The steam train shows no sign of slowing down at Telecom plus. Today's half-year figures include profits nearly doubled on turnover ahead by 46%, with investors seeing their reward in an 80% rise in the dividend. Unfortunately, the rating reflects the growth prospects, says Magnus Grimond.

In retrospect, we have been much too cautious in the re-rating of Telecom plus shares that has taken place over the past 12 months or so. We first tipped the shares at 117.5p in our Hemscott Analyst subscription newsletter in October last year. After a good run, which saw the price rise to 193.5p by May, we sold out. That was clearly premature, judging by the subsequent 86% rise in the shares to the current 360p, up a penny today.

The thing about Telecom plus is that it has hardly put a foot wrong since it floated. Indeed, the company's only mistake was to arrive on the market just as the shine started to come off telecom and tech stocks in a big way. Today's half-year results show just why it cannot be lumped into the same category as the also-rans which have fallen by the wayside since 2000.
Pre-tax profits for the six months to September jumped 96% to £4.9m, on sales 46% up at £37.2m. Diluted earnings per share romped ahead by two-thirds to 5.2p, out of which Telecom plus is paying an interim dividend hoisted 80% to 4.5p. (Register date for the payment is 12th December.)

Followers of the company will know all about the unique approach to selling telephone, gas and electricity services followed by chief executive Charles Wigoder and his team. By combining the benefits of surplus capacity, a centralised IT system and a network of more or less casual salesmen, the company has struck a winning formula.

Accelerating growthNormally, a company growing this fast could expect to see its rate of expansion decelerate - it is just much harder to grow at the same percentage rate from a larger base. That does not seem to be happening as yet at Telecom plus.

The number of customers served in the latest six months has grown by a mighty 20% to 160,000 at the end of September. At the same time, the number of services taken - telephone, internet, gas and electricity - is up by 19% to 270,000. Roughly speaking, that looks about double the percentage rate clocked up at the same time last year.

Not bad going for a company which does no noticeable advertising. Granted, the economic conditions may have improved somewhat in 2003 compared with 2002, but it is still an excellent result. Needless to say, the economies of scale in such a business are doing their bit too. Half-year operating margins have fattened by a hefty 3.5 percentage points to 12.8% compared with the same period last year.

As before, remarkable amounts of cash are being thrown off for such a fast-growing business. Conversion of operating profit to cash reached 104%, up from 97% in the comparable figures, with debtors falling in both absolute and relative terms since the year end in March. Net cash in September was £8.12m, or 69% of shareholders' funds.

Little wonder that Wigoder, who personally controls around 25% of the shares, wants to get his hands on some of that cash. The interim dividend today will hand him and his family a handy cheque for around £700,000.

Wigoder himself was in typically combative mood today, shrugging off any suggesting that Telecom plus faces competitive threats. In direct contradiction to some observers, he argues that the company has erected high barriers to entry through its unique multi-pronged strategy.
He confidently predicts that Centrica, possibly his nearest rival, will never be able to operate its IT networks as efficiently as Telecom plus. He also sees little threat too from supermarkets like J Sainsbury, which have never managed to break into the telecoms market, despite years of effort. Even if they do, with 20m households in the UK, there is plenty of room for all, he says.

Naturally, he also dismisses other possible pitfalls, like the mis-selling accusations which dogged electricity suppliers a little while back. Wigoder argues the commission structure at Telecom plus ensures this won't happen because it aligns the interest of the sales people with that of the company. This is because they gain a continuing income from a cut of the calls people make, thus ensuring that they have an interest in signing up genuine customers who will use the company's services.

Wigoder is not a man troubled by much self-doubt, but, given his record, it is hard not to agree with his comment that Telecom plus has "largely answered all the question marks".

Certainly, Seymour Pierce was sufficiently impressed with today's results to up its full-year forecast by £1.7m to £9.5m and next year's by £1.4m to £10.9m. That puts the shares on a forward multiple of 32, falling to 28, with a forward yield of at least 2.5%. The rating falls to 31 and 23 if you believe the more optimistic forecasts of house broker KBC Peel Hunt.

Growth north of 50% this year would justify that rating for now, but even on Peel's numbers, the rate decelerates quite sharply in 2004-2005. The rating does not really allow for mistakes at these levels, while competition there surely will be sooner or later. Hold.

Share prices can go down as well as up. The past is not necessarily a guide to future performance and the marketability of some shares can make them difficult to sell.

posted by Jeremy Tromans at 11/28/2003 11:44:00 PM