Telecom Plus - powering after the big 6

Telecom Plus: This is the company behind Utility Warehouse, offering a one-stop shop for consumers to buy telephony and energy utilities. It uses a multi-level distributor system to drive new customer growth, which can a tricky model to grow in the longer run. The shares are down some 40% over the last year, having seen growth disrupted by new, unhedged, energy suppliers taking advantage of tumbling spot prices. Telecom Plus see this as a temporary timing difference. They have also had to write off almost £11m as a non-cash item, due to ‘gas leakage’, which originates in poor industry reconciliation of accounts as customers move property. In these annual results to 31^st March 2015, revenue was up 105% to £729.2m, with over 2m services supplied to over 580,000 customers through almost 50,000 agents. The longer-term aim is to reach 1m customers. Cross selling continues to improve with almost 60,000 customers now taking all five services (phone-line, broadband, mobile, electricity and gas) against just over 40,000 a year ago. Adjusted pre-tax profits of £52.2m were in line with the guidance given with April’s warning and still 22.5% up on the previous year. Eps were up 9.4% to 53.0p and the dividend, as guided, was hiked 14.3% to 40p. Further earnings growth is forecast for FY2016, although they complain that the Big 6 utilities are not passing on lower spot prices to their wholesale customers. Likewise, new retail competitors are still exploiting low spot prices to undercut those, like Telecom Plus, who operate hedging programmes.

Looking forward the group is hoping that the CMA will duff up the Big 6, to the advantage of smaller rivals. They also want to see a halt called to the prevalence of exploiting legacy books of customers to fund low introductory offers, a practice that Telecom Plus now eschews (albeit at a cost to current customer growth). They also point out that the passage of time should start to erode the new entrants cost advantage as spot prices recover, whilst Telecom Plus’s old hedging contracts start to unwind and roll forward. In the meantime though, customer growth remains below target.

For the current year to 31^st March 2016, the group guidance is for adjusted pre-tax profits to be between £54m and £58m, representing growth of 3.5%-11.1%. On the back of ongoing strong cash generation, the group has forecast a 15% dividend rise in FY2016, taking the payout to 46p. Further earnings increases over the coming years will also be reflected in further dividend growth. Consensus eps for FY2016 are centred on 57p, a PE of 15x at today’s 852p, with the 46p prospective dividend being a yield of 5.4%. I feel that I should be excited about these metrics, as growth is being achieved despite various headwinds. However, the Big 6 in Energy will never be easy competitors and the telephony space is seeing mergers and acquisitions potentially produce new larger beasts. Allied to my general mis-givings about the whole agent/distributor model, I see enough reasons not to invest for now. (Neil Cumming^, 23^rd June 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower