Broker tips: Telecom Plus, KCOM, Entertainment One

25th May 2010 13:08

Multi-utility supplier Telecom Plus's full year profits were down but the figures were not as bad as expected according to KBC Peel Hunt, which has raised its target price for the stock."Reported profits were impacted by the normalisation of energy margins, which masked the strong underlying growth," KBC analyst Charles Hall suggests. "The 19% increase in customer numbers and 24% increase in services ensures good visibility for this year's numbers," Hall adds.The broker applauds the increased focus on home owners, even though it has slowed the rate of new customer additions. "Homeowners take more services (3.27 vs 2.86), have a lower churn (1.5% per month vs 2.7%) and have lower bad debts," KBC notes.The broker has reiterated its "buy" recommendation on the stock and upped its target price to 380p to 360p.FinnCap is also a buyer of the stock, noting that the "reason to hold the stock remains the dividend, and the predictability of the financials is highly encouraging." It too has lifted its price target to 380p. Consensus earnings forecasts for Entertainment One are likely to edge up again, in the view of house (joint) broker Singer Capital Markets, following the better than expected full year figures from the film distributor.The broker notes that earnings were ahead of even the upgraded guidance given in March, while net debt, at £63.2m, was comfortably better than the £68.4m Singer was expected."While it is early in the fiscal year ETO [Entertainment One] has expressed confidence in the trading outlook and given the strength of the release schedules (approximately 120 films will be released with the high profile third New Moon film scheduled for June) we expect consensus FY'11 EBITDA [fiscal 2011 earnings before interest, tax, depreciation and amortisation] to edge up to c£39.0m," the broker predicts.Singer itself is currently forecasting EBITDA of £38.0m for fiscal 2011. The broker thinks the shares are significantly undervalued and places a fair value of 117p on the shares. "The industry continues to be impacted by the availability of finance. This plays to ETO's strengths and we expect its strong financing position (approx. $173m) and related business proposition to help drive its position in the industry much further," Singer analyst Jonathan Barrett concludes. Hull-based telecoms group KCOM is a long time favourite of FinnCap and the broker is back in buying mode following the company's preliminary results on Tuesday, which were in line with expectations."On the positive side, net debt was £117m, ahead of our expectation of £137m, and the FY [full year] dividend of 1.75p exceeded our 1.5p forecast. All the way through the financial statements there is evidence of tight and competent financial management, within which the working capital movements are not expected to unwind," FinnCap analyst Andrew Darley states.The broker thinks fair value for KCOM shares is 50p but with the company competing against industry titans BT and Cable & Wireless the problem is finding a catalyst that propel the share price towards that value. "An improvement in the dividend to bring it in line with the yield from other telcos would be just the ticket," the broker suggests.FinnCap has upgraded its rating on the stock from "hold" to "buy".