Telecom Plus Share Price (TEP)

Never mind the long term debt, look at the profit history since birth. I bought at 7.5p per share.
Marl

Hi Leapfrog, My dividend cover figures are based on the adjusted EPS which excludes the share incentive scheme charges and licence amortisation. I still think the dividend cover is very thin. Cash isn't only needed to fund growth. It can also be used to pay down debt and, as interest rates rise, the cost of financing that debt will rise.

At 31 March 2021, TEP had £89.4m of long term borrowings (it also had cash of £25.1m) and £2.4m of financing costs. In the absence of any rate cap etc. it does not seem unreasonable to assume that TEP's financing costs could double from 2021 levels over the next 12 months as the BofE interest rate rises. You've also got to factor in that the corporation tax rate will rise from 19% to 25% from 1 April 2023 onwards. These, together with the likelihood of additional bad debt costs, are all good reasons why TEP should not be increasing its dividend and should, if anything, be considering reducing its dividend so that it can pay down debt at a faster rate.

I am hanging on, not selling. This company has resisted the war-blown onslaught, proving its worth as a defensive stock, and I like to imagine the bounce back. I'm happy to stay because of the long history of consistently gathering customers and winning awards, and this continues according to the latest reports.

I guess you understand their stange financing? TEP has a very unique approach that no one has so far seriously tried to replicate (which may or may not be a good sign). Its earnings are heavily impacted by a non-cash amortisation charge of ~£14m per year. This is the depreciation of a ~£300m licence with Npower to supply to TP's customers at attractive rates.

So in cash terms the dividend is covered, although even then the company still has a high payout ratio as it doesn't need to retain a lot of capital to grow.

At some point the licence will need renewing (it's a 20 yr licence that will run out ~2034), but this will probably be paid with debt and new equity, same as for the last one.

I estimate that TP can sustainably grow the dividend by around 4-5% and over time, and if earnings grow faster than I've figured, then cash flows will continue to cover the dividend.

Hope this helps.

Having bought in February 2021 and sold in April 2022, making a capital/dividend retrun of about 33%, I can't complain but I can't help but think that TEP is way overvalued (again).

I've been here before. I originally bought TEP at c357p back in early 2005 and sold at c1,260p in mid-2013 (missing out on the subsequent rise to c1,900p later that year). So, from a timing perspective (at least), I don't have pedigree ;-)

I'd like to think that TEP has legs and that there may be an opportunity to get back in but I'm concerned about the dividend cover and the PE ratio.

Even on an adjusted basis, by my estimates, the dividend cover hasn't exceeded 1.11x for the last six years (including 2022 which I'd estimate at about 1.07x based on the most recent RNS). There really doesn't seem to be any headroom to increase dividends further and they probably ought to be considering reducing them to c40p (1.5x dividend cover) if they were being prudent. I'm not saying that TEP will reduce its dividends (it seems likely that TEP will be looking to increase them again for 2023) but such a high payout doesn't give TEP any financial cushion (particularly if they see a significant increase in bad or slow paying debts as a result of the energy price rises).

My concern with the PE ratio is that TEP is an eclectic mix of businesses that don't make it a prime acquisition target. Sure competitors might (in more normal times) want to cherry-pick its customers but I can't see a utility company or (say) a telecoms company ever wanting to acquire the whole company. TEP makes sense as a standalone business but not as an acquisition target and, as such, does not warrant any buy-out premium. It's currently trading on a PE ration of c38x (on an unadjusted basis) and c27x (on an adjusted basis). The adjusted PE ratio is likely to drop to c26x when the 2022 results are published and, if we were to assume that EPS was to increase by (say) 20% (in line with the expected customer growth rate) in 2023, it would appear to be trading on a PEG of c1.3.

Anybody care to discuss? I'll be honest. If I'd done this analysis back in February last year, I'd probably not have bought and would have therefore missed out on a c33% return but this share does have a history of getting ahead of itself (2013) before reality sinks in and the share price hits the doldrums.

All reviews of this company are favourable and expecting 1700+ this year, then today there is a 3% SP drop. With the very considerable rise in energy price, the price cap was raised today - in line with expectations, should say.
Perhaps it is expected that energy custmers will become more price sensitive. TEP is more about convenience than price.
We will have to see how in reality TEP's customer base reacts.