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Gamble of the week: A telecoms stock going cheap
Not only does this telecoms network holds one of the few remaining monopolies in Britain, it's also well-placed to grow its dividend. That makes the shares look like a good value buy, says Phil Oakley.
KCOM Group (LSE: KCOM) is best known for owning and operating the telecom network in Hull and East Yorkshire. This network is one of the few remaining telecom monopolies in Britain and underpins the value of the group.
The near-term outlook for KCOM's telecoms business looks good. A strategy that is working for BT in the rest of Britain, selling super-fast broadband and TV, looks set to work for KCOM in East Yorkshire. Better still, KCOM has one main advantage over BT; it can't win many new customers, but it can't lose many either. Meanwhile, it can sell its customers more services and increase the average revenue per user.
There's plenty of potential to do this via its rollout of fibre optic broadband services and the fact that the number of customers buying bundled services (phone, broadband and TV on one bill) is still quite small. YouView, the fast-growing TV service that has worked well for Talk Talk, should also help KCOM.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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KCOM's telecoms services division competes for business across the whole of Britain. It is finding life tougher at the moment but is winning new business in both the public and private sectors. Its internet services business is also showing strong growth in its order book, where cloud computing products are doing well. This division is a good source of profits and cash-flow growth for the group.
One of the key attractions of KCOM is that it is far less indebted than many other telecom companies. Net borrowings are broadly equivalent to its annual gross cash flow, which is very low, and it does not have a big pension fund deficit. This gives it the potential to invest in fibre-optic broadband without cutting dividends to shareholders.
KCOM's ability to pay growing dividends makes me think that the shares are cheap. It has promised to grow its payout by 10% a year for the next three years. Anyone buying the shares at 82p will have a dividend return on their investment of 7.1% by 2016. Reinvesting those dividends to buy more shares may pay off too.
The big risk with KCOM is that a future government decides to end its East Yorkshire monopoly. This is what makes the shares somewhat of a gamble, but one that could nonetheless pay off.
Verdict: speculative buy at 82p
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