Juicy Profits At KCOM

Published in Company Comment on 26 May 2011

A change of strategy sees profits and dividends soar.

Back in November, I was pretty bullish about the prospects for Hull based KCOM (LSE: KCOM), the company previously known as Kingston Communications. After seeing a nice boost to first-half profits, I expected the company to finish off with a good second half and pay a decent dividend.

And that's exactly what has happened, after KCOM unveiled full-year results on Thursday.

Revenues were down as expected, by about 4% to £395m, as the company has been pursuing a policy of moving away from low-margin commodity business and chasing higher margin contracts. And that strategy appears to have been successful, with a 71% rise in pre-tax profits revealed -- up from £19.2m last year to £32.9m.

Costs and debts down

Control of costs also did their bit for the bottom line, with operating costs apparently reduced across the company, and finance costs remaining static at £7.4m.

Profit has been turning into strong cash flow quite nicely, with net debt coming down by £35m over the year, to £82m, which is its lowest for quite some years and is ahead of target. 

The pension deficit has been drastically slashed too -- standing at a scary £50m a year ago, it is now down to just £7m.

We saw basic earnings per share of 4.44p, up 28% from last year's basic figure of 3.47p.

Doubling the divi

A full-year dividend of 3.6p per share was announced. That's more than double last year's dividend, and beats the minimum commitment given earlier in the year. 

Even after Thursday morning's 7% share price rise, that's still a yield of over 5%. And that rise caps a very satisfactory year for the shares, which have firmly outperformed the FTSE.


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New growth

Where did this new spurt in profit growth come from? Executive chairman Bill Halbert tells us…

"Our results are ahead of expectations, with strong cash generation and a further strengthening of the balance sheet. Recent contract wins show the Group beginning to deliver on its return to growth strategy. They underline our growing reputation and recognition in our chosen markets and we are excited about the Group's future opportunities."

That's great, and a lot of investors will be loudly cheering their dividend windfall. But I'm a little more cautious, and I can't help feeling it might have been better to get a bit more of that new growth behind the company before boosting the dividend quite so aggressively.

It's not very well covered, and analysts' forecasts for next year are still pretty modest -- and with KCOM committing itself to a minimum 10% growth in dividend per year for the next two years, I just hope it doesn't end up getting a bit stretched.

New contracts

Anyway, this year's success came from a number of high value new contracts, including ones with the NHS Business Services Authority, Morrisons (LSE: MRW), Domino's (LSE: DOM) and Eversheds.

The company also won the Staffordshire Public Sector Networks contract, and has been named as preferred bidder for the Dorset equivalent.

And amongst its existing customers, KCOM counts such industry leaders as British Airways, Reckitt Benckiser (LSE: RB), and Aviva (LSE: AV).

Buy the shares?

So is it too late to buy in now? 

Well, analysts' forecasts for 2012 are all up in the air, but on this week's results we're looking at a trailing P/E of around 16. With expectations for next year sure to be nudged up a bit now, the shares probably aren't overpriced -- one broker, finnCap, has already lifted its target price for the shares to 80p. But then, they're not in the bargain basement either

Unless anything goes drastically wrong, we should be seeing a reliably rising dividend for the next two years at least (even if I'd prefer it to be a little more cautious), so I still think you'd do OK to buy at these levels.

So that's two telecoms companies reporting good results in as may days. Do you invest in telecoms? Would you buy the shares now? We'd love to hear what you think, below.

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eccyman 26 May 2011 , 9:09pm

Pursuing high margin business instead of low margin business seems fair enough, even obvious. But if every company followed this lead then high margin business will become low margin and vice-versa.

If low margin business is profitable then why not carry on with it? It might well lead to higher margin business, help retain staff or provide a more stable business.

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