ii view: Telecom Plus ditches two units to focus on core business

Operating under the Utility Warehouse brand and offering a dividend yield of over 3.5%. We assess prospects following its latest news. 

Selling two businesses

ii round-up:

Utility retailer Telecom Plus (LSE:TEP) today announced the sale of two non-core businesses as it looks to sharpen its focus on its core business of supplying competitively priced services including energy, broadband and insurance. 

Both its meter and boiler installation services are being sold with neither sale expected to have material impact on group profits for either the current or future years. 

Telecom Plus shares gained marginally in UK trading having already risen by more than a fifth in the past year. Shares for renewable energy generator SSE (LSE:SSE) are up by a similar amount over that time, while British Gas owner Centrica (LSE:CNA) has climbed by more than two-fifths. The FTSE All Share index is up by around 9% over the last year, although is little changed year-to-date. 

Telecom Plus supplies both households and small businesses throughout the UK under its Utility Warehouse brand. It uses over 40,000 paid partners to expand its customer or membership base rather than using advertising or price comparison sites.

The metering business, which had installed around 400,000 meters since 2018, made a pre-tax loss in the year to end of March 2021. Its boiler installation business, comprising of both Glow Green and Cofield Ltd, had been consistently loss-making since being bought back in 2018. 

Customer numbers grew by over 3000 to more than 660,000 in the first half of the year to the end of September. Total services supplied rose to 2,079,756 from a prior year’s 2,073,797, with revenues growing 6% to £371.3 million. 

Accompanying management comments at the time of the November results flagged a significant increase in activity following the recent energy crisis. It also pointed to a strong uplift in partner recruitment in response to the emerging cost of living crisis. 

An update for full-year trading to the end of March maybe announced sometime in April, although has not been confirmed. 

ii view:

Started in 1996, Telecom Plus focuses mainly on the residential market. Its partners or representatives look to offer the four core services of broadband, mobile phone, energy and insurance under its Utility Warehouse brand. As of its most recent results, energy supply accounted for around half of its overall supplied services, with the balance divided relatively evenly between broadband, mobile phone, and cashback card services. 

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For investors, the pandemic did hurt. Interaction with potential new customers proved challenging. A one-off settlement to industry regulator Ofgem saw first-half adjusted profit for the current year fall by 5% to £26.3 million.

On the upside, its differentiated business model sets it apart from rivals. Significant rises in energy bills and a cost-of-living crisis are likely to see consumers hunt around for better value alternatives, while the regulator’s high focus on competition has moved on following the demise of many suppliers. In all, and while some caution remains sensible, a utility-related business offering a historic and estimated future dividend yield of over 3.5% remains tough for income investors to ignore. 

Positives: 

• Attractive dividend yield (Not guaranteed)
• Differentiated business model

Negatives:

• Dividend remained unchanged from 2020 to 2021
• Ongoing pandemic uncertainty

The average rating of stock market analysts:

Buy