Telecom Plus -TEP

pre trading update - heads-up.

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This is just some thoughts, it isn't investment advice or incitement to buy in any way, just my views - please do your own thorough research. I’m not an analyst, I’m just a private investor looking after my own money. Nothing I do or say is meant as advice or should be taken as such. Here I publish my ideas and research that I have done and discuss the way I invest.  Anything written here needs to be verified for its accuracy. Assume any stock I write about I likely own, so my views are biased. Inevitably I will get things wrong, Everyone is responsible for their own decision making and what they buy and sell. Subscribing and reading this article means you accept the above and you take full responsibility for your own actions and decisions. Small Cap stocks can be illiquid and very hard to sell at times when demand is weak so caution is required.

I have been holding TEP for a couple of months now.  With the consumer feeling the squeeze I have been looking for stocks which supply value for people, the places the public will go if things get tight and they need to shop around.

Telecom Plus market themselves as Utility Warehouse - All of your home services in one place, the 8th largest utility supplier in the UK.

They supply households and small businesses throughout the UK with a wide range of essential services under the Utility Warehouse brand.  They supply broadband, mobile, energy and insurance.  The business offers customers -

Simplicity - just one simple bill for all your home services.

Savings - compared with the prices they were previously paying.

Service - delivered by award-winning UK-based support teams.

Telecom Plus say they are “a smarter way to earn”. They recruit customers of which some will become home sales people.

“We offer our Partners a highly flexible opportunity to make money by telling their friends and family about UW, helping them to switch essential services, that they are already taking from other suppliers, to us. In return, they can receive a share of the revenues generated by those customers, into perpetuity. Between them, our 48,000 Partners have introducedvirtually every one of our 657,000 customers to us. They are inherently local and trusted brand advocates who spread the word about UW, one neighbour at a time. The clear alignment of interests that underpins our Partner revenue-sharing model enables us to build a uniquely high-quality customer demographic, in an effective and cost-efficient fashion”.

The business is simple. They recruit partners, basically “Avon Ladies”, who recruit friends to purchase their utility services from UW. These customers may just take their utility services from UW or they may become a UW partner too, selling the services to others and earning a bit of income. “Avon Ladies” is probably unfair – they are more like evangelists, people supplied by UW who want to spread the good news and make money as a side effect.  A great benefit of this is that all marketing is word of mouth, a huge cost saving.

This is UW’s unique route to market. With low prices and low costs they aim to retain customers who can get on with their lives and stay loyal with no reason to shift supplier. The strategy is to encourage purchasers of the services to become partners and sell the services to friends, hopefully taking Broadband, Mobile, Gas, Electric and Insurance. Utility Warehouse try to make doing this as easy as possible, keeping it simple. The more partners they can achieve the greater the sales and profits.  UW say:

“Maintaining a relentless focus on delivering best-in class service and support to our customers, always treating them fairly, and investing in our technology and support teams to achieve this. To these ends, we have significantly improved access for our customers through longer call-centre opening hours, introducing online chat, and enhancing our mobile app. Equally importantly, continually seeking to simplify and improve the competitiveness of our proposition, and innovating where necessary and further evolving our customer proposition to reflect consumer demand in each of the markets we operate in - for example full fibre broadband, EV charging points and in-home smart services”.

Gaining a customer that takes one service is okay but the target is to get customers to take all five services, Broadband, Mobile, Gas, Electricity and Telephone. Last year, customers increased by 22 per cent, on average each customer takes 3 services. Telecom Plus are targetting 2m customers they say, they still only have a small part of the total addressable market.  Having started as Telecom Plus, supplying just telephone services, their addressable market has escalated. By achieving a customer take up of all 5 services the margins increase a lot. The more they can “score a 5”, the faster and greater earnings will grow.  To build on the original plan, UW are investing heavily in cross-selling capabilities, sharing the benefits of any additional services taken by customers with partners. Putting it basically, Telecom Plus provides five services with one overhead while other customers just supply one service with the same overheads for each. It is far easier to get an existing customer to take another service than find a whole new customer. To help retail customers further, UW have a cash back card, recognised by money saving guru Martin Lewis as the best cash back card available.

My reason for investing here is several.  Firstly I know the history of Telecom Plus quite well, I have followed it since it made its stock market debut. They are known for providing some of the lowest priced products and good value in the sector.

From floatation to 2013 Telecom Plus virtually 10 bagged.  For the next 7 years the performance had been lacklustre.  In a £218m acquisition, Telecom Plus acquired Electricity Plus Supply Limited and Gas Plus Supply Limited from N-Power in order to secure energy supply at better margins.  They also sold Opus Energy for circa £70m.

It’s fair to say the following seven or so years were mediocre but all of this is the past, my interest starts in September 2021 when the chart triple bottomed. TEP appointed Stuart Burnett as Co CEO here.  I like chart changes when boards change. In March 2022 the company said this:

“Following the appointment of Stuart Burnett as co-CEO in November 2021, and the improving growth prospects for the business, the Board believe it is now the right time to redress the historical imbalance in the proportion of independent non-executive directors by announcing the following boardroom changes. These are expected to take effect from the AGM in July 2022. Charles Wigoder stepped down as Exec Chairman.  Melvin Lawson and Julian Schild retired from the Board”.

Re-invigorated boards excite me. Stuart Burnett had been COO for two years.  Internal promotions like that are often a very good signal. In fact he was promoted to Co-CEO alongside Andrew Lindsay which is an unusual set up and wouldn’t be a place for egos but they seem to work well together watching the company presentation.

Where it all gets interesting is Feb 22 when Russia invaded Ukraine.  Energy prices rocketed, Telecom Plus were an obvious beneficiaries in most eyes, the shares nearly doubled. But the volatility and several other effects meant that only about half the bumper extra profits were from the higher prices, there were several negative effects too. This means the underlying growth wasn’t as much from the rising energy price as many assume.

TEP earnings rocketed from 41.3p in 2021 to 46.6p in 2022 to 81.6p for 2023, nearly up 100% from 2022-2023.  Energy prices have since plummeted so obviously the market has taken fright, after the share race from £13 to £25 they have now retreated back to £15.70.  But the forecasts have continued to rise with 25%+ earnings growth forecast for this year and EPS of 105p.  That’s a PE of 15 for 25% earnings growth or a PEG  of 0.6. What’s more a further 15% is forecast for 2025. Despite energy prices coming back down the energy price is still double its historic levels.  Sales and earnings this year will be double that of 2022 with an 85.2p divi.

2023  was a record year for the company although you wouldn’t believe it looking at the share price response. I believe many don’t realise the multi-service cost advantage or that they can be doing well in a falling energy price market. But energy is just two of the five utilities they provide. In a climate where people are trying to cut outgoings this is another business set to benefit like CARD, SHOE, BEM, etc who provide great value and low costs.

Add to this they have net cash of £94m and they pay a yield of 5.4% and intend to do additional share buy backs.  Based on forecasts this is clearly a gross undervaluation in my book.  But these forecasts will be over optimistic surely, we had the energy price boost from Ukraine invasion and prices have come right back?  Well actually, if you watch the last results presentation the secret is acquiring more customers and partners that take all 5 utilities, not the energy prices. It is the volatility in energy prices which are harmful it seems.

Perhaps underlining this, The chairman said this at the AGM statement in August.

“We remain focussed on our medium-term target of welcoming an additional million customers to UW, underpinned by our market-leading offerings across energy, broadband, mobile and insurance, and the competitive advantage that our unique multiservice customer proposition gives us."

In addition, the wife of CEO Stuart Burnett bought £100k worth of shares on August 22^nd 

With no share dilution to speak of in the last 5 years and free cash flow of 281p per share last year I see scope for higher divis, share buy backs and cash return to shareholders.

It’s worth watching the year end results presentation. The upheaval in the industry had lots of positives for Telecom Plus and has created huge barriers to entry.

As ever I could be completely wrong and I do have a very meaningful size holding so I am likely to be biased too, so you need to do your own research.  I would suggest watching the last results presentation online, there are a number of positive and negative effects of the past year which offset each other, the underlying growth is far stronger and unaffected. it’s far better to hear this all from the company themselves than me trying to re-write it – it is very enlightening and can demonstrate the rather exciting performance here better than I can.

https://stream.brrmedia.co.uk/broadcast/6470833ac0e842f4c6ea84c5/649a952b2d4fe213e22beadb

43 minutes of lazy research just watching and listening  to the board.  There’s good body language  from the board too.

This is mainly a ‘heads up’ prior to a trading update.  They had a trading update on Oct 3^rd last year so very possibly something from the company at a similar time this year.

For me, this is a stock that a year ago was tading at £25 a share and doing 82p eps

Today, this is a share that is now trading at a £15.50 a share and set to do 105p eps

A PE of 30 is now around 15, a yield of just over 2% is now nearly 5.5%

If you like a PE of 15, 25% earnings growth and a PEG of 0.6, if you like 10% of the market cap in net cash, nearly 5.5% divi yield that’s growing and an upbeat trading outlook you may find TEP interesting. There are just 2 brokers covering TEP from what I can see, neither available on Research Tree so getting forecasts isn’t easy - for that reason I again think investors may not realise the value here.

I am not enticing anyone to buy, I’m just writing about the reasons I am long.  You can decide for yourself.

Rebel