately spoiled the effect by referring to the “75 basis point” increase in rates. Cut the jargon: outside the policymaking bubble, people count in percentage points.