Value Utility Supplier...

MrT

2nd Dec '08

They claim to have "no financial exposure to volatility of wholesale energy prices" but I can't see how this could be the case. Surely, they can't be completely hedged given that sales are growing and are therefore uncertain?

StrollingMolby

21st May '10

Resurrecting this old thread on Telecom Plus (LON:TEP) as I've just started researching it.

They claim to have "no financial exposure to volatility of wholesale energy prices" but I can't see how this could be the case. Surely, they can't be completely hedged given that sales are growing and are therefore uncertain?

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 buy 'blocks' of energy in the wholesale market in expectation of anticipated gas & electricity sales - customers are simply signed-up and receive the gas/elec 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 Club card scheme (i.e. 5% rebate from Sainsburys/Boots etc for all purchases made in-store on the Club card).

The other circumstance where UW foot the bill temporarily for customer power bills is the underpayment during the 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 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.

Full-year results are due next Tuesday 25th and it will be interesting to see how the cash position has changed. Cash flow was flagged-up in the Interims as -£5m due to £10m spent on refurbing offices (figures from memory) and through the exceptional level of bonus payments to distributors for signing-up new customers, so may well still be negative in the results.

The anticipated 14p final dividend gives a payout for the year of 22p equating to a yield of 6.7% on the 327p offer price currently (though the spread is ridiculously large I note today).

StrollingMolby

26th May '10

Well, the results were issued yesterday and appear to see the company well positioned now for a resumption in revenue growth and EPS growth.

In summary:

Revenue up 33% to £369.1m (2009: £278.3m)
PBT down 19% to £18.2m (2009: £22.5m)
Y/e net cash balance of £2.5m (2009: £25.4m)
EPS down 19% to 19.7p (2009: 24.2p)
Final dividend of 14p per share (2009: 12.5p) making a total for the year of 22p per share (2009: 17.5p)

This provides fundies of:

P/E - 16x
Yield - 6.9%
Market Cap - £219m
No debt

As i mentioned in the post above, 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 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.

There are now over 35,000 distributors of Utility Warehouse products (2009: 27,100) though it is not known how many of these are actively seeking new customers.

One area that I believe may come under stress in future is the cash balance, as it can be expected that when new customers are signed up, one-off distributor bonuses are made. However, 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 similar 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 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.

Disclaimer: I bought a few yesterday for my pension.

StrollingMolby

26th May '10

Another couple of interesting data tables from the results yesterday:

Year	Average Revenue Per Customer
1999	£190
2000	£286
2001	£316
2002	£329
2003	£459
2004	£482
2005	£505
2006	£634
2007	£801
2008	£872
2009	£1,057
2010	£1,152

Services Provided	2010	2009

Electricity	267,186	209,262
Gas	224,256	177,452
Fixed Telephony (calls)	211,565	188,426
Fixed Telephony (line rental)	153,074	124,762
Broadband	98,595	77,049
Mobile	34,067	36,127
CashBack Card	39,433	11,146
Non-Geographic Numbers	16,340	15,417

Total	1,044,516	839,641

Residential Club	883,904	695,542
Business Club	52,949	39,585
Total Club	936,853	735,127

Non Club	69,855	70,137
Total Telecom Plus	1,006,708	805,264

TML	37,808	34,377
Total Group	1,044,516	839,641

Value Utility Supplier...

Unlock the rest of this article with a 14 day trial

About the Author

MrT

4 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...