Telecom Plus increases dividend again as growth stabilises

Discount utilities provider Telecom Plus (TEP) is trying to prove that it can keep growing now the madness of last years’ gas prices has receded.

Before the pandemic Telecom Plus was a single-digit growth business, but when prices spiked customer growth accelerated as desperate consumers looked for cheaper deals. As Telecom Plus bundles broadband, insurance and energy together, it can offer them cheaper than competitors.

Now things are starting to settle down again. Co-chief executive Stuart Burnett is hopeful that growth will now settle at a structurally higher double-digit rate, aided by the fact a few of the low price energy suppliers have gone out of business. So far this year, Telecom Plus has increased customers at a 14 per cent annualised rate and it expects to exceed one million by the end of the financial year.

This customer growth fed through to revenue which increased 57 per cent year on year. However, not quite as much of this made it through to earnings per share which increased 14.5 per cent on an adjusted basis but because of a big increase in the tax bill dropped 3.3 per cent on a statutory basis.

A tricky consideration for Telecom Plus is to manage growth with profitability. Administrative expenses increased by over 40 per cent which is roughly in line with gross profit growth. The hope would be it would benefit from scale improvements. Burnett is confident this will happen but says the company wants to make sure it has good customer services so it has been investing ahead of schedule. 

Broker Peel Hunt forecasts earnings growth to compound at around 10 per cent each year. Telecom Plus has also increased the half-year dividend by 6 per cent and it is now trading on a forward dividend yield of 5 per cent. Given all this, it is starting to look good value.

Peel Hunt currently has it trading on a forward price to earnings of 16 but this drops to 14 in 2025, as earnings are expected to keep rising. Profitability could also improve further if it manages to start turning some of the scale benefits into improved margins. The steep rise in inflation-linked broadband contracts will also mean more customers are pushed to look for better deals. There aren’t many growing utilities providers out there, but Telecom Plus is one of them. Buy.

Last IC View: Buy, 1,614p, 28 Jun 2023