In the highly competitive telecoms industry it is often hard for small companies to make it big, and it can require an imaginative approach to growth and to marketing. Telecom Plus might have just what it takes.
It's sometimes strange the difference a few years can make. I remember Telecom Plus (LSE: TEP) from its early days in the late nineties when the company made a smart autodialler device that connected to your phone line and routed your calls via the cheapest option. Apart from considering getting one of the boxes (I didn't, for reasons that I've long forgotten), I really didn't give Telecom Plus much more thought than that -- I pretty much assumed the market for such boxes would disappear as competition in the industry hotted up, and companies making them would disappear.
But I couldn't have been more wrong about Telecom Plus, which has recently been named the Financial Times Company of the Year. From those humble beginnings, Telecom Plus has risen to become a FTSE 250 company valued at over £200m and with an annual turnover of more than £180m.
What does it do?
That kind of growth wasn't going to come just from selling those little gizmo things, so what does the company do now? It trades under the name Utility Warehouse and it's an unusual mix. It offers fixed and mobile telephone services along with Internet access, but it also sells gas and electricity, buying all commodities in from the major suppliers -- telecoms bandwidth from the wholesale market and energy from the npower arm of International Power (LSE: IPR). A subscriber's telephone connection is either rented from BT (LSE: BT-A) and calls are automatically routed via Telecom Plus (BT has to do that in accordance with unbundling regulations), or access is via cable and the use of one of those autodiallers.
The company's marketing is unusual too, operating along the lines of a multi-level marketing model. What that means is that existing customers get to spread the word to potential new customers, and take a small slice off the bills of anyone they manage to convert. That's why you won't be seeing any expensive adverts for the company on the telly any time soon.
The bottom line
What does that all mean for investors? The last few years results, plus forecasts, look like this:
| Year ending Mar 31 | 2004 | 2005 | 2006 | 2007 | 2008 | (f) 2009 | (f) 2010 |
|---|
| Turnover (£m) | 82 | 102 | 136 | 176 | 186 | | |
| Pre-tax profit (£m) | 11 | 10 | -1.6 | 12 | 17 | 23 | 25 |
| EPS (p) | 12 | 12 | 0.3 | 12 | 18 | 24 | 27 |
| DPS (p) | 10 | 10 | 6 | 3 | 10 | 18 | 22 |
That's a steady increase in turnover, even if profits have been a little erratic. The share price has largely followed those fortunes and has shown a very nice rise from the 2006 dip, having roughly tripled from the start of 2008 to today's 312p per share. That puts the share price on a forward P/E of 13 for 2009 and 11.5 for 2010, based on current forecasts, with a current market cap of £213m.
Size and ownership
I'm usually wary of small telecoms companies, for two reasons. Firstly, it is very difficult to compete with the market leaders in the long term and I usually tend to expect telecoms tiddlers to last a few years and disappear, either to go out of business or be swallowed up cheaply by bigger fish when things start to get a bit rocky. I also fear that some small startups are aimed at making their original owners as rich as possible as quickly as possible, with little regard to establishing long-term businesses.
But on both those counts, I think Telecom Plus passes muster. It has grown past the tiddler phase, and while a £200m company might be tiny compared with the £7b behemoth that is BT, it's no small beer. Also, the directors hold nearly 30% of the company, so their interests should hopefully be in line with those of small investors. With institutional investors holding around another 30%, that should provide enough shareholder muscle while still leaving a good amount of liquidity in the remaining 40%.
As of September 2008 Telecom Plus had around 225,000 domestic customers, and today appears to be doing well on the customer-satisfaction front, so it does sound like there is potential for significantly more growth. Perhaps Chief Executive Charles Wigoder might be able to do what he did with the Peoples Phone Company (which grew to 400,000 customers), and grow the company enough to sell out for a handsome price. With today's share price looking fairly buoyant (by the standards of the times, anyway), I can't really see it as a screaming bargain right now, but I'm far more interested in the long term and I’m going to keep my eyes peeled for the March 2009 full-year results.
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