Desjardins The fallout from “a packed regulatory slate” facing the Canadian telecom industry will likely “significantly improve visibility” for investors moving forward, according to Desjardins Securities analyst Jerome Dubreuil.
In a research report released Friday, he assumed the coverage of six companies within the sector, which he emphasized will be transformed byRogers Communications Inc.’s proposed acquisition of Shaw Communications Inc. , pointing to the “impact on future market dynamics, regulatory reviews, spectrum auctions and further M&A in the sector.”
“The major regulatory reviews currently underway have the potential to shape the industry for several years — a risk we believe is relatively well understood by the market,” he said. “These reviews are designed to assess whether it should be mandatory (and at what price) for wireless and wireline facilities-based network operators to provide access and capacity to operators that do not own networks. The CRTC’s decisions, which are expected to be published in 2021, are difficult to predict given the complex nature of the reviews. However, we believe the crucial role telecommunications networks have played amid the pandemic has likely improved the regulator’s view of the current framework—hence, reducing the likelihood of major changes.”
Despite the uncertainty brought on by the Rogers-Shaw deal and also pointing to the possible disruptions brought on by the acceleration of 5G and network convergence, the analyst sees the sector as “attractive” for investors.
“Overall, we estimate the sector is cheap at current levels for the following reasons. (1) We believe current sector valuations are not reflective of current low interest rates, which we believe favour capital-intensive companies with elevated yields, such as the telecom sector. (2) We believe the positioning of the sector vis--vis regulators has improved during the pandemic, which could lead to improved telecom valuations vs the rest of the market, in our view,” he said.
“While several regulatory reviews are ongoing, we believe regulators now have a more positive opinion of the companies in the sector following their accommodative response during the pandemic. We also believe regulators see the current framework more favourably as it produced highly resilient networks, which was evident in their stable performance despite the massive migration to work-from-home. (3) Canadian companies have maintained ownership of their wireless towers — highly strategic assets — which not all international peers have elected to do. Infrastructure assets (such as towers) are in great demand by money managers and, therefore, command very high valuations due to the stability of their cash generation; we believe the sector’s valuation does not fully reflect this. (4) In our view, access to quality broadband is now higher on the scale of staple products for households since the pandemic started, which we believe reduces the downside risk in the sector. Moreover, we believe surprises related to the pandemic are mostly in the rearview mirror, as only a small percentage of the industry’s revenue is still contingent on the full reopening of the economy (live sports and wireless roaming revenue). Most companies in the sector have provided guidance for 2021, which speaks to the relatively high visibility the telecom business provides in the current environment.”
Mr. Dubreuil assumed coverage of these companies in order of preference:
1. Telus Corp. with a “buy” rating and $30 target. The average on the Street is $28.75, according to Refinitiv data.
“In our view, the recent increase in T’s valuation does not fully capture the additional value the company offers to shareholders through its large exposure to wireless and ownership of attractive growth platforms,” he said. “We believe the strong and forward-looking management team has positioned the company for long-term robust growth in connectivity, IT, health and agriculture, in addition to potential capex reductions.”