CIBC commentsOur Conclusion
BCE is trading at a five-year trough multiple amid heightened competitive intensity, volatile interest rates and concerns around FCF growth. While we recognize these concerns, we believe that they have been priced into the name at these levels. We do not foresee any change to the dividend growth model through 2024, expect improving FCF in H2 post restructuring, and expect the TPIA final decision to be relatively benign. We retain our $52 price target and, as of April 22, upgrade BCE to Outperformer from Neutral.
Key Points
Trading At Five-year Trough Multiples: All of our telecom coverage is trading below two-year and five-year EV/FY2 EBITDA multiples amid heightened competition and volatile interest rates. However, BCE is trading at the largest discount (1.1x) to its five-year average and at a trough multiple of 7.2x. While we acknowledge the difficult competitive environment and the role of rates in telecom valuations, BCE appears attractive at current levels relative to the group.
TPIA Final Rate Appears Priced In: One of the market concerns has been the final TPIA rate decision, which is expected sometime in 2024 and, in its interim form, disproportionately impacts BCE. Based on the February committee hearings, we believe that the final rate is more likely to clarify the definition of “reseller” to exclude incumbents operating in other geographies. If the final TPIA rate can only be accessed by traditional resellers at a rate similar to the interim rate, we believe that the impact to BCE should be relatively benign, given consolidation within the reseller space and the competitive wireline market.
Expect No Dividend Change Through 2024; Restructuring Should Benefit H2: Dividend growth sustainability has been an investor concern post weaker-than-expected F2024 FCF guidance, with BCE’s dividend yield now at ~9%. We see no change to the dividend growth through 2024, with the dividend assessed annually by BCE’s board. We expect dividend growth to continue to be a longer-term focus given the pace of FCF growth amid a more competitive environment and continued fibre rollout, and we would not be surprised to see dividend growth adjusted post 2024.
What Is The Downside? If heightened competition continues, we expect the downside to valuation is for the Canadian telecom names to begin to trade in line with U.S. telecom multiples given the pricing and competitive environment in the U.S. has historically been much more competitive than in Canada. That said, we view it as unlikely that the pricing war continues indefinitely and expect the sector to eventually revert to a more traditional pricing environment. This week, Rogers (Fido) and BCE (Virgin) increased pricing to $39/20GB, up from $34/20GB previously. TELUS (Koodo) and Quebecor (Freedom) retain $34 offers, although Koodo’s website notes that its promotion ends April 22.