Telecom Plus Looks Well Set For Revenue And EPS Growth

27th May '10 by StrollingMolby

14 comments 9420 reads

Telecom Plus (LON:TEP) (trading as the Utility Warehouse) supplies a wide range of utility services (gas, electricity, fixed telephony (calls and line rental), mobile telephony and broadband internet) to both residential and business customers. The company doesn’t advertise but instead recruits customers via an army of distributors. Full year results to 31 March were issued yesterday and appear to see the company well-positioned now for a resumption in revenue growth and EPS growth in future years after a decline this year despite impressive top-line growth.

In summary, revenue was up 33% to £369.1m (2009: £278.3m) driven by a combination of a surge in the number of customers and an improvement in the quality of the customer base. PBT was down 19% to £18.2m (2009: £22.5m) after gross margins narrowed from the ‘exceptionally favourable wholesale pricing environment’ experienced the year before. EPS was down 19% to 19.7p (2009: 24.2p). The year-end net cash balance was £2.5m (2009: £25.4m) and the final dividend was 14p per share (2009: 12.5p) making a total for the year of 22p per share (2009: 17.5p).

In terms of fundamentals, the stock is currently trading at a market capitalisation of £219m, has no debt, with a P/E of 16x and a yield of 6.9%. The chairman, Peter Nutting, indicated that the total dividend payout is unlikely to increase in the current financial year “reflecting the need to retain a reasonable proportion of our future earnings to fund the increasing working capital requirements of the business as it continues to grow” which seems a sensible move with the dividend totalling £15m.

There are now over 35,000 distributors of Utility Warehouse products (2009: 27,100) though it is not known what proportion of these are active in seeking out new customers. The customer base now stands at 345,762 (290,826) up 19%, with the average customer spend now standing at £1,152 p.a. - an increase of 9% on one year ago, and up 303% from ten years ago (2000: £286).

Cash flow was negative at the interims due to the purchase of freehold office premises and an increase in the level of sign-up bonuses due to distributors last year. We now know from the finals that the bonuses shot-up due to a deluge of letting agents becoming distributors and signing-up whole blocks of flats. This practice of signing-up those in rented property…

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loglorry

27th May '10

Ummmm I can't help thinking with such low margins and relatively high turnover compared to their cash balance things could get out of control if they experience incteased costs. That could result in capital raising.

Andrew L

28th May '10

The old "these guys only have 1% of the market and so could grow massively" argument. Maybe but all the other utility and telecoms operators also want to increase market share.

Tesco will launch faster broadband this year, Sky recently reduced the price for their 20mb broadband, Telecom Plus don't appear at all competitive in mobiles. With regard to Utilities they are only competitive if you ignore the dual fuel offers of competitors (i.e. take electricity and gas at once).

TEP isn't a bad company but it is in an ultra competitive space so to say it could just shoot up to 5% market share won't necessarily be realistic. Margins in the business are also ultra low and what if Tesco starts to offer the whole bundle which TEP offers. Suddenly it will surely be blown out of the water.

djpreston

I don't doubt that the company can grow and has done a good job thus far; however, it is ultra competitive in the utilities sector and I really don't feel comfortable enough with the cash position and need to manage the working capital in a rpaidly growing business, in order to pay 16x eps. Just doesn't ring a bell for me.

As has been said above, if tesco enter the market.... Of course they could just buy TEP but not when the shares are on 16x already imo.

I've been wrong on TEP before so what do I know but for me, I'm staying on the sidelines, even though the yield is attractive.

Good article though.

StrollingMolby

9th Jun '10

Yes, fair point about the cash levels and margins, which is a concern as the 'sufficient bank facilities' are likely to be called upon at some stage later in the year. The management of working capital by the CFO will need to be a fine art in the coming year, and analysis of the working capital turnover and debtor & creditor days will be enlightening here.

30th Sep '10

Confident conversion of 75,000 options (@ £1.71) by COO Andrew Lindsay without any apparent corresponding sale to settle tax. He now holds 81,465 shares (0.12%).

Last year a Trading Statement was issued on 30-Sep at the end of Telecom Plus (LON:TEP) 's half-year - perhaps we'll get one tomorrow, or early next week?

tux222

I recently researched Telecom Plus as a consumer (looking for a better deal on my utilities). It appeared to be one of the worst deals on the market for gas and electricity. Not even their 5% cashback card could make it look attractive.

Also it sells by what looks suspiciously like multi-level marketing. Keeps the advertising bill low, but I wonder what sort of porkies its (innumerate? ) customers are told by their (self-serving, greedy? ) "friends".

Yes, I had been pondering its merits as an investment. After my research at the customer's end, I couldn't be bothered with the other sort of research, because it had offended my sense of ethics and had joined a small set of companies that I won't support with my capital at any price. (The others are tobacco companies, sub-prime lenders/ legal loan sharks, and Phorm).

1st Oct '10

And here's the Trading Statement, right on cue:

As stated in July 2010, we anticipate that our half yearly report will show earnings and pre-tax profits significantly ahead of the figures for the comparable period last year.

The first half of the financial year has seen continued organic growth, with customer numbers increasing during the period at an annualised rate of around 6% to over 356,000 (31 March 2010: 345,762) and service numbers increasing at an annualised rate of over 10% to more than 1,103,000 (31 March 2010: 1,044,516).

Cash flow

Cash flow has been in line with management expectations and our reported cash balance at 30 September 2010 is expected to be around £18 million (31 March 2010: £2.5 million).

The cash is high at the interim stage due to lower energy consumption through the summer, allied with fixed monthly payments from customers - the key test is what the cash balance falls to next March.

We have seen an encouraging improvement in the proportion of new members applying for the CashBack card, which is currently running at almost 40% - this is almost double the rate being achieved 12 months ago. We issued more than 14,000 cards during the period, taking the total number of cards in issue to over 54,000.

The Cashback card benefits consumers by reducing their monthly bill (by 5% of the expenditure in partner shops), Telecom Plus (LON:TEP) because it makes customers 'sticky', and other retailers as customers keep returning to do their shopping with them using the Cashback card (and they are happy to suffer the 5% hit on each transaction). We are customers of Utility Warehouse and regularly use the card in this way, taking £25-£40 off of our utility bill each month as we now buy our groceries and fuel at Sainsburys, and also have expenditure at M&S, B&Q, Mothercare, Toys R Us, etc... that sees 5% of the cost flow back to us. This is all everyday expenditure, so there is no element of going to a retailer to get the discount. Indeed, if an item or fuel is >5% cheaper elsewhere, we'll go there. These are the retailers who are partnering with Utility Warehouse and the Cashback Card.

Little response from the market at the time of posting though it is almost at an all-time high, so we'll see where we go in the run-up to the release of the Interims on 23 November.

23rd Nov '10

Half-year results released this morning, and make for good reading:

Financial highlights

·       Revenue up 18% to £147.0m (2009: £124.8m) reflecting continued organic growth

·       Operating margin of 5.3% (2009: 4.4%) reflecting improved underlying profitability

·       Profit before tax up 45% to £8.5m (2009: £5.8m)

·       Continued strong underlying cash generation; net cash £18.0m (2009: £27.9m)

·       Earnings per share 9.4p (2009: 6.3p)

·       Interim dividend maintained at 8p per share

·       Intention to pay a total dividend of 22p for the current year (2009: 22p)

TEP is still showing plenty of growth and also offers a 5.5% divi at the current price of £4.

There's a fly in the ointment with bad debtor provision up, though this is likely to decrease as the customer mix moves largely to homeowners rather than previous levels of customers in rented homes, though fitting prepayment meters will help here.

Cash is lower than at the same stage last year, and I wonder if their energy prices will rise in line with competitors to maintain margins on energy - note British Gas announced 7% increase in gas this month. TEP has no debt.

For investors looking for 'something new' there is a curious statement regarding future opportunities in the internet TV space with http://www.youview.com/

We look forward to the launch of the new "YouView" television service, a partnership between the BBC, ITV, Channel 4, Five, BT, TalkTalk and Arqiva, which has been designed to deliver an attractive range of channels to customers' TVs using broadband. In due course we believe that this will provide an exciting opportunity for us to broaden our current range of services, grow revenues and improve customer retention. Whilst this activity may require some up-front investment in subsidising set-top boxes, any impact on our cash flow will be spread over a number of years. We anticipate that the combination of our current strong balance sheet and future retained earnings will enable us to fund our intended entry into this market from internal resources.

The outlook statement concludes:

In the absence of unforeseen circumstances, we anticipate reporting record profits and turnover for the full year, and to paying a maintained total dividend of 22p per share. We look forward to returning to a progressive dividend policy, subject of course to retaining sufficient funds within the business to support our continuing strong organic growth. We face the future with great confidence.

So I'll continue to hold for both the income and growth potential.

lightningtiger

9th Oct '13

Great company buy some we are customers, distributers and shareholders. The shares have more than doubled for me and I increased my holdings earlier in the year and wondered why they did not go over £14.00 they started to drop so I sold a big chunk of them & bought Clinigen(CLIN). This is my type of share all traffic lights are green with an X Div today of2p/share doubling in a year & good potential. I am also holding Globo. I am still on a learning curve with Stockopedia only had it about a week and still finding my way round it at the moment. Cheers from Lightningtiger.PS +10.6% today more than pays for my subscription to Stockopedia! & keeps TEP back on track.

johnrosier

I too looked at it as I was thinking of becoming a distributor. The dual energy deal was way more expensive than what I was already on and what was available. (I actually ended up switching to someone else). So I decided a) not to switch to TEP and b) not to become a distributor because how could I sell something that I didn't believe in and where I was not convinced it would save money! Clearly it has been a good investment but it is not for me.

10th Oct '13

Can I suggest we look at the chief executive Wigoder , purchases & you can see all are purchases over the last few years: He has not sold any as far as I can see
50k@200p
500k@140p
40k@129p
5.5k@107.25p
5k@123p
20k@127p
15k@200
100K@176
20k@299.75
128k@free gift
5k@625p
TOTAL 8885k@1400p which is a lot of money & perhaps a good lesson learned here. See the exponential graph long term. He is an excellent businessman. He wants customers with 4 services because they last longer as customers & each customer potentially can become a distributer. He sold out a telephone business, as you probably know & started TEP. Now you can see successful distributers driving around in minis with Utility Warehouse painted al over them. The gas & electric are competitively priced. They are not the cheapest, but guaranteed to be cheaper than British Gas & certainly in the cheaper than average bracket. This coupled up with the cashback card makes it a good deal. This information is not meant as an advert to promote them but help people to make a better decision. On the debt side there will be a few customers that do not pay bills but only a small portion. "Only 2% of people think, 3% of people think they think & 90% do not think at all" From Think & Grow Rich by Napoleon Hill. Would I buy some more shares yes.Cheers from Lightningtiger. PS Now I can see a few more green lights with Stockopedia with TEP

21st Nov '13

Shares of TEP are today £19.02p Bid price, that is about £5.00 more than earlier in this blog. Fuel prices are now keener. Customers are spending more. Less bad customer debt. See the latest news.
Cheers from Lightningtiger

23rd Nov '13

Time to take some profit sell above £18.00 if I can. Strike while the iron is hot I think, & buy back later. Open offer 1 ordinary share for every 35 shares held @ 1475p each
Cheers from lightningtiger

25th Nov '13

Done @ £18.30 & bought open offer shares @ £14.75. Now just need to buy back again when the time is right.
A bit of time left before ex div. Is it worth going short in the next 2 days?I
Cheers from Lightningtiger

Telecom Plus looks well set for revenue and EPS growth

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StrollingMolby

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