Telecom Plus: Strong balance sheet but asset poor

Telecom plus (LON:TEP) is a reseller of multiple utility services (gas, electricity, fixed line telephony, mobile telephony, broadband and insurance services) integrated under the Utility Warehouse and TML brands.

The variety of services means it is regulated by Ofgem, Ofcom, and the FCA – to name a few. As a reseller, the Group does not own any of the network infrastructure required to deliver these services to its membership base.  

It claims to be the UK’s only fully integrated provider of these services, offering consumers the convenience and simplicity of having all their core household services on a single bill. Over 55% of new customers switched all five of their core services to Telecom Plus. Accolades have followed. It was named ‘Utilities Provider of the Year’ at the Which? 2018 Annual Awards, and a Which? ‘Recommended Provider’ for Mobile and Broadband. 

At the time of its H1 2018 financials, Chief Executive Andrew Lindsay noted: “Revenues and profits are at record levels, and our balance sheet remains robust. In contrast to the majority of other energy suppliers, this puts us in a strong position now that the dynamics of the energy market have started to change in our favour.”

Its domestic energy churn rate is 12% - substantially below the 20% industry average – a reflection, the company says – of the “the high quality of our membership base together
with our focus on treating customers fairly.”

Gross margin for the 2018 financial year increased to 23.0% on an annualised basis (2017: 22.5%).

Lindsay remarked: “The long bear market in wholesale gas and electricity has reversed, with commodity prices up by around 20%, accompanied by a narrowing of the gap between standard variable tariffs and introductory fixed price deals. Together, these have significantly improved our competitive position.” 

Conclusions based on H1 figures to 30 September 2018, then annualised:

For: good current ratio; very low net gearing; very strong interest cover; strong debt capacity (2/3 of credit facility unused)

Against: Low tangible net assets per share (just 51p versus market share price of £14); low EPS yield (2.6%); Price:Tangible Book Value is 28x; low revenue per share (just £4 per £14 share); moderate dividend yield (3.5%); very high PE (39x); high effective tax rate (25.6%)

Overall:  A strong balance sheet and favourable business strategy are outweighed by poor asset cover and shareholder return, making Telecom Plus overall, not an attractive buy.