Investors are piling into the perceived KCOM (KCOM) cash machine like nobody's business, putting its shareholders in unfamiliar territory – the shares leapt 9%-odd to 83.55p. Are they right?

 

The theory is that the market has been getting a bit itchy about the north of England telecoms group's 10% a year dividend growth commitment, first flagged last year. Before today's full-year results, the shares had toppled from 87.25p last month to 76.85p, a 12% slide. So, when the group not only underlined its payout ambitions, but extended them out to 2016, income seekers flocked to buy the stock.

 

In a nutshell, supporters, including respected City number crunchers at FinnCap, Liberum and Espirito Santo, claim KCOM is throwing off enough cash to cover all of its future commitments. Yet the safety net is starting to look a bit threadbare to me, increasingly locked-in to rising payouts, capital expenditure (capex) and pension deficits.

 

Net cash inflow from operations fell £6 million to just over £50 million last year, but so too did its pension deficit liability, from £13.9 million to £9.8 million. When you do all the cashflow sums, KCOM actually had to tap lenders for an extra £13 million to cover all bases. Interesting too is that net assets of £82 million would fall into the negative once you strip out £100 million or so of intangibles, albeit, an arguably overly-conservative stance. Remember, this is a company that has seen revenues declining for six straight years, with flat ebitda (earnings before interest, tax, depreciation and amortisation) for the last three periods.

 

This year will be better if cashflow jumps considerably as analysts predict, to over £72 million. But it seems a biggish if, especially when analysts have £27.5 million of capex pencilled in to forecast models. The company admitted today that it expects over £30 million capex this year. Add to that this year's anticipated 4.8p per share divi payout will cost roughly £25 million, let's assume £12 million to cover pension costs, £5 million of interest, that's the £72 million cash outflow right there, with not an inch of headroom. If things go pear-shaped, something's got to go 'sayonara'. Suddenly the implied 5.7%-odd payout yield this year doesn't look quite so attractive.


Issue Date: 07 Jun 2013