Telecom Plus boosts dividend as profits surge

Telecom Plus (TEP) bundles household utilities like energy, internet and home insurance together to drive down prices. Unsurprisingly, it has found its product in high demand recently. Revenue more than doubled for Telecom Plus (TEP) to £2.5bn in the year to March, while adjusted EPS rose 57 per cent.

Energy and internet costs have risen well ahead of pre-pandemic levels and consumers have turned to Telecom Plus as they look for cost savings. Last year, customers increased by 22 per cent to 887,000. It also managed to increase the number of services supplied to them by 24 per cent to 2.8mn – meaning each customer is using an average of just over three services each.

This rise in sales helped push up adjusted EPS by 57 per cent. However, profit growth was a lot slower than revenue growth because there was disproportionate increase in low margin energy sales in the period. The gross margin fell from 19.5 per cent to 12.4 per cent and this margin could fall next year with the Ofgem price cap set to be lowered in July.

Telecom Plus also said it experienced increased churn at the end of the year as energy suppliers restarted their retention programs, so, there are some potential headwinds. This is reflected in the company's slightly more modest growth aspirations. It says it will be able to deliver double-digit annual percentage growth in customers and adjusted profit before tax this year. This is still strong, but not quite the 50 per cent profit growth we saw in 2022.

Broker Peel Hunt makes the point that decreased media coverage around energy prices will also mean customers won’t be reminded to switch suppliers as regularly. Combined with the price cap reduction, Peel Hunt has decided to reduce its 2024 revenue forecast by 5 per cent. However, it still expects adjusted EPS to rise 5 per cent from last year to 106p giving a forward price to earnings ratio of 13.

Next year won’t be as strong as this, but the share price isn’t prohibitive. All the marketing is done by word of mouth which frees up cash which management is happy to return to shareholders. It increased its final dividend by 53 per cent to 46p, giving a healthy dividend yield of around 6 per cent. Now the price has come off its 2022 peak we move to buy.

Last IC View: Hold, 2,400p, 22 Nov 2022