Shares in Telecom Plus (LSE: TEP) fell by 23% when markets opened this morning, after the firm slashed its pre-tax profit forecast for the year by a whopping 16%, blaming a “combination of unfavourable circumstances”.
However, the firm did confirm its planned 14% dividend increase, which will take the full-year payout to 40p.
£11m loss
The big shocker in today’s update was that Telecom Plus is going to write-off £11m of bad debt.
This isn’t down to customers who haven’t paid their bills. Instead, it relates to gas that Telecom Plus supplied to customers, but which was lost through leakages and theft, and thus cannot be billed for.
This is presumably a problem that affects all gas suppliers, but what makes this case worrying is that Telecom Plus has allowed its unbillable balance of £11m to build up for seven years without doing anything about it.
To me, this suggests very aggressive accounting: allowing this uncollectable debt to build up on the balance sheet for seven years has added an average of £1.5m to the firm’s profits for each of those years.
Given that last year’s record profits were only £29m, that’s a big deal.
Telecom Plus changed auditors in February, and I suspect that is the reason for today’s embarrassing confession.
Going forward, the firm will do what it should have done before, and will provide for these losses annually. As a result, gas revenues are expected to be reduced by 2-3% per year — about £6.5m, based on last year’s figures.
Full-year profits down 16%
Most of us enjoyed the long, warm autumn last year — but Telecom Plus didn’t, as many of its customers didn’t fire up the heating until much later than usual.
The firm says that the combination of warm weather and price cuts by the big energy suppliers had a big impact on profits and new customer signups.
As a result of this, and the cost of recognising last year’s unbillable gas losses, Telecom Plus has cut its full-year pre-tax profit guidance by 16%, from £63m, to £52-53m, a 17% increase on last year.
Is the worst over?
Telecom Plus shares have now fallen by 53% over the last year, but the firm’s dividend has been maintained, giving a chunky 5.3% yield.
However, growth appears to be slowing, and the firm has been hit hard by the big utilities’ price cuts and fixed-rate tariffs. I’d wait for the company’s results, in June, before making a trading decision.