Phone Home....

...no not E.T but today we have final results from KCOM, the telecoms provider and a trading update from Bellway (BWY) the house builder. You can visit their corporate sites and read the full announcements by clicking the highlighted names above. Otherwise my take on them is as follows.

Firstly Bellway is one that I have been in since the end of 2013 when it was trading around the 1400p level and it also features in the Mechanical Compound Income Scores Portfolio ( which henceforth I'm going to refer to as the MCIS Portfolio to save my fingers). Any way they reported a update today to the end of May 2015 with some guidance for what they expect for the full year. The key points from this were:

• Completions expected to be up by 12% to around 7700
  
• Operating Margins to be up by around 3% to over 20%
• Forward order book up 22% to £1270m (5502 homes) & compares to full year turnover last year of £1485m
• Disposal of shared equity holdings for £32.5m which will be reinvested in more productive land holdings
• They have spent £500m on land and land creditors in the last year
• 6,400 plots in hands of solicitors and a pipeline of 14,600 coming down the road
  
• Reservations running at 182 per week +3% year on year
  
• Average selling prices to be up by around 3% to £220,000

So overall a strong update as you would expect and they say the election made no discernible difference. However, I note continued house price increases announced by Halifax and Nationwide plus record low mortgage rates and record numbers of cash buyers recently. This is in addition to the encouragement that the government is giving to first time buyers.

Thus the outlook still seems fine at the moment and the company seem confident of delivering further value for shareholders with it focus on disciplined growth as they seek to roll out some further division in places like the South West of England for example.

However, as you can see from the chart below the shares have done exceptionally well in the medium term and also more recently after the Tories were returned with a majority in the election.

This has left the share looking over bought and on a fullish looking rating, for a house builder, of 10 to 11x depending on which years earnings you want to look at. The income attractions remain though as the yield (which is 3x covered) is expected to be 3% this year and 3.3% next year on the back of strong growth.

Summary & Conclusion
While I am happy to run this one for the medium term given the on going low rates and government support helping to sustain strength in the housing market. However, in the short term after such a strong run and with the first signs of renewed austerity early in this parliament yesterday, before the budget next month, I think they may be vulnerable to some profit taking now given the wobbly market at the moment.

So I wouldn't rush out and buy them now and I'm not that surprised to see them off today. I guess it is always possible they could close the gap on the chart around 2000p which would leave them less extended in price terms and put them on a more attractive looking 8x and 4% or so rating for the year to July 2016. I would suggest this is not impossible as they have seen sharp corrections in the past and If they should get down there this might then offer a more attractive entry point.
 
Meanwhile KCOM announced in line results which saw their adjusted eps up by 5% and the dividend up by 10% which is in line with their policy to increase it at this rate until March 2016. In brief they say this is the second stage of their transformation as they move away from legacy business to more focus on fibre products and serving enterprise and small and medium sized businesses.

Summary & Conclusion
A dull in line performance from KCOM is not enough to get the shares going today. This is especially so since they have moved up nicely from the 80p level when I flagged them back in January this year. They have now all but hit my 100p target so I wouldn't suggest chasing them up here as they tend to be a bit of a trading stock. However the yield for the year to March 2016 remains the main attraction at 6%.

The main question is whether their transformation can lead to more growth in earnings which might then support more dividend growth beyond 2016. I say this because the cover is forecast to have been run down to a low 1.3x or so as they have struggled to grow earnings. But the Company did say in the statement today:

"Last year we began the second stage of the transformation of our business. I am pleased to report that there has been continued progress in our focus areas. In Hull and East Yorkshire, the strong demand for our Lightstream fibre-based services has been maintained and in the Enterprise and SMB markets, we continue to see growing interest in our cloud and collaboration related capabilities. These are the key opportunities for future growth. "In the coming year, we will seek to accelerate that progress, particularly in the Enterprise space where we see significant opportunity."

So the question will be can they grow this side fast enough to offset the decline in traditional business and maintain some dividend growth. I would assume on that basis that the dividend growth will slow to no or low growth given the cover, unless their comment about accelerating progress can translate into say 10% earnings growth from 5% this year. The shares on a yield of 6% are probably pricing in little or no dividend growth so I would say it is a hold for yield but I wouldn't expect much more upside to the price from here as there doesn't seem to be enough in these numbers to me to justify it breaking our from its range at this time but i guess time will tell.