Broker snap: Telecom Plus margins to improve as gas prices rise

23rd Nov 2010 10:28

Broker finnCap sees rising gas prices coupled with a cold winter leading to improved margins at Telecom Plus, despite the group's interim performance being below expectations.Revenue for the utility and telecoms supplier was 3% below the broker's forecasts coming in at £147m, while earnings before interest, tax, depreciation and amortisation stood at 9% under estimates."Nevertheless, gross margin outperformance, and prospects for revenue uplift in the second half, generate optimism for full year numbers", says analyst Andrew Darley. Darley observes that when gas retail prices rise the inflation can generate a period of supernormal margins, and so when accompanied with a cold winter it will enhance gas consumption "maximising the benefit of those temporary margin bursts". However, the broker notes that the group's cash weakness was surprising at the recent trading update.The broker considers Telecom Plus a yield stock, estimating a dividend of 23p for the full year. At a 6% yield target, finnCap sticks with a 'hold' at a 380p target price.