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A new week has brought new optimism to this weekly column, helped by the release of Telecom Plus financial results. The best performing stock in the FTSE 350 has had a stellar first half and investors will enjoy the benefit of its strong performance with a significantly higher dividend.
This week we will also run through the numbers from:
A more settled week for the economy has helped the London Stock Exchange regain its crown as the largest investment market in Europe - the reign of the Paris market didn’t last long.
Telecom Plus (LON: TEP) is the top performer in the FTSE 350 in the year to date. Investors who bought at the September 2021 low point (soon after the company had reported a drop in revenue and earnings for the year to March 2021) have more than doubled their money.
The multi-utilities provider (which trades to consumers under the name Utility Warehouse) has - to a certain extent - been in the right place at the right time. The company has been able to offer cheaper fixed energy tariffs than peers because it bundles together many different utility contracts. These fixed tariffs (which have even captured the attention of the UK’s money saving man, Martin Lewis) have been in incredibly high demand amid the UK’s energy-fuelled cost of living crisis.
Telecom Plus has therefore enjoyed the dual benefit of rising demand (because its prices are lower than competitors) and rising prices (because the underlying price of energy has soared). Management doesn’t say how much of the 52% increase in revenue in the first half came from price hikes and how much came from new customers, but the energy division certainly played a big role in the strong performance. Out of the 292,000 new contracts added in the period, almost 170,000 came from energy. As of September 2022, Utility Warehouse was servicing 1.4m energy contracts, compared to 1.1m at the same time last year.
And because Telecom Plus bundles its utility contracts, the other divisions have benefited too. Mobile and broadband contracts are up 18% and 5% to 364,000 and 341,000 respectively, while insurance contracts have leapt 67%, albeit from a much lower base. It’s these contracts (which are relatively expensive) that allow Telecom Plus to offer such cheap energy tariffs and still generate a profit. Still, margins have been hurt by the rising proportion of cheap energy contracts. Gross margins in the first half were 20%, compared to 23% in the first half of 2021.
So now Telecom Plus poses a conundrum for both investors and customers:
Management at the company, unsurprisingly, believes that the current period of trading isn’t just a short term spike caused by unprecedented economic conditions. Over the next five years, they expect to add at least 1m new customers.
It is easy to be sceptical about Telecom Plus and the way it operates. Its word of mouth marketing strategy can be compared to a pyramid scheme (customers get paid for recommending the service to new customers) and it is hard to evaluate the price savings with other providers because of the way the company bundles its services (the more you bundle, the more you save).
That said, Telecom Plus rewards loyalty which means customers won in this strong period, could be customers for life. And, as we’re some way from the end of the energy crisis, there could still be further good times to come. Regardless of the wider picture, Telecom Plus investors will enjoy a generous annual dividend, hiked to 80p per share following the string first half, which means the yield is currently 3.9%.
London’s commercial property market has faced its fair share of battles in the last few years. First the Brexit vote threatened the capital as a major financial centre, causing many international businesses to consider moving offices to the continent. Then came Covid-19 and the subsequent work from home policies which left many businesses pondering the need for an office at all. And now rising interest rates have brought an end to the era of cheap money, making it more expensive for landlords to get loans on big commercial property in the capital.
And so the commercial landlords are facing a rare conundrum. Rents are rising, but valuations falling:
Demand for swanky offices and sustainable building supplies is protecting these companies to an extent. To keep workers enthused about coming into the office, businesses know they need to provide a luxury environment. According to British Land, new and refurbished office space leases faster, achieves premium prices and vacancy is lower than in the wider market. Businesses are seemingly willing to spend more per square foot than they were prior to the pandemic, although for many, their total office footprint has now been slashed.
But that doesn’t much matter when supply is being constrained by rising interest rates and pricier building supplies. More than a third of the office building work currently happening in the capital is already pre-let, while many projects are being delayed. These trends mean the rental market is likely to continue to be strong in 2023.
The same cannot be said for the investment market which is struggling with high yields and falling valuations. Investors pondering big real estate purchases are likely waiting for more economic clarity.
Still the office rental market is faring far better than landlords operating in the retail space, where both valuations and rents are falling.
Recession, what recession? Developers and home owners alike are still spending on property - that’s at least what the numbers from buildings supplies group CRH (LON: CRH) and B&Q’s owner Kingfisher (LON: KGF) seem to be saying in third quarter trading updates.
But investors seem sceptical. Both companies ended the day down after the release of their trading updates earlier in the week, despite upbeat commentary on the outlook.
There are certainly reasons to be way. Management at both Kingfisher and CRH pointed to the difficult economic backdrop which is causing a rise in material and labour costs and a slowdown in construction. CRH has combatted the lower demand with “price initiatives” (presumably increased prices), while Kingfishers is busy trying to undercut competitors on price. Neither strategy is likely to deliver growth in the long run.
About Megan Boxall
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hi sh62. I think it means retail as in shops rather than residential as in housing.
Thanks Richard - that makes sense and can't think of why I hadn't interpreted it that way. Maybe being a little bit defensive about my holdings in BLV and TPFG ? Cheers Geoff.
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Hi Megan :
Thanks for this interesting article - especially about the "push-pull" (as I call it) in the property rental market. I was however confused by the part stating that rents were falling in the retail property market. Listening to the recent webcast (can't remember the date - 2 months ago and I believe they also preseneted at MELLO ?) from Belvoir (Dorian Goncalves and Louise George), they gave the impession of a circa 7% rise in rents when new tenants moved in. Maybe a lag in there ? Thanks.
Geoff