Calling it “a dark horse stock checking all the right boxes,” Canaccord Genuity analyst Aravinda Galappatthige initiated coverage of Telus International Inc. (TIXT-N, TIXT-T -0.73%decrease) with a “buy” recommendation on Monday, seeing it “well positioned within growth sectors.”
“TELUS International (TI) is a digital IT service provider with deep expertise in customer experience (CX) and an extensive roster of blue chip clientele,” he said. “Much of TI’s CX work involves the digital transformation of enterprise customer care operations including the introduction of self-serve functionalities, agent assist bots, streamlined resources for agents, etc. TI’s recent acquisitions have substantially expanded its capabilities into high-growth areas like AI (data annotation), content moderation, digital product development, and consulting. Thus, TI now boasts end-to-end digital capabilities, notably expanding its TAM [total addressable market] and longer-term growth potential, in our view.”
“In addition to a sizable TAM of approximately $750-billion, we believe TI’s longer-term prospects are supported by many of its product categories residing in high-growth subsectors, be it digital transformation (26.7-per-cent CAGR [compound annual growth rate] 2023-2030, Grand View Research), data annotation for AI (26.6-per-cent CAGR 2022-2030, Grand View Research), content moderation 12.6-per-cent CAGR (2022-2026, Research and Markets), and digital customer experience management (15.4-per-cent CAGR 2023-2030, Grand View Research). In addition, we see TI’s profile and reputation with enterprise customers developing quickly. In fact, approximately 90 per cent of growth is now sources from existing customers.”
Mr. Galappatthige called Vancouver-based Telus International, which made its market debut following an initial public offering in February of 2021, a “rare amalgam of high growth, FCF yield, and margins.”
“We believe TI’s investment thesis stands out as a rare combination of attractive FCF-led valuations and high top-line organic growth,” he said. “Even against the presently challenged backdrop, organic growth xpectations are in the double digits, alongside a high single-digit FCF yield. Moreover, TI’s margins are at the upper end of its comp group, reflecting solid execution and management, in our view.”
“TI’s 2023 guidance stands out to us as notably robust given the macro conditions and, in our view, asserts its placement at the higher-growth end of the broader IT services comp group. Our forecasts of 20.6-per-cent revenue growth and 17-per-cent EBITDA growth in 2023 translate to 10.1-per-cent and 8.5-per-cent organic growth for revenue and EBITDA, respectively. Management has indicated its expectation of mid- to high-teens organic growth beyond F2023. While we have somewhat more conservative estimates for F2024 recognizing the possibility of an economic slowdown spilling over into 2024, we consider the 15-18-per-cent range fully achievable in normalized conditions.”
The analyst set a target of US$28.50 per share, exceeding the current average on the Street of US$27.17.
“Against the current backdrop, sustainability of earnings expectations is potentially more important than even valuation multiples,” said Mr. Galappatthige. “We believe TI’s more resilient positioning going into a potential economic slowdown, and evidently more robust estimate revision trends, sets it apart from many of its comps.”