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.
11mloss
The big shocker in todays update was that Telecom Plus is going to write-off 11m of bad debt.
This isnt down to customers who havent 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 firms profits for each of those years.
Given that last years record profits were only 29m, thats a big deal.
Telecom Plus changed auditors in February, and I suspect that is the reason for todays 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 years figures.
Full-year profits down 16%
Most of us enjoyed the long, warm autumn last year but Telecom Plus didnt, as many of its customers didnt 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 years 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 firms 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. Id wait for the companys results, in June, before making a trading decision.
Avoid the regulators
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.