UPDATE 3-BT shows evidence of turnaround, shares rise 11 pct

* FY sales down 2 pct to 20.9 bln stg

* Adjusted EBITDA up 6 pct to 5.78 bln stg

* Final dividend 4.6 pence, FY dividend 6.9 pence

* 2010-11 sales seen at around 20 bln stg

* 2010-11 adjusted EBITDA seen in line with 2009-10

(Adds new analyst comment, details on free cash flow, dividend)

By Georgina Prodhan

LONDON, May 13 (Reuters) - British telecoms provider BT Group Plc BT.L showed evidence of a long-awaited turnaround as cost cuts and service improvements began to bite, slowing its full-year revenue decline to 2 percent and lifting its shares 11 percent.

Britain’s biggest fixed-line telecoms provider said it was now in a position to increase investments in high-speed fibre and TV, and would spend an extra 1 billion pounds ($1.5 billion) to extend its fibre rollout to two-thirds of Britain.

BT predicted it would return to growth in 2012-13, helped by new consumer offerings and growth in corporate services in Asia. Its troubled Global Services IT services division should turn cashflow positive in 2011-12, it said on Thursday.

“We are investing in the future of our business,” Chief Executive Ian Livingston said ahead of an investor day, adding there was still a lot of work to do.

BT beat consensus estimates on all its key sales, profit and cash flow figures and outlined a three-year plan to return to growth. It said it would pursue a “progressive” dividend policy, keeping the payout in line with profits and cash flow.

BT shares had risen 11 percent to 133 pence by 1156 GMT, by far the top gainer in a flat European telecoms index .SXKP.

“The turnaround is definitely in full gear now,” said analyst Mike Kovacocy of Daiwa Securities. “They’re getting very close to actually growing the business again.”

BT has been plagued by underperformance at Global Services, which has caused two recent profit warnings at the group. In the year to the end of March, Global Services sales declined in line with the group and core profit grew for a fifth consecutive quarter.

“The revenue beat was driven by Global Services, which beat consensus by 164 million pounds (7.7 percent), of which 100 million was due to early delivery of revenue due to the delivery of significant contract milestones,” Citi analysts wrote.

BT is also operating under the cloud of a huge pension deficit, which stood at 5.7 billion pounds at March 31. BT is awaiting results of a review by Britain’s pension regulator of its proposed 17-year plan to fund the deficit.

Before Thursday's news, BT shares had fallen about 10 percent this year so far, underperforming a 7 percent decline in the European telecoms sector .SXKP.

They now trade at about 7.6 times expected 2010-11 earnings, according to Reuters data, below the European average of 10.6 for fixed-line providers.

Livingston said the Asia-Pacific region would drive growth at Global Services, helped by increased investments in networks and staff.

“This will be the decade of the Asian multinational,” he told journalists on a conference call.

He declined to comment on overall headcount targets. BT plans to cut another 900 million pounds in costs this year, after 1.75 billion worth of cuts last year, but said on Thursday the extended fibre-rollout would employ more people.

BT now plans to cover two-thirds of Britain with high-speed fibre by 2015, instead of the 40 percent it had previously targeted, making it one of the world’s biggest privately funded network buildouts.

Faster Internet delivery will also help BT’s efforts to develop its consumer IPTV business, BT Vision.

A court recently ruled that pay-TV broadcaster BSkyB BSY.L, which dominates sports coverage in Britain, must wholesale its premier sports offerings to competitors, including BT, at more favourable rates.

But implementation of the price cuts has been delayed pending a final appeal, making it difficult for BT and others to pass on those savings to customers.

Livingstone said BT would offer Sky Sports 1 and 2 in time for the soccer season starting later this year, and would offer lower entry prices for consumers by unbundling it from other offerings, but would hold off on passing on price cuts.

“We will be working on the basis that the current prices hold,” he said.

Livingston said he had nothing to announce on a possible disposal of BT's 31 percent in Indian IT services firm Tech Mahindra TEML.BO -- worth about $630 million at current market value -- following media speculation it might sell the stake.

“We’ve got a very long-term relationship with Tech Mahindra. We’ll look at that over time and consider the options,” he said. BT is also Tech Mahindra’s largest customer, accounting for about 40 percent of its revenues. (Editing by Hans Peters, Simon Jessop and Karen Foster) ($1=0.6722 pound)


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