Telecom Plus looks well set for revenue and EPS growth
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 has now been made less financially attractive and the re-focus on homeowners will provide a better 'quality' of customer i.e. homeowners tend to use more services (incl. higher margin telephony services), remain as customers in their property for longer, and have lower bad debt levels.
One potential concern for Telecom Plus is the volatity of wholesale energy prices but the company claim to have "no financial exposure" to this. On the face of it, that seems true, as it is the end-user who suffers the volatility. I don't believe it is the case that Utility Warehouse buys 'blocks' of energy in the wholesale market in expectation of anticipated gas & electricity sales - customers are simply signed-up and receive the gas/electricity from npower, who now supply UW on a rolling two-year contract.
One circumstance where UW may be on the hook for unpaid power bills is through bad debt provisions (though this will be offset through reduction in customer bills through payments from participating stores in the Clubhouse cash back card scheme (more detail on the cash back card below). The other circumstance where UW foot the bill temporarily for customer power bills is the underpayment during winter months by those paying by equal monthly instalments when their consumption is of course highest. This was flagged up in the end of year trading statement issued on 31 March:
"Due to the exceptionally cold weather conditions experienced throughout the UK over the last few months, we have experienced a substantial seasonal cash outflow, which means we will be reporting a small cash positive position at the year end. This is primarily a function of the timing differences between when we receive payments from our customers (who we encourage to spread their energy bills across the year in equal monthly instalments) and our payments to npower for the energy they have used (which are based on actual consumption each month). This cash outflow will be recovered progressively as we move into the summer months, and as customer payments are adjusted for the higher levels of energy usage this winter."
One of the most compelling reasons for new customers signing-up to the various services is the cash back card, referred to above, which launched in 2008. Over 40,000 cards have been issued to customers who are able to make sizeable dents in their monthly utility bill, as they receive a rebate of 5% if the card is used when shopping in a growing list of participating stores, such as Sainsbury’s,Boots, Argos, Homebase, B&Q, Dominos, Halfords, Mothercare, Comet, Toys R Us, and many more. This makes for exceptionally ‘sticky’ customers and I gather there are even some customers who have negative monthly bills!
However, one area that I believe may come under stress in future is the cash balance, as it can be expected that when an increasing number of new customers are signed up, one-off distributor bonus payments will also grow. In conjunction with another cold winter as we have just had could see huge energy consumption that is not immediately paid for by the customers who are on a fixed monthly payment (and who catch-up with their payments in the summer months). TEP anticipates that it will have a similarly sized net cash balance at end-March 2011 (£2.5m) and states:
"The Company has sufficient banking facilities available to meet any reasonably foreseeable increase in our working capital requirements resulting from our anticipated growth, higher energy prices and/or another cold winter."
We will see if this is sufficient.
Notwithstanding the last point about working capital, I personally view TEP as a well-managed company with the potential for many more years of growth, and with a very attractive yield in the meantime.
As CEO Charles Wigoder stated in September 2008: [ref] https://www.telecomplus.co.uk/extranet/np0908.pdf [/ref]
“What is really astonishing is that although we are already a major British quoted company, with projected turnover for this year of over £260 million, we still have less than 1% of the market for the services we provide. We could double in size, then double in size, then double in size again, and we would still be the UK’s smallest utility provider. That’s a fantastic growth opportunity for us to seize together.”
Quite, and this demonstrates the potential if the Board can manage this growth without the company suffering growing pains and demands on working capital.
Disclosure of interest: The author holds shares in TEP.
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14 comments
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
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
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
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
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.
Half-year results released this morning, and make for good reading:
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/
The outlook statement concludes:
So I'll continue to hold for both the income and growth potential.
SM
And here's the Trading Statement, right on cue:
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.
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.
SM
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).
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.
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?
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.
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.
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.
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.