The Motley Fool

Are KCom Group plc, Genel Energy plc and Watchstone Group plc a buy after today’s news?

Pre-tax profits at Hull-based telecoms firm KCOM Group (LSE: KCOM) fell by 7% to £47.9m last year, the firm said this morning. Adjusted earnings per share dropped 4.7% to 7.54p, but the dividend was increased by 10.1% to 5.9p.

Having cleared its debt by selling its national business for £90m last year, KCOM now plans to invest heavily in its local infrastructure. The firm believes this will support future growth and cut operating costs significantly.

These improvements won’t come cheap. Capital expenditure is expected to be more than £40m per year in 2017 and 2018. To keep shareholders happy, KCOM has promised a minimum annual dividend of 6p per share during this period. That’s a 5.5% yield at today’s price.

The company’s capex, pension and dividend commitments for the next two years now total nearly £150m. That’s four times next year’s forecast profits. This programme of spending will also have to be managed by a new pair of hands, as the firm’s chief financial officer announced his departure today.

In my view, KCOM shares look fully priced on a 2017 forecast P/E of 15. I think there’s better value elsewhere.

Steer clear

Watchstone Group (LSE: WTG), formerly known as Quindell, published its 2015 results this morning, revealing a staggering £178m pre-tax loss. Much of this related to £113.5m of non-cash impairments relating to acquisitions during the Quindell period. I’ll gloss over this and focus on the performance of the firm’s continuing business. Is there any value here?

The group generated an operating loss of £22.2m on revenues of £58.3m from its ongoing businesses. These activities generated an operating cash outflow of £67m, which suggests to me that a substantial amount of growth will be required just for Watchstone to break even.

The firm’s £103.2m cash balance means that it can support losses for a certain period of time. However, Watchstone’s house broker is forecasting a loss of 36.8p per share for 2016. The group also confirmed this morning that it’s facing a Serious Fraud Office investigation relating to past accounting practices at the firm.

In my view Watchstone shares are a clear sell at current prices. The chance of further losses seems high to me.

A speculative buy?

Shares in Kurdistan oiler Genel Energy (LSE: GENL) fell by 7% this morning after the firm admitted that the Kurdistan Regional Government (KRG) had only paid half of Genel’s invoices for April 2016 oil sales.

For the last few months, the KRG has managed to make payment in full each month. Investors were hoping that this pattern would continue, but with the KRG’s finances under severe pressure from the low oil price and IS conflict, a shortfall in payments was always a big risk.

A second problem is that Genel’s oil reserves aren’t as big as we previously thought. The firm announced a major reserve downgrade for the Taq Taq field in February, following production declines seen in 2015.

Low oil prices and falling production mean that Genel isn’t expected to return to profit until 2017. Although the firm still has a strong balance sheet and could benefit from takeover activity in the region, I’m not convinced the risks are worthwhile at the moment. At best, this is a very speculative buy.

I believe there are better options elsewhere in the oil sector. However, identifying shares with the potential to deliver big gains can be a time-consuming process.

That's why the Motley Fool's investment gurus have produced 10 Steps To Making A Million In The Market.

The simple 10-step process outlined in this investment strategy could help you build a £1,000,000 portfolio much more quickly than you'd expect.

This exclusive report is FREE and carries no obligation. I strongly recommend you take a look today.

To download your copy of this must-read report, click here now.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended KCOM Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.