Smaller companies are notoriously less researched than their larger counterparts. However, in part because of their smaller size, our team has great access to these companies and their management teams. In seeking to exploit this advantage, a core part of our investment process is meeting the companies we invest in.

These meetings then inform our four ‘M’s method for assessing companies. This method looks at a company’s model, money, management and momentum.

Here, we explain how we develop our investment analysis for one company we met recently.

Case study: Telecom Plus

In February, we met with the co-CEO of Telecom Plus (TEP). The company provides bundled utilities to consumers, through its Utility Warehouse brand.

The company’s model is particularly exciting in our view. Its bundling is unique within the market. It allows consumers to combine services as diverse as their mobile, broadband, house insurance and energy.

By combining multiple services, TEP can pass on bulk discounts to its customers. This means its pricing is hard to compete with, in our view, and the company has been well-reviewed by consumer champion Which?.

Customers also receive a single invoice for their core utilities, a feature many have appreciated during the cost-of-living crisis.  The company is aiming to double its customer base in the next five to eight years.

Selling bundled utilities also gives the company a structural cost advantage. It can spread central costs, such as a customer call centre, across more revenue streams. This allows it to work to higher margins than utility providers that only offer one service.

Finally, the business has a unique distribution model, a referral network of ‘partners’ who sell directly to friends, relatives, and neighbours. This produces a customer base that is more loyal and carries a lower credit risk than the wider population. It also results in lower ‘bad debts’.

Looking at its money, despite relatively low gross margins, the business generates high returns. This is because it does not own assets and so does not incur costs linked to these.

We think the business runs with a sensible amount of borrowing. However, TEP pays commission to its partners up-front while only invoicing customers at the end of the month. This means we will be monitoring how quickly it converts these costs into revenue.

Despite this, it generates cash and shareholders are rewarded for this through an attractive dividend yield.

Its management is in a period of transition, with its current CEO stepping down in July and his co-CEO, Stuart Burnett, taking on the reins single-handedly. However, the company’s founder, Charles Wigoder, remains its chairman and has a considerable shareholding. This could offer a stabilising influence.

In terms of our analysis, momentum is the final factor we consider. This looks at the prevailing market conditions surrounding a company’s stock – and more specifically we seek to assess the probability of a company’s reported earnings beating market expectations.

Power prices coming down is an obvious challenge to any energy provider. On the other hand, during the energy crisis in 2021 and 2022, 33 energy suppliers went bust.¹ Competition has fallen significantly and new rules from OFGEM, the regulator, should prevent too much new competition building. We believe this will allow the company to add more customers and grow earnings faster than expected.

We think this change in competitive dynamic isn’t fully appreciated in the market – and so is not yet reflected in the share price.

We initiated a position in February when the stock was trading at £15.

Investing in smaller companies for growth

By using our repeatable and methodical process, we can get a full picture of a company’s operations through meeting them. We use this analysis to build a diversified portfolio of smaller company stocks, aiming to deliver capital growth for our investors.

¹ Source: Ofgem, as at April 2024.

Glossary

Diversification –
A way of spreading risk by mixing different types of assets/asset classes in a portfolio, on the assumption that these assets will behave differently in any given scenario. Assets with low correlation should provide the most diversification.

Share price –
The price to purchase (or sell) one share in a company, not including fees or taxes.

Yield –
The level of income on a security over a set period, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.

 

Disclaimer

References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

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