Fool's Eye View

[ November 28, 2000 ]

Kingston Gets Ready For DSL

By Stuart Watson (TMFTiger)

Great Titchfield Street, London -- Telecom stocks have received a massive drubbing in the last few months. Kingston Communications (LSE: KCOM) is no exception, although it seems to be one of the better regarded of the "new breed". Today's interim results pleased investors as they contained details of new funding that the group has secured as well as a statement that its intention is to roll out Digital Subscriber Line (DSL) services without going to shareholders for more cash.

Torch and the other bits

Kingston has always been a strange mix. The core of the business is its East Yorkshire telecoms network but investors have always been more excited about the prospects for Torch, its business-to-business telecoms operation. As a side dish it also has MediaStream, an international satellite services business which serves "major international Internet Service Providers" and the likes of Railtrack (LSE: RTK), Xerox (NYSE: XRX) and CNBC.

At the moment most of Torch's revenues come from its Yorkshire network. In the last two years it has also added networks for the South West, South Midlands, East Midlands and Thames Valley. These four are now starting to bring in revenues. But the original Torch Yorkshire seems to be growing quite slowly. Its sales only increased by 7.7% to £34.9m for the last six months.

It's unclear to me how significant this is in the great scheme of things but it was noticeable that this little detail was tucked away at the bottom of the results statement and there was no explanatory comment. Taken as a whole, the group's sales are quite sluggish as well. Turnover was £108.6m, up 17% on last year. This looks a little light given the group's £950m market value. If anything the side dish of MediaStream looks more exciting. Its revenues leapt 46% to £13.2m.

It is also difficult to see how Kingston's underlying margins are holding up at the moment. Although the group turned in a profit this time last year, it has now slipped into losses due to the cost of investments. The trouble is that, for investors anyway, the exact amount of these investments isn't made clear.

DSL and the cash situation

As expected Kingston revealed this morning that it had secured new bank facilities of £250m. The debt situation of telecom stocks has been the focus of attention in recent weeks and Kingston looks better placed than most. Currently it has cash of £64m. It looks like most of the new facility will be used to fund the roll-out of its DSL services. Investors seemed to take heart from Kingston's statement that it intends to enter into substantial partnerships with other network operators, equipment vendors and content providers in order to do this. As a result Kingston expects its outlay to be limited to £150m for the next three years.

Of course the flip side of this is that Kingston will now get a smaller slice of the pie. However, this move reduces the probability that it will go away completely empty-handed, which in the current market environment would worry investors more.

Where Next?

• Kingston discussion board

• What on earth is DSL?

• Telecoms are a Steal