Search Icon

KCOM profits slide but dividend holds firm

Telecoms group warns it is losing business customers but strong cashflow and steady profits provide 10pc dividend increase, says Questor

The company said yesterday that trading was in line with expectations making the shares worth considering for income alone.
The company said yesterday that trading was in line with expectations making the shares worth considering for income alone.

KCOM
85¾p-3¾p
Questor says HOLD

HULL-based telecoms group KCOM warned that revenue would be lower than expected for the full year, sending shares down 4.6pc yesterday.

The company announced a cost-cutting programme after revenue and profits fell in its first half results yesterday.

Questor thinks that should be enough to support the healthy forecast dividend yield of more than 6pc, which management plans to increase by 10pc until 2016. The company yesterday reported a 6.7pc fall in revenue to £173m and pre-tax profits of £23.6m, an 8.5pc decrease, in the first six months ending September.

KCOM said that the public sector and business communication part of the company is struggling to win enough new contracts to replace lost business and that this will hit full-year revenue forecasts. Market consensus is for pre-tax profits to slip marginally to £48m, on revenue of £367m.

The consumer part of the company that generates about three quarters of the group’s profits was stable with profits marginally up on the same period last year.

Telecoms companies have stable revenue and cash generation as customers tend to renew fixed line and broadband packages with the same provider. That is what enables KCOM to increase the interim dividend by 10pc to 1.79p per share, ex-dividend December 29 and payable February 2.

The company is also generating plenty of cash with a slight improvement in the cash performance during the first half of the year.

KCOM is attractive to investors in no small part because it generates plenty of cash. The company made £67m in free cash flow last year – up from £46m a year earlier – meaning that the £24m paid out in dividends was covered almost three times.

The company’s overall debt position was made more secure by refinancing a £200m borrowing facility until 2019.

KCOM is certainly not a growth stock, but with the shares rated on 12 times forecast earnings it doesn’t really have to be. We downgrade to a hold on this update, but Questor thinks the shares are still worth keeping for that income.