Telecom Plus has now released their interim results for the year ending 2018.
Revenues increased when compared to last year as a £767K reduction in customer acquisition revenue was more than offset by an £8.4M growth in customer management revenue. Depreciation was down £251K but other cost of sales increased by £2.2M to give a gross profit £5.7M higher. Admin expenses were up £4.5M due to higher technology, regulatory and staff costs, and there was a £221K increase in share incentive scheme charges which meant that the operating profit grew by £963K. Finance expenses fell by £278K but tax charges were up £607K to give a profit for the period of £14M, a decline by £198K year on year due to the lack of profits from discontinued operations (£832K last time).
When compared to the end point of last year, total assets declined by £28M driven by a £30.8M decline of prepayments and accrued income along with a £5.6M fall in the value of the energy supply contract, partially offset by a £5.1M increase in cash, a £2.3M growth in inventories and a £1.2M increase in receivables. Total liabilities increased during the period as a £43.3M decline in accrued expenses and deferred income was more than offset by a £44.3M increase in bank loans and a £1.1M growth in payables. The end result was a net tangible asset level of £38.4M, a decline of £25M over the past six months.
Before movements in working capital, cash profits increased by £1.4M to £28.4M. There was a cash outflow from working capital due to a decrease in payables, relating to timings of payments to suppliers, and after tax payments increased by £4.6M the net cash from operations was £7.1M, a decline of £8.6M year on year. Of this, £1.5M was spent on intangible assets and £503K on fixed assets to give a free cash flow of £5.2M. This didn’t come close to paying the dividends of £19.5M and their own share purchases of £25.4M so the group took out new borrowings of £45M to give a cash flow of £5.1M and a cash level of £23.9M at the period-end.
The growth in revenue was broadly in line with the increase in service numbers, which grew by 36,348 (52,037 last time) with the impact from higher telephony and energy prices being largely offset by a continuing decline in average energy usage due to warmer weather, the progressive impact of energy efficiency initiatives and the prepayment meter price cap that was introduced in April. The growth in service numbers was affected by the one-off loss of services (mostly fixed line telephony) relating to a migration programme from their legacy IPStream product onto faster fibre-based services.
Net customer acquisition costs had been expected to increase but remained broadly flat reflecting a steady level of investment in gathering high quality new members. These include the costs associated with Project Daffodil which continued. The quality of the membership base continued to improve with a steady rise in the proportion of members taking energy, broadband/phone and mobile services.
Churn rates in the electricity industry are running at a record annualised rate of nearly 20% and the Big 6 suppliers are losing customers to smaller outfits. The churn within the group is around 1% per month and they have increased market share.
Following a successful trial of insurance last year, the group continue to make progress in broadening the coverage and competitiveness of the quotes they offer through deeper relationships with more underwriters; gathering annual policy renewal dates from members; and developing a fully automated marketing and quote system to ensure maximum operational efficiency and convenience. By the end of the period they had around 1,800 live policies with encouraging month on month growth of new policy sales. While the focus in 2018 will be the scale roll-out of their home insurance product to their members, they will continue to invest resources into extending the range of insurance services they offer over the medium term.
It remains unclear if bundles linear TV services have a long term future or whether customers will increasingly choose to purchase the content they want and stream it to their devices as and when they want it. The group retain a watching brief in this area but will only enter the market if they find a way to do so that offers a satisfactory return. The group are also considering the supply and installation of gas boilers and providing boiler service and breakdown cover.
SSE and N Power have recently announced their intention to merge their UK domestic supply businesses, creating a new supplier which will become the second largest. The group have been informed that their current supply agreement with N Power is intended to become the responsibility of the new entity, and they will be discussing logistics with them over the coming months.
Service growth during the period was at the lower end of management expectations but the board are optimistic that the proposed SVT price cap will materially improve their competitive position and will act as the catalyst that takes their growth rates back towards the double digit levels they have historically achieved. Overall the board expect their adjusted pre-tax profits for the full year will be slightly ahead of current market expectations.
After a 4.3% increase in the interim dividend the shares are yielding 4.1% which increases to 4.2% on the full year consensus forecast. At the current share price the shares are trading on a PE ratio of 36.2 which falls to 21.4 on the full year forecast. At the period-end the group had a net debt position of £20.4M compared to a net cash position of £18.7M at the year-end.
Overall then this has been a bit of a mixed period for the group. Profits were down due to the sale of the Opus business, but like for like profits grew. Net assets declined and the operating cash flow was down due to working capital movements – cash profits increased and although an OK amount of free cash was generated, this did not cover the dividends. Overall business seems a bit subdued as increases in telephony and energy prices offset lower usage of energy, partly due to the weather.
The current state of affairs is likely to continue until the SVT price cap comes into force and then the group may once again enjoy some real growth. The forward PE of 21.4 is nothing to get excited about but the yield of 4.1% is not too bad. This could become an interesting safe play but I am not sure there is enough here yet to make me want in.
On the 19th April the group released a trading update covering the year ended 2018. Full year adjusted profits from continuing operations are expected to be around £54M, a growth of £700K and in line with previous guidance.
Throughout the year a significant gap remained between the low introductory fixed price energy deals available from some suppliers and the standard variable prices charged by the Big Six. In addition, the energy market saw record levels of switching with around 20% of domestic customers changing to a new supplier over the last year. Together these factors created a challenging environment although customer and service numbers both increased during the year.
Home insurance policy sales have grown steadily during the year to just under 5,000 households, as the group ramped up their internal resources and added new insurers to their panel. During Q4 they began a marketing campaign to existing members to gather their home insurance renewal dates with around 60,000 having been collected by the end of March. The renewal rates amongst the earliest customers who took a policy from them over a year ago are running at over 90%. The board are confident that home insurance will make a small initial contribution to group profits this year and thereafter become increasingly significant.
The group have completed the acquisition of a 75% shareholding in Glow Green, a fast growing supplier of domestic gas boilers and warranty care plans, for a total consideration of £2M. The intention is to support their existing management team in implementing their growth plans for the business by providing relatively modest working capital and promoting their services to their members.
Within the energy market, costs are rising, exerting an upward pressure on retail pricing. Combined with the proposed price cap expected later this year, this is expected to improve the group’s competitive position and lead to faster growth in the latter month of the New Year.
Despite lower average energy revenues and rising investment in their technology and systems, they expect the combination of a higher quality customer base, better commercial terms from wholesale partners, growing benefits from their smart meter rollout and an initial contribution from the extra services they added over the past year to deliver further growth in profits. In the absence of unforeseen circumstances, they expect adjusted pre-tax profits in 2019 to be in the range of £55M to £60M.