It’s that time of year when summer gives us some time for reading and I have taken the opportunity to read the Annual Reports of a couple of my holdings:
Telecom Plus (TEP): This is an exemplary example of how to write and publish an Annual Report. At 151 pages it’s not too long although it could be shorter. On page 3 there is a useful description of “Why invest in Telecom Plus?” I reproduce it below:
Telecom Plus is a unique UK multi-service provider with a purpose: to stop households wasting time and money on essential services. We have partnerships with leading suppliers of energy, broadband, mobile and insurance, and a high quality customer base. This leads to a high growth, predictable, capital-light and cash generative business model supporting a clear capital allocation policy of high returns through dividends supplemented by share buybacks.
- The UK’s only multi-service provider We have a unique award-winning customer proposition providing multiple essential services including energy, broadband, mobile and insurance to over one million UK customers under the Utility Warehouse brand. This provides consistently larger savings than peers, and simplicity through a single bill and point of service.
- Significant growth opportunity Our ability to offer lower prices than competitors, combined with award-winning customer service, means we are able to achieve sustainable double digit customer growth. We are the leading challenger in our markets and with a c.3% share of the UK energy market, around 1% of the broadband and mobile markets, and a nascent position in insurance, there is ample opportunity for growth.
- Differentiated route to market Our business model is based on a unique and hard-to replicate word-of-mouth route to market. Our Partners refer UW to their friends, family and their personal networks, attracting loyal multi-service homeowner customers which other operators find hard to reach. Customer satisfaction and loyalty gives market-leading customer lifetimes and lower bad debts. Our Partners value the opportunity to earn an additional income, providing a high quality and low cost means of customer acquisition, while fulfilling our social purpose.
- Structural cost advantage We have a structural cost advantage as we have multiple revenue streams but only one set of overheads, unlike our competitors. This allows us to offer the most attractive prices to our multi-service customers, permitting us to be more profitable and reinvest in the business to improve our value for money still further – reinforcing our competitive position and sustaining our superior growth rate.
- Capital light business model We do not own any infrastructure, as we are a virtual service provider meaning we do not need significant capital expenditure to grow. We are able to offer high quality services from the best providers, benefiting from 20 year relationships and long term contracts. Our long track record increases supplier and Partner confidence in us. Our model means we differentiate on price, simplicity and service while not taking capacity or technology risk.
- Proven financial track record with strong returns We generate predictable, growing earnings from the supply of essential services. We are highly cash generative due to our capital light model. Over the last ten years our gross profit has grown by 254%, adjusted profit before tax by 162% and dividend per share by 137%. We consistently generate strong returns with a ROCE of above 30%. We pursue a progressive distribution policy with a total payout of 80-90% of adjusted net income including a dividend rising modestly with inflation and supplemented by share buybacks, with an appropriate level of gearing.
It’s always good to be reminded as to why one bought the shares. My only comment is that with a revised bonus arrangements introduced last year the total pay of the directors (“Single figure of remuneration”) has increased from £4.5 million to £7.3 million. The company did well last year but I still feel this increase is unjustified.
The other company to comment on is Halma (HLMA). At 276 pages the Annual Report is way too long. If you obtain a paper copy as I prefer to do as it makes it more readable you get a heavyweight document that is an inch thick.
Halma is a conglomerate of many individual companies they have acquired in recent years – mainly focussed on safety and environmental issues. They summarise it in a paragraph on page 8 which is headlined with “Sustainable growth with purpose”. The document is full of meaningless PR speak such as that. Another example is this paragraph:
Halma Cultural Genes. These are the unique cultural and behavioural principles that we require, protect and leverage to effectively optimise our organisational genes and deliver our purpose. • Live the purpose • Embrace the adventure • Be an entrepreneur • Say yes, and… • Just be a good person.
I fear this company has swallowed a dictionary of management speak which they could have done without. But despite this they have a good recent financial track record. How they control this now sprawling empire is not exactly clear though.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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