Valuation11 May '22
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.