ii view: Telecom Plus shares surge as profits boom predicted

Shares for this multi-utility related company have comfortably outperformed the FTSE 250 index year-to-date. Buy, sell, or hold?

First-half trading update to 30 September

• Net new customers of 86,004
• Expects full-year profit to be materially ahead of current analyst expectations

Andrew Lindsay & Stuart Burnett Co-chief executives said:

"At a time when cost of living pressures continue to rise, we are uniquely positioned to offer households what they need now more than ever: savings on their essential bills and an extra income from recommending these savings to their friends and family.”

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ii round-up:

Utility retailer Telecom Plus (LSE:TEP) today upped its full-year profit expectations following record customer additions and sky-rocketing energy bills in the wake of Russia’s invasion of Ukraine. 

The FTSE 250 company, which under its Utility Warehouse brand offers bundled services such as energy, broadband and insurance, added 86,004 net new customers in the six months to the end of September. That leaves its total customer base at 814,684, equating to an annualised growth rate of almost 24%. 

Telecom Plus shares rose by around a fifth in UK trading having come into this latest announcement up almost a tenth year-to-date. British Gas owner Centrica (LSE:CNA) is little changed during 2022, while  renewable energy generator SSE (LSE:SSE) is down by close to 5%. The FTSE 250 index has fallen by more than a quarter year-to-date.

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

City consensus forecasts for full-year adjusted pre-tax profit currently sit at around £75 million, up from nearly £62 million in its last full year to the end of March. 

Management now expects profit to be materially ahead of this £75 million forecast, aided by stronger customer growth and a reduction in the previously expected cost of multi-service discounts during the second half.

First-half results are scheduled for 22 November. 

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. 

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, although small, a rise in its customer related bad debt charge to £11.6 million during its last financial year from £11.2 million last time, should not be overlooked. The pandemic did hurt, with interaction towards potential new customers proving challenged, while a price to net asset value above the three-year average suggests the shares are not obviously cheap. 

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More favourably, its differentiated business model sets it apart from actual suppliers such as SSE and Centrica. Elevated energy bills and a cost-of-living crisis should see consumers continue to hunt around for better value alternatives, while its diversity of products offered is also worth remembering. 

On balance, and while a degree of caution looks sensible, a utility related business offering an estimated future dividend yield of over 3% has some appeal.

Positives: 

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

Negatives:

• Total annual dividend has remained unchanged since 2020
• Valuation not obviously cheap

The average rating of stock market analysts:

Buy