ii view: Telecom Plus dividend yield still attractive

Covid has raised costs for this utility retailer but profit is predicted to rebound. We assess prospects.

Full-year results to 31 March 2020

• Revenue down 1.7% to £861 million
• Adjusted pre-tax profit down 7.7% to £56.1 million
• Net Debt to adjusted profit (EBITDA) rose to 1.1 times from 0.9 times
• Final dividend of 30p per share
• Full-year total dividend unchanged at 57p per share

Guidance: 

• Expects current full-year adjusted profit to rise to around £60 million
• Expects to maintain the FY dividend at 57p per share

Chief executive Andrew Lindsay said:

"We are emerging from the pandemic with considerable optimism about the future: as millions prepare to return to their workplaces after prolonged periods of working from home, the alternative flexible income opportunity that we offer our Partners has never held such appeal.

"We are hugely excited by the prospect of helping many more people to get on in life and achieve their goals in partnership with UW over the months and years ahead, and are investing in both our customer and Partner propositions to meet the rising demand that we anticipate."

ii round-up:

Utility retailer Telecom Plus (LSE:TEP) today reported a fall in profit as higher administration costs because of tough operating conditions during the pandemic dented performance.  

Adjusted pre-tax profit for the company, which trades under the Utility Warehouse brand, retreated by 7.7% to £56.1 million, in line with management’s prior forecast. The total dividend payment for the year to the end of March was maintained at 57p per share. 

Telecom Plus shares fell by around 2% in UK trading, leaving them little changed since pandemic related market lows back in March 2020. Shares for British Gas owner Centrica (LSE:CNA) are up by nearly a third over that time while shares for water company Pennon (LSE:PNN) are up by around 14%. 

Telecom Plus supplies both households and small businesses throughout the UK. It uses over 45,000 paid partners to expand its customer or membership base rather than using advertising or price comparison sites.

Customer numbers rose over the year by just under 1% to 657,411, with total services supplied increasing by 2.5% to 2.07 million. The Board’s medium-term objective of taking its customer base to a million and then beyond remains unchanged.

Adjusted pre-tax profit for the current year to the end of March 2022 is forecast by management to return to its pre-pandemic 2019/2020 level of £60 million, with the total dividend again being maintained at 57p per share. 

Average revenue per customer from providing core and other services fell slightly to £1,254 (2020: £1,305) primarily due to lower energy prices during last winter following the Ofgem price cap reduction in October.

ii view:

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. Some customers also take up its cashback card service. It has the goal of being the nation’s most trusted utility provider. Its current market share for its combined core services is under 2%, and management therefore sees few practical constraints on the size of business it can build organically.

For investors, the pandemic clearly has hurt. Interaction with potential new customers has become more difficult, while internal communications have also had to adapt. Customer bad debts have risen the broader economic and the Covid outlook remains uncertain. That said, its differentiated business model sets it apart from rivals. Squeezed consumer finances going forward could increase customer demand and allow it to recruit more partners. The shares have been historically volatile and some caution remains sensible, but a utility-related business offering a dividend yield of over 4% is tough for income investors to ignore. 

Positives: 

• Attractive dividend yield
• Differentiated business model

Negatives:

• Small business customers fell over the year
• Bad debt charge rose by 8% to £11.2 million 

The average rating of stock market analysts:

Buy