Why the Telecom Plus share price could keep rising

The Telecom Plus share price has delivered big gains over the last year. Roland Head explains why he thinks there’s still more to come.

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The Telecom Plus (LSE: TEP) share price has risen by 25% over the last year, as this energy supplier has emerged as a big winner in its market, following the failure of more than 30 of its UK rivals.

Legendary investor Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked”. That’s what happened last year with UK energy suppliers. It wasn’t pretty. But for me, it was a useful reminder of just how good the Telecom Plus business really is.

Customers up 20%

Telecom Plus is probably better known under its trading name of Utility Warehouse. This business buys utility services such as electricity and gas wholesale. It then resells them to domestic customers through a workforce of self-employed agents.

One of the secrets to the group’s strong financial performance is its long-term energy supply deal with German utility giant Eon. This deal is allowing Telecom Plus to sell energy profitably below the UK government price cap.

It’s a tremendous competitive advantage in the current environment, as it makes UW pricing very attractive for people who need a new energy deal.

Telecom Plus says that during the six months to 31 March, customer numbers rose by 20%, on an annualised basis. Growth is expected to continue at this rate in 2022/23. I think that’s pretty impressive for a business with over 700,000 customers.

What could go wrong?

Market conditions at the moment are pretty unusual and will (hopefully) return to normal at some point. When this happens, Utility Warehouse could face tougher competition on pricing.

Another potential concern for me is that long-time executive chairman and major shareholder, Charles Wigoder, is planning to step down to a non-executive role in July. Wigoder has been gradually reducing his stake in the company and now only owns 9%.

Personally, I’m pretty relaxed about Wigoder’s decision to step back. Co-CEO Andrew Lindsay has worked with Wigoder since 2007. He looks like a safe pair of hands to me.

Would I buy Telecom Plus shares now?

I’ve followed Telecom Plus for several years and have really come to like this business.

Wigoder has kept the group’s focus on its core business and resisted the temptation to diversify. He’s also taken care to keep the dividend safe – the payout has not been cut since 2006.

In my view, this is a well-run business, with strong finances and an impressive track record of growth.

After last year’s gains, Telecom Plus shares now trade on 22 times 2022/23 forecast earnings. That’s not especially cheap, but the group’s strong cash generation means that the shares still offer a useful 3.9% dividend yield.

Perhaps more importantly, I think this quality business is likely to continue growing, even if market conditions normalise. I’d be happy to buy Telecom Plus shares at current levels. I think there’s a good chance they’ll keep rising.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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