Full-year results from telecom services supplier KCOM (KCOM) excite the market, pushing the shares nearly 3% higher to 93.55p, finally ending a dismal run through April and May. While the headline numbers themselves look so-so, two elements offer hope for the future.
First there's the impressive cash generation during the second half. The FTSE 250 group's operating cash flow increased 42% for the 12 months to £71.2 million. That's 95% of its £75.3 million earnings before interest, tax, depreciation and amortisation (EBITDA). This is a substantial improvement on the first-half performance in which KCOM generated £20 million, or 53% of EBITDA.
As analysts at IT and communications consultancy Megabuyte pit it, 'KCOM generated almost three-quarters (72% or £51 million) of its full-year operating cash flow in the second half.' With capex, dividends and share buybacks totting up to £27 million, £24 million and £1.7 million respectively, KCOM was able to finish the year having slashed net debt by £25 million, to £75 million, better than the half year's £100 million and, interestingly, beating consensus market expectations of £88 million.
'Cash flow was strongly ahead with a strong recovery in working capital through the second half and lower than expected cash capex, at £27.9 million versus our forecast of £31.5 million and consensus £31.4 million,' say analysts at investment bank Espirito Santo.
That's encouraging since the drain on cashflow was one of our key concerns this time last year, when the shares were trading at 83.5p. Progress is being made on the pension deficit too, and analysts at Oriel Securities admit getting that call wrong. 'We thought pension top-up payments would remain significant for longer than consensus expected,' they say. Pension top-up payments will be £2 million a year in 2015 and 2016; Oriel had assumed £10 million per year because the 'actuarial deficit changed very little between full-year 2010 and 2013.'
The other interesting point is that KCOM is talking about acquisitions and real growth for the first time in years.
'The next stage is therefore to suggest possible growth,' points out finnCap analyst Andrew Darley. 'Legacy revenue streams are declining, but the success of new contract wins, such as the HMRC contact centres (unnamed, but suggested by The Times), and the growth shown by Eclipse and Smart421 indicate the potential higher margin business to be won.'
Darley also flags impressively quick take-up of KCOM's FTTP (fibre to the premise) strategy in its Hull and East Yorkshire heartlands. 'In KC the fibre rollout has proved successful beyond expectation, with 27% take up.'
But Oriel retains its caution view despite reviewing its long-standing 'sell' recommendation. 'KCOM now plans to invest organically and inorganically to help KCOM grow,' the broker says, but 'at this stage, there is no guarantee that any acquisition will be at a reasonable price or that it will add value.'
But at least the company now looks like it's worth watching for more than just the near-6% payout yield.
