January 31, 2008

KCom admits earnings weakness

KCom has admitted it is coming under increasing pressure from investors to crystalise value in its struggling managed IT services division after the group guided market expectations for the underperforming unit to the low end of its range.

The telecommunications group, formerly known as Kingston Communications, said continued depressed spending in the financial services market had forced it to guide earnings before interest, tax, depreciation and amortisation (ebitda) margin forecasts for the full year for its Integration and Managed Services businesses (I&MS) to the low end of its 3 to 5 per cent range.

Malcolm Fallen, chief executive, said he was aware that KCom "has got to deliver more from the investment made" in I&MS.

"Taking our numbers to 1 per cent implies a circa 10 per cent cut in our group forecasts," Dan Gardiner, analyst at Landsbanki Securities, said. "We believe there is a story here but believe ... that a break-up is increasingly the most realistic way of delivering shareholder value," he added.

The shares fell 2½p to 44p as Investec, the group's broker, cut full-year earnings per share forecasts by 11.5 per cent to 4.5p and moved its rating to "hold".

Mr Fallen responded that I&MS "looks right for the market as we see fit. But as a business we will keep a sharp eye to create value".

KCom remained confident that its target earnings margins of 5 to 8 per cent in 2008-09 for the unit was achievable. It said group trading was in line with market expectations, underpinned by its telecoms and internet business, which accounts for 80 per cent of ebitda.

FT Comment

* With the shares close to a five-year low, management might come under further pressure from shareholders to deliver value through a sale. The frustration is evident from the valuation, which at 9.1 times earnings is relatively cheap. Investors still have two-thirds of the full dividend payment to come. With the market currently ascribing virtually no value to I&MS, investors are getting any upside virtually for free.

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