AJ Bell press comment – 22 November 2022
- Multi-utility provider makes the most of energy rivals’ failure
- Record customer growth
- Dividend increased and profit guidance for the year raised
“The failure of energy suppliers such as bulb, ampower, igloo, Hub Energy and many, many more has caused great distress to many householders, but a lot of them have been able to get help from Utility Warehouse, whose parent is Telecom Plus,” says AJ Bell investment director Russ Mould. “As a result, the FTSE 250 firm is adding customers at a record pace, hiking its first-half dividend, raising full-year profits guidance and the shares are hitting new all-time highs.
Source: Company accounts
“Utility Warehouse is a multi-service provider that offers broadband, mobile and insurance, as well as energy, and it is successfully cross-selling to new customers too as they seek savings wherever they can get them.
“Telecom Plus added more than 85,000 customers in the first six months of its financial year and provided 292,000 more services.
Source: Company accounts
“Energy was understandably the key driver here, but customers also signed up for mobile, insurance and broadband, while only the legacy wireline telecoms business showed a drop.
Source: Company accounts
“Sales are done by Partners and word of mouth, with nothing spent on advertising, while the firm also has a longstanding, long-term energy supply deal with E.ON (npower, back in the day), whereby the German utility carries the risk of buying and sourcing the energy. Telecom Plus also get a discount on the supply deal, whose strategic value is proving huge amid widespread energy price volatility.
“The strong customer additions in the first half of the fiscal year to March 2023 help to underpin the bullish goals laid down by co-CEO Andrew Lindsay alongside the last set of full-year results in June. Telecom Plus aims to add one million new customers within the next five years, a target that may not be as outlandish as it seems when it has few rivals left in the energy business, the E.ON supply deal offers a major competitive advantage and only 2% of UK households currently take a service from the group.
“The strong growth in customers and service provision is helping to drive sales and cash flow.
“The company had guided to adjusted pre-tax profit of at least £75 million for this year, against £61.9 million in fiscal 2022, but has now upped that to at least £95 million.
Source: Company accounts, analysts’ consensus forecasts, management guidance for 2023
“That boost to profits is driving cash flow and cash flow pays dividends, especially at firms like Telecom Plus where net debt is very limited at barely £20 million, and profits cover interest payments many times over.
“Mr Lindsay had targeted a dividend per share of at least 65p for this year but has now increased that to at least 80p per share, enough for a well-supported dividend yield of 3.3%.
Source: Company accounts, analysts’ consensus forecasts, management guidance for 2023
“It is not all plain sailing, however. Profit margins fell, to reflect the increase in energy prices and also the shift in customers toward lower-margin energy services, while bad debts rose to £8.5 million from £5.1 million. Although this still represents a modest 1.5% of sales, the company will be on the alert for signs that customers are struggling to pay, or at least cutting consumption of power in order to save money, as they wait to discover what the next stage of the government’s Energy Price Guarantee will look like.
“Nevertheless, customer churn remains very low, thanks in part to the lack of viable options in the energy market and the profit and dividend forecast upgrades suggest that Telecom Plus feels it is well positioned to help consumers through this extraordinarily difficult period, while keeping regulators sweet at the same time.”
