Telecom Plus word of mouth marketing is spreading

Telecom Plus (TEP) bundles together energy, internet and insurance deals. The upshot of this is that the company can offer customers better deals than traditional energy providers because the diversification lowers the risk.

The affordability of Telecom Plus has made it a cost of living crisis beneficiary so far. For the six months to September, revenue was up 51 per cent to £562mn and adjusted pre-tax profit increased 22.5 per cent to £32.1mn. This was driven by an annualised customer growth rate of 24 per cent.

Telecom Plus’s marketing strategy is word of mouth. It pays its customers to recommend it to others instead of spending money on online advertising. Squeezed budgets will encourage people to recommend the company to others because they get a recommendation payment and their friend or neighbour profits from the cheaper utilities package.

Co-chief executive Andrew Lindsay thinks this word-of-mouth strategy also improves the quality of customers. The concern with Telecom Plus is that the cheaper package would attract customers with low credit scores, meaning a higher chance they can’t pay the bills. However, in the past year, bad debt as a percentage of revenue has only risen from 1.4 per cent to 1.5 per cent. Lindsay said this is because most of the business comes from “middle Englanders telling their neighbours”.

Operating cash flow increased from £22.7mn to £78.6mn due to the timing of payments from the government’s energy bill support scheme, but this will need to be paid to customers. There is currently £120mn of accrued expenses and deferred income on the balance sheet.

This cost of living tailwind boosted these half-year results, and management is now guiding for adjusted 2023 full-year pre-tax profit of at least £95mn. The dividend is also expected to be 80p, up from 57p last year.

Broker Numis is guiding for a full-year pre-tax profit of exactly £95mn, and is then expecting it to rise again to £116mn in 2024. This would give a 2024 price/earnings ratio of 21.4, which looks expensive for a utilities business.

Telecom Plus’s business model is working and the word-of-mouth marketing is providing healthy growth. However, the company's cost of living sweet spot won’t last forever. Either gas prices will get cheaper or customers will stop being able to pay their bills. Buying in now might be like buying an ecommerce company at the height of Covid-19 lockdowns. Hold.

Last IC View: Hold, 1,807p, 21 June 2022