Defensive income plus growth potential? This stock ticks all the boxes
Telecom Plus has survived the energy crisis that has driven so many of its competitors under, and has emerged bigger and stronger than ever. One to consider for your portfolio, says Rupert Hargreaves.
Over the past two decades the group has focused relentlessly on lowering costs for the customer and improving service to a level where it does not make much sense to go anywhere else. I know if I go to Amazon‘s website I can order pretty much anything and it will arrive tomorrow.
It is only able to do this because it has invested hundreds of billions of dollars in infrastructure to fulfil customer orders. It has prioritised long-term capital spending over short-term profits.
A company with similar qualities here in the UK is Telecom Plus (LSE: TEP).
A utility provide charting a course through stormy waters
For those unaware of the business, Telecom Plus supplies gas and electricity under its Utility Warehouse brand. Customers who take up both pay £50 below the government price cap.
While the company does not offer fixed-price deals, it does allow consumers to save money when they bundle together additional services such as home insurance, broadband and mobile services.
Utility Warehouse supplies my gas and electricity, and my bill tells me that I could save £80 a year by signing up for extra services. These services would cost around £40 a month, (according to the estimate on the bill) which is roughly what I’m paying anyway.
This is a great offer, especially when the cost of living is increasing so significantly. And it seems I’m not the only one who’s interested. Last year, Telecom Plus saw a 10% rise in customer numbers to 729,000. Management expects the group can win over a million new customers during the next five years as consumers look to bundle services and save costs.
As its share of the UK supply market is only around 2%, there’s certainly plenty of room for growth.
While other suppliers struggled last year, for the year to the end of March 2022, the company reported a 10% increase in adjusted pre-tax profit to £62m. Revenues came in at £967m, compared with £861m a year earlier. Management expects the bottom line to grow further this year. For the financial year to the end of March 2023, the group is projecting an adjusted pre-tax profit of £75m.
A long-term mindset has helped the company prepare
So how has Telecom Plus been able to grow in an environment that has seen a huge number of suppliers collapse? Its focus on the consumer is only one part of the equation. The other part is management’s long-term mentality.
CEO Andrew Lindsay worked at Goldman Sachs as an M&A banker before he joined the utility group in 2010. His background means he knows a thing or two about hedging risk, a key part of the utility supply business. Telecom Plus has an agreement with Eon whereby the German utility supplies energy at a permanent fixed discount to the UK’s retail price cap. Hedging and supply risks are all passed on to Eon.
The company has also learned the lessons of the past. Lindsay told City Insider last year that over the past 20 years of the group’s existence, it has seen several market cycles. “Energy markets are cyclical. We learned back in 2005 that you get wholesale price spikes. But everyone’s conveniently forgotten about that,” he said.
That’s why Telecom Plus has not only been able to navigate the crisis this time around, but it’s emerged bigger and stronger on the other side.
A defensive stock with plenty of growth potential
Based on Refinitiv analyst estimates the stock is trading at a 2023 price/earnings ratio (p/e) of 24, which is a bit on the pricey side. Nevertheless, considering the fact that the company believes it can more than double customer numbers over the next five years, I think it might be worth paying a premium for the stock. Shares in the utility group also support a dividend yield of 3.6% on a forward basis.
By taking a long-term approach to reducing risk and focusing on the customer, Telecom Plus has put itself in a great position to grab market share in a tough economic climate.
At a time when the outlook for so many other companies both inside and outside the utility sector is becoming bleaker by the day, the group’s positive growth outlook really stands out. It’s not often that utility suppliers show the hallmarks of a growth stock, but in my opinion, Telecom Plus does. Investors who’re looking for certainty in uncertain times might want to consider this one for their portfolios.