TELUS Corp T.T

Scotia comments

[incomedreamer11]

TTech Valuations Stretched - Downgrading to Sector Perform

OUR TAKE: Mixed. We continue to believe that TELUS should outgrow most Canadian telcos over the next few years given the company’s high exposure to wireless and superior bundling metrics. However, as the sector faces increasing ARPU pressure both in wireless and wireline, we believe the stock’s premium multiple will likely come under increased scrutiny. As we show in the report, if we remove the value of TIXT, the company’s TTech segment, which includes the telecom, health and Ag businesses, is currently trading at a higher multiple to its justified valuation given its expected growth prospects ($2/share higher). Recent acquisitions by TELUS in the Health and IT services segments have increased leverage without a commensurate bump in overall revenue growth. We expect 1H24 growth metrics to lag the company’s yearly guidance as growth looks to be backend loaded. We are taking a wait-and-see approach until underlying growth returns to levels that can provide a tailwind to valuations.

KEY POINTS

Market valuation of TTech is pricing-in higher growth than what is currently anticipated by the street. When we peel back the value of TIXT from TELUS’s corporate EV/EBITDA multiple we find that TTech (telecom+Health+Ag) is currently being priced at around 8.1x 2024E EV/EBITDA when a more appropriate valuation given the segments' expected EBITDA growth in 2025 should be closer to 7.7x. The relationship, which we show in Exhibit 1, indicates that TELUS’s stock is trading around $2/share higher than what would be explained by regression analysis. Overall we believe current yearly guidance and consensus growth expectations are achievable; however, the stock looks to be ahead of itself if one compares valuation to North American peers.

We have reviewed our 2024 estimates for TELUS given changes in market dynamic expectations on pricing and immigration combined with business operation trends; we still see yearly guidance as achievable, but growth looks to be backend loaded. As we have highlighted in our note from last week, wireless pricing intensity in the Canadian telecom landscape remains elevated, putting significant pressure on wireless ARPU while also pushing churn rates up. We expect TELUS’ wireless APRU to decline by 1.3% y/y in Q1, contributing to overall negative ARPU growth of -0.5% in 2024 and while we hope for lessened ARPU pressure in 2H/24, the turnaround will be contingent upon reduced price competition as we progress through the year and a reduction in churn. Despite lower ARPUs, we think the wireless market remains robust from a subscriber point of view and hence growth in wireless loading is still expected although not at the levels we’ve seen in 2023. Normalization of population growth, driven by government objectives to reduce student visas and immigration has led us to slightly reduce our 1Q24 and 2024 wireless phone net adds.

Pricing pressure in wireline and subdued growth in Health and TIXT likely to put a drag on overall revenue growth. Within the health portfolio, the loss of a few major clients since the acquisition of LifeWorks will likely contribute to soft revenue growth in Q1. TELUS should be able to generate EBITDA growth in the segment given the focus on cost and the benefit of recent restructuring initiatives, but overall we find the results to date from the LifeWorks acquisition to be underwhelming. For TIXT, we also expect subdued results due to lingering pressures from key clients. Overall, while we continue to expect high-single-digit EBITDA growth at TIXT in 2024, overall topline growth in the tech service industry is waning. Recent results from key competitors have indicated a more subdued buying funnel with heightened pricing pressure and deals taking longer to close. Large-scale transformation projects are continuing to advance forward; however, enterprise customers are allocating fewer dollars to discretionary spending. On the wireline side, Rogers has recently upped its bundled pricing in Western Canada to try to spur momentum; the special pricing on wireless/internet combo plans could also likely lead to some pressure on wireline ARPU for TELUS as it responds to these offers.

[quietobserver]

Market valuation of TTech is pricing-in higher growth than what is currently anticipated by the street. When we peel back the value of TIXT from TELUS’s corporate EV/EBITDA multiple we find that TTech (telecom+Health+Ag) is currently being priced at around 8.1x 2024E EV/EBITDA when a more appropriate valuation given the segments' expected EBITDA growth in 2025 should be closer to 7.7x

[Milhouse123]

I think Maher Yaghi is one of the more insightful telecom analysts.   Revenue/ARPU definitely seems to be under pressure due to competition and that's why you're going to start hearing a shift towards a focus on margin/AMPU.  Beyond population growth, the bulk of profit growth is going to be driven by how efficiently companies can deliver services.  T has been