Telecom Plus is surely one of the oddest companies to be included in the mid-cap FTSE 250 index.
Where are the workers?
Telecom Plus certainly has an offbeat business plan. It has no public outlets and doesn't even advertise, relying instead on word-of-mouth recommendations by existing customers. Also, it has a tiny workforce for a company with a market value approaching half a billion pounds. So, how has Telecom Plus become such a stand-out success?
The simple answer is that the firm grew strongly by relying on a huge army of self-employed distributors who sing its praises while signing up new customers to its multi-utility tariffs. In effect, Telecom Plus is a network-marketing business offering landline, mobile phone, broadband, gas and electricity services across the UK.
Telecom Plus is best known for its Utility Warehouse brand, which competes aggressively for communications and energy customers. It also owns a subsidiary that markets fixed-line telephony and broadband to small- and medium-sized businesses via a network of resellers and dealers. In addition, it holds 20% of Opus Energy Group, an independent supplier of gas and electricity to businesses of all sizes.
One benefit for Utility Warehouse customers is less paperwork, because they receive a single monthly bill itemising all of their telecoms and energy spending. In my 10 years of financial journalism, I've come across Utility Warehouse many times, and it's clear to me that its customers and distributors love the competitive deals they get from the firm.
Last weekend, Telecom Plus held its yearly sales conference. Incredibly, 6,000 of its distributors turned up to learn more about making money from network marketing, up 10% on 2011. Now that's what I call a motivated workforce! What's more, thanks to rising unemployment and reduced job security, this distributor base will surely keep growing.
This morning, Telecom Plus unveiled a trading statement for its financial year ending 31 March. It reported a "strong fourth quarter [and] results in line with recently upgraded market expectations". It also confirmed that half of new customers now take at least four of its services in their bundles. This should increase revenue per customer, as well as lowering customer churn.
In a show of confidence, Telecom Plus also announced a final dividend of 17p per share. Added to the interim dividend of 10p, this gives a full-year payout of 27p, which is a tidy 23% ahead of 2010/11's 22p.
Furthermore, cash flow was better than previously predicted, so Telecom Plus should end the year "with a small positive cash balance".
A share in this success
Andrew Lindsay, chief executive and major shareholder of Telecom Plus, said today: "We are pleased with the continuing positive momentum being demonstrated by the business, with strong underlying growth in distributor, customer and service numbers."
Lindsay added: "We believe that the improving quality of our customer base, which has been achieved through our sustained focus on delivering both consistently good value and exceptional levels of customer service, places us in a strong position to deliver significant shareholder value over the months and years ahead."
These are fine words from the man who founded the firm in 1996 and floated it on the London Stock Exchange in July 1999 at 30p a share. What's more, Lindsay is obviously a born competitor: as a British rower, he won an Olympic gold medal at the Sydney Olympics in 2000 -- one award that few CEOs can claim to have!
Despite its winning ways, I feel that the Telecom Plus share price has got too far ahead of its commercial success. As I write, its shares trade at 691.5p, up 4p this morning, valuing the group at £485 million. At this price, they trade on a fairly steep price-earnings ratio of 20.8 and offer a dividend yield of 3.9%, covered a mere 1.2 times.
As a value investor, I'm not interested in Telecom Plus, as I'm put off by its high PER, low dividend cover and negligible tangible assets. This is one story that will appeal only to go-go growth investors and those who hope Telecom Plus will fall to a knockout bid from a bigger rival.
For me, Telecom Plus shares are a sure and solid sell!