Telecom Plus launches fresh assault on five-year high

A promise to return more cash to shareholders as profits grow has been well-received by investors.  

At a time when the utility sector has not been kind to investors, Telecom Plus (LSE:TEP) continues to buck the trend by promising 10% dividend growth alongside a further hike in profitability.

Contrast this 2019/20 outlook for the Utility Warehouse owner to the position at Centrica (LSE:CNA) or BT Group (LSE:BT.A), where the steady loss of customers and dividend uncertainty are constant themes.

Telecom Plus bundles together services across energy, broadband, landline, mobile, and home insurance to more than 630,000 Utility Warehouse members. The business relies on word of mouth rather than advertising, with 40,000 partners used to sign up new members.

Full-year results out today showed further momentum, although the performance slowed somewhat in the final quarter due to a warm winter and impact of the Ofgem price cap, which reduced energy revenues. Average revenue per member fell slightly to £1,245 in the year.

Profits and dividend still rose as expected by 4%, to £56.3 million and 52p a share respectively, with Telecom Plus confident that it is on track to deliver a profits figure of between £60 million and £65 million this year. This should lead to a 57p a share dividend in the current year.

Chief executive Andrew Lindsay said: "Our balance sheet remains robust, with low leverage and strong cash flow. In contrast to the majority of other energy suppliers, this puts us in a strong position to take advantage of a challenging retail marketplace."

Shares responded to this confidence by rising another 4% to 1514p, which is the highest level in five years. While the stock isn't cheap with a forward earnings multiple of about 23 times, it is still some way short of the 1,900p peak recorded at the start of 2014.

House broker Peel Hunt has a target price of 1,540p, adding: "Telecom Plus continues to have great visibility and the prospect of strong customer growth bodes well for long-term performance and dividend growth."

Source: TradingView Past performance is not a guide to future performance

One of the biggest differences in performance between Telecom Plus and others in the utility sector has been in its rate of churn, which improved to 11.8% last year from 12.7% the year before. This is despite record numbers of households switching energy suppliers.

Peel Hunt said Telecom Plus's performance compared with 18% churn for the Big Six energy suppliers and 27% among smaller and medium-sized suppliers.

The broker thinks the rate for Telecom Plus should continue to reduce as the company grows the proportion of customers taking multi-services. More than a quarter of members use the company for all their core utilities, with this metric continuing to rise each month.

The company recently added boiler care as the seventh service in its portfolio, with Peel Hunt seeing this as an attractive market based on 470,000 existing gas customers.

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Telecom Plus recently negotiated a new deal with its long-standing wholesale supply partner Npower, under which the power giant assumes the risks and rewards of buying and hedging energy for the company's customers. Telecom Plus said it was "extremely pleased" with the outcome of the talks, which included a modest improvement in commercial terms.

It said it continued to benefit from a "significant niche" in an energy market polarised between the Big Six, who have largely remained profitable at the expense of market share, and a significant number of independent suppliers, who are growing their customer numbers whilst incurring substantial losses.