Tap high-yield Telecom Plus's potential

Telecom Plus, which trades as Utility Warehouse, sells competitively priced bundles of electricity, gas, broadband and both landline and mobile telephony to business and residential customers. It differentiates itself from the dominant providers by offering fair, consistent prices to both new and existing customers, the convenience of a single monthly bill and excellent customer service. By contrast, the 'Big Six' energy providers have gained a reputation for using aggressive introductory offers - which are subsidised by existing users - to lure in new customers through price comparison sites before bills are hiked. Telecom Plus also saves money by eschewing expensive marketing and instead relying on 'word of mouth' recommendations by happy customers and a network of more than 45,000 part-time authorised distributors, or partners.

That said, marketing does play a part in driving growth and the company's decision to reduce such spending, while boosting profitability in the short term, is weighing on growth expectations and the share price. Specifically, management is holding off on any major marketing activity until the Big Six cut their standard variable rates. So its encouraging Eon has this week cut gas prices, and there could be progress on this front in April when competition authorities are expected to publish a report into the UK energy market - those who don't actively seek out the lowest tariff are thought to risk paying up to £400 more annually. But while Telecom Plus's growth may have slowed, new customers do continue to sign up.

Indeed, with many energy providers funnelling depressed energy prices into short-term deals rather than lowering their overall prices, Telecom Plus continues to boast a competitive advantage. The big players' tactics, together with Telecom Plus's compelling business model, allowed the company to grow its customer base by 6 per cent to over 595,000 in the 12 months to September 2015. It also increased the number of services it supplied by 7 per cent to about 2.15m and maintained a low level of 'churn' - the number of customers switching to other suppliers. And management remains confident that it can supply 1m households in time.

Telecom Plus continues to encourage customers to take more services and expand the number of services and benefits it provides - a strategy intended to reduce churn and boost average revenue per customer. One of its most successful initiatives has been offering to replace all of the light bulbs in new customers' homes with energy-efficient LED bulbs for free, potentially cutting their annual electricity consumption by more than a tenth. The offer is limited to homeowners who apply for at least five services. The upshot was that 45 per cent of new customers took five or more services in the weeks after the initiative kicked off, up from 30 per cent. And more than half of its customers take at least four services.

A fillip for the shares could be the company's planned entry into the insurance market this year, where it will use an external provider and act as a broker. Analysts predict it will initially target the home, motor and pet insurance segments. Management is also weighing up the options to enter into the water market once it opens for business customers in 2017, which would provide valuable experience in anticipation of the retail water market opening up to competition in the future.

The company's steady progress and ambitions underpin the solid growth prospects reflected in our table. We feel this potential is undervalued especially considering the fat yield offered by the shares backed up by impressive cash generation.