Interactive Investor

Telecom Plus warns on profits, but dividend safe

16th April 2015 13:30

Harriet Mann from interactive investor

Ahead of full-year results in June, Telecom Plus has uncovered an £11 million black hole in its accounts. It now expects full-year profit will be well below market forecasts, and that profit growth will be slower in 2016. The share price slumped by as much as a quarter to a three-year low, although at least the company still expects to grow the dividend by 15% in 2016 to 46p.

Higher-than-expected leakage and theft within the gas network are blamed for the non-cash hit, which leaves a big dent in the balance sheet. A review into the accuracy of the company's billing system highlighted the issue, which was initially thought to be recoverable.

This £11 million accumulated over seven years, so management will restate past accounts to provide an accurate reflection of performance. Telecom Plus says provisions against future losses will reduce future gas sales by 2-3%, but initiatives like Project Nexus and the roll-out of smart meters should bring the gas industry more in-line with the electricity sector.

Apart from the £1.5 million tax credit expected to be refunded to Telecom Plus after the accounts are updated, management were quick to say the news has no impact on its cash position. It will still recommend a final dividend of 21p per share, which takes its full-year pay-out to 40p per share, 14% higher than last year. A 15% increase next year to 46p remains on the cards, giving a prospective dividend yield approaching 6%. 

However, a £6 million provision for gas leakage will reduce pre-tax profit below previous guidance to £52-£53 million. Even stripping this out, profits would miss forecasts following reductions to retail energy prices and lower levels of consumption during the fourth quarter caused by un-seasonally warm weather.

Management called customer and service numbers growth "satisfactory," with both up by 11% to 207,416 and 56,584 respectively. Expansion was found in all of the services Telecom offers; landline, broadband, mobile, gas and electricity.

Looking ahead, Telecom Plus is concerned about political and regulatory uncertainty linked to the General Election and the Competition and Markets Authority's preliminary findings soon to be announced. There could also be demand changes as a result of unseasonal weather. But management believe the gap between standard and cheaper short-term tariffs will get smaller, allowing it to beef up its customer base by 40,000-60,000. As it stands, pre-tax profit in 2016 is expected to reach £54-£58 million.

"These should prove to be conservative numbers," says Charles Hall, an analyst at house broker Peel Hunt. "Although clearly bad news, the model is not broken and the company is still adding customers at a good rate. The divi should provide some support - a 6% yield would give a share price of 750p."

Andrew Darley, an analyst at finnCap, says: "Telecom Plus's share price has suffered recently in the expectation of the effect of the decline in gas and electricity pricing, for which we had adjusted forecasts accordingly in February, and the uncertainty surrounding the impact of legislative changes relating to the general election.

"With a higher risk profile now apparent as the company reveals what we expect to be its performance nadir, we reduce our 12-month target price to 1,310p (1,530p), based on a 3.5% (3.0%) target yield."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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