Telecom Plus winning the battle of attrition

Shares in Telecom Plus (TEP) recorded a double-digit increase on results day, even though the utility services group revealed that adjusted profits had pulled back after it was forced to increase a provision for an Ofcom fine for overcharging customers.

But changes to the UK energy landscape, the source of frustration for many consumers, have been working in the group’s favour. The increased rate of attrition has meant that Telecom Plus, which trades as Utility Warehouse, recorded a net increase of over 15,000 new customers in October alone. Over 20 energy companies have gone belly-up in the UK this year, thrown into disarray because of the massive increase in wholesale energy prices, specifically natural gas.

The price rises haven’t proved as ruinous for the group, which also offers telecoms and insurance services, but it said that revenues benefitted from “a colder spring relative to the prior year”. In the event, the gross margin decreased by 80 basis points to 22.9 per cent, but given the febrile nature of wholesale energy prices this year, a 7.3 per cent rise in cost of sales isn’t as drastic as it may seem.

We are witnessing an ersatz consolidation in the sector, driven in much the same way as the budget airline industry in the wake of the pandemic travel bans. How those new customers are brought on board is immaterial in a sense. What does matter is that management is forecasting “10 per cent growth in [the] customer base during H2, and double-digit annual percentage growth thereafter".

Andrew Lindsay, co-chief executive, said that “the recent energy crisis has brought a seven-year destructive price war to an abrupt end, and the subsequent spate of energy supplier failures has demonstrated the inherent flaws in the regulator's policy of competition at all costs”.

Other commentators have also blamed the consumer price-cap for distorting the UK retail energy market, though essentially the privatisation process was something of a dog’s dinner right from inception. Now, with the race to net-zero hogging the headlines, we are likely to witness ever more government intervention in energy markets.   

Utilities, by definition, are staid, low-growth affairs. But Telecom Plus, through its multiservice offering, is a slightly differentiated provider. Client acquisition is normally an incremental process, but the wider turmoil is an unlikely plus point (for now). To bear this out, consensus EPS expectations rise from 60.7p to 69p in FY 2023. The rate of attrition may have already peaked, but we envisage more turmoil in the sector going forward. However, a forward rating of 24 times consensus earnings suggests the market may have priced this in already. Take profits – sell.

Last IC view: Buy, 1,206p, 18 Jun 2021