Buy Telecom Plus* (TEP) at 357p

Argues Tom Winnifrith of t1ps.com

Telecom Plus was originally recommended on t1ps.com back in January 2008 when the share price was 187.25p, so if you'd invested back then, you could have enjoyed gains of over 90%! But with solid fundamentals and strong growth prospects, Tom believes this stock still has much further to go, so at up to 425p he rates it a "buy".

Following on from a brand new hot tip yesterday, Tom will be publishing yet another tomorrow, exclusively on t1ps.com. This new tip is a cash generative company that continued to pay down debt and grow its dividend payout during the recession - and is now again growing strongly, with upcoming results likely to make its current lowly rating even clearer.

To find out more, plus see yesterday's new hot tip and listen to 5 new CEO webcasts uploaded in the last few days, click here.

And back to Telecom Plus, here's why Tom believes the shares are still worth buying now:

The Business

Telecom Plus has grown as a provider of a range of domestic utilities from 2004 when it launched its Utility Warehouse brand. From its core telephony roots, it has expanded rapidly and is now the only UK provider of a range of essential domestic utility services. Spanning gas, electricity, telephony, mobile, and broadband services, the company's stated mission is to offer customers a better value package than that provided by industry juggernauts. By pooling the combined buying power of its customers, Telecom Plus seeks to secure lower-cost supply from wholesalers through economies of scale, with the associated savings passed on to customers.

The Financials

In July the firm announced that its financial performance since its 31st March year end had been "in line with market expectations" adding, "we anticipate that our half yearly report will show earnings and pre-tax profits significantly ahead of the figures for the comparable period last year". It also stated that, in the absence of unforeseen circumstances, it again intends to recommend a dividend of 22p per share for the current year.

In the first quarter (to June) customer numbers increased by a further 5,680 to 351,442 (an increase of more than 12% compared with the same stage last year) and the number of services provided rose by almost 31,000 to 1,075,363 (an increase of 18% over the previous 12 months). A net increase of around 800 distributors was also achieved, taking the total to just under 36,000 - with activity levels noted to be "comfortably ahead of the levels seen during the previous quarter, following the successful distributor sales conference held in April and the launch of our new web-based training programme".

Valuation

The stock is now 357p. So is it a buy, sell or hold? Well, the company has net cash, and this year (to March 31st 2011) earnings will come in at - around - 25p. Next year I am looking for mid-thirties (and certain folks think more is possible), and the year after I am looking for 40p plus.

Now you might say that for a company with a slightly variable record, a current year PE of 14 looks a bit steep but the thing is that we are only 8 months away from next year when the PE drops to around 10. The year after, it is around 9. This is clearly now a growth stock and how many FTSE 250ish stocks with net cash which are clearly growth stocks can you buy for a PE of 10 falling to 9 (and to 7 and a bit)? Not many, if any. As such I certainly would not be selling. In fact (having first tipped this one at 187.5p, so we are now over 90% + dividends ahead) I am increasing my Limit Buying Price from 365p to 425p. My new 18 month target price is 600p and the stance is still very much buy.

*The SF t1ps Smaller Companies Growth Fund, which is managed by a subsidiary of Rivington Street Holdings, the owner of UK-Analyst, owns shares in Telecom Plus.

Key Data

EPIC: TEP
Market: FULL
Spread: 350p - 364p (4.4%)

Tom Winnifrith edits t1ps.com where he publishes 20 t1ps a year with a constant stream of updates. T1ps also plays home to infamous bear raider Evil Knievil and his exclusive thrice weekly diaries. For one year's access for as little as GBP73 click HERE