Canaccord Upgrade Following three years of underpeformance versus the TSX Composite, Canaccord Genuity analyst Aravinda Galappatthige sees a “a strong case” to overweight the Canadian telecom sector into 2022.
“The outlook for wireless, in particular, is quite positive when one considers a) further strengthening in wireless fundamentals as international roaming continues to recover (at 50 per cent vs pre-pandemic as of Q3/21) and potentially some margin gains from the current trend towards BYOD b) comparatively manageable competitive environment as pressure from the primary challenger brand (Shaw/ Freedom) is likely to remain muted, and any potential successor emerging from the Rogers-Shaw transaction (we delve into potential scenarios in the report) is unlikely to step up promotional activity in the near term and c) a seemingly constructively regulatory structure,” he said in a research report. “Our projections indicate service revenue growth north of 3 per cent in 2022, a far cry from the 0-1-per-cent growth pre-pandemic. Furthermore, on the Telco side of things (BCE/TELUS), we expect continued share gains on the wireline front, as well as the likelihood of FCF upside post 2022 as the accelerated capex spend on FTTP and fixed wireless moderates.”
Ahead of earnings season in the sector, Mr. Galappatthige said his “preferred approach to the sector is to lead with TELUS and BCE.”
“In addition to the wireline sub gains and FCF upside referred to above, wireless execution at both companies remain impressive,” he said. “This, we estimate, facilitates mid- (in the case of BCE) to high single-digit (TELUS) EBITDA growth in 2022 and potentially through to 2023. Dividend yields are also attractive in both names and we expect to see continuity of the current 5-7-per-cent annual dividend growth policy. While RCI.b is certainly tempting given the underperformance over recent years and resultant discounted valuations, we think a ‘wait and see’ approach at least through H1/22 is more prudent given a) a relatively higher financial impact from the omicron wave b) risks around upswing in balance sheet leverage upon closing of Shaw acquisition c) lower relative visibility around execution on both wireless and cable. In general, we also believe it could take a little while to rebuild investor confidence, following a messy leadership transition last year.”
Mr. Galappatthige raised his target prices for both stocks.
His target for BCE Inc. rose by $1 to $70 with a “buy” rating. The average on the Street is $65.72.
His Telus Corp. target rose to $33 from $32, exceeding the $31.75 average, also with a “buy” rating.