ii view: Telecom Plus shares hit new high as profits surge

Record new customer numbers and a reasonable forward dividend yield. We assess prospects. 

First-half results to 30 September

• Revenue up 52% to £562 million
• Adjusted pre-tax profit up 23% to £32.1 million
• Adjusted net Debt of £67.2 million, down from £70.3 million in March
• Interim dividend up 26% to 34p per share

Guidance: 

• Expect full-year adjusted profit before tax of at least £95 million, up from a previous £60 million
• Expects full-year dividend of at least 80p per share, up from 57p in 2022

Andrew Lindsay and Stuart Burnett co-chief executives said:

"The business is growing faster than ever, at an annualised rate of almost 24%. With inflationary pressures showing no signs of easing, we expect demand for what we offer to remain high, supporting our progress towards our target of welcoming an additional one million customers in the next 4-5 years."

ii round-up:

Shares in utility retailer Telecom Plus (LSE:TEP) today hit a new high as record numbers of customers joined to save on their bills, triggering a 23% surge in first-half profit to £32.1 million. 

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The FTSE 250 company, which under its Utility Warehouse brand offers bundled services such as energy, broadband and insurance, now expects full-year adjusted pre-tax profit of at least £95 million. That’s up from £62 million last year. 

Telecom Plus shares today rose around 3% to a new all-time high having come into this latest announcement up 47% year-to-date. Shares for British Gas brand operator Centrica (LSE:CNA) are up by close to a third in 2022, while major renewable energy generator SSE (LSE:SSE) is little changed year-to-date. The FTSE 250 index is down close to a fifth in 2022. 

Total customers at Telecom Plus numbered 814,684 at the end of September, up from 728,680 in March, just after Russia’s invasion of Ukraine. 

With customer growth remaining at record levels, the total annual dividend payment is expected by management to be at least 80p per share, up from last year’s 57p per share. 

Telecom Plus supplies both households and small businesses throughout the UK, using over 50,000 paid partners to expand its customer or membership base rather than using advertising or price comparison sites.

Services supplied to customers totalled over 2.5 million as of the end of September, an increase of almost 300,000 from March. Supplied insurance products increased 67% to almost 75,000 while a broadband agreement with TalkTalk had been extended under improved commercial terms. 

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 electricity, gas, broadband and mobile phone services, along with other services such as insurance and a cashback payment card. 

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Electricity supply accounted for almost 47% of revenues during its last financial year, with gas supply a further 30%. Then came fixed communications such as broadband at around 13% of sales, with the balance split between mobile phone and other services at close to 5% each.  

For investors, an estimated price/earnings (PE) ratio above the three- and 10-year averages suggests the shares are not obviously cheap.  The pandemic did hurt, with interaction with potential new customers proving challenged, while customer bad debts rose to £8.5 million during this latest period, up from £5.1 million last year although still only representing under 2% of revenues. 

On the upside, elevated energy prices and a cost-of-living crisis do appear to be playing into its hands, pushing customer numbers upwards. A differentiated business model sets it apart from actual suppliers such as SSE and Centrica, while the diversity of its products is worth remembering. 

On balance, some caution remains sensible given its current valuation, but this utility related business is currently in something of a sweet spot.  

Positives: 

• Differentiated business model
• Targeting one million additional customers over the next 4 to 5 years

Negatives:

• Valuation not obviously cheap
• Rising customers bad debts

The average rating of stock market analysts:

Buy