Telecom Plus trading update

TELECOMPLUSPLC

Trading as the Utility Warehouse, Telecom Plus PLC provides a range of services to households and small to medium sized businesses. The Company is engaged in the supply of fixed telephony, mobile telephony, gas, electricity and Internet services through independent distributors. I have a holding in my growth portfolio (epic code: TEP).

Telecom Plus issued a trading update today that was not well received by the market, pushing their shares down by almost 20% to 785p. 

The essence of the statement is that management expects adjusted pre-tax profits of between £52m and £53m, this is after taking account of a ~£6m impact of higher than anticipated leakage and theft in the gas system.  The market was expecting pre-tax of £63m, so even if the £6m is excluded the company will be 6-8% below expectations.  The shortfall is due to the cumulative effect of retail energy price reductions during the fourth quarter and lower energy usage during the year, caused mainly by un-seasonally warm weather.  There will be an ongoing charge for leakage and theft in the gas system, so including this charge for the current year the shortfall against market expectations was 18%. 

The company will recommend a final dividend for the current year of 21p, making a total of 40p for the year, a 14% increase over last year.  Management have recently conducted a detailed review of the unbilled energy debtor carried on their balance sheet and concluded that a total of approximately £11m (net of anticipated tax credit), which has accumulated over the seven years between April 2007 and March 2014, is not recoverable. This relates to higher levels of leakage and theft within the gas distribution network than had previously been anticipated.  Although this has no cash effect, it will require a write-off to profits; as this balance has built up over the years, it is of concern that it has taken them until now before a review has taken place.  Possibly the arrival of the new CFO Schoenfeld in the New Year was the catalyst. 

Management have given guidance that adjusted pre-tax profits for the year to March 2016 should be between £54m and £58m, previous expectations were for £66m and they state that this should enable them to increase the dividend by at least 15%, to not less than 46p per share. Based on the company guidance the company is on a prospective yield of 5.9% and a P/E range of 12-13.