Canaccord In a research report previewing the third-quarter earnings season for Canadian telecommunications companies, Canaccord Genuity analyst Aravinda Galappatthige expects to see signs of a further recovery in wireless results.
“Despite noticeable weakness over the past month, we continue to see an underlying recovery in the Telecom sector after having performed poorly in 2019 and 2020,” he said. “With that said, the sector returns year-to-date are still lagging key yield-oriented sectors such as Banks, Pipes, and REITS as well as the broader S&P/TSX index. We believe this is driving up the relative attractiveness of Telecom yields. With Q3 results likely to corroborate the ongoing recovery in wireless fundamentals, residential wireline trends likely to remain robust, and a further normalization in conditions in terms of the pandemic offering upside in areas like international roaming, wireless volume growth (e.g., supported by immigration), media etc., we continue to recommend overweighting the Telecom sector at large. Our call is also based on the improved regulatory and government relations backdrop as well as a manageable competitive/promotional environment – two key factors with respect to the health of Telecom economics.
“In terms of risks, we would keep a closer eye on balance sheets, as leverage is Expected to tick up as payments for the recently acquired 3500MHz spectrum largely hit the quarter.”
The analyst reaffirmed BCE Inc. ( “buy” rating and $69 target) and Telus Corp. ( “buy” and $32) as his preferred picks in the sector.
“Operationally, both BCE and TELUS have been delivering a stronger recovery in wireless than expected, with service revenues nearly back to pre-pandemic levels as of Q2/21,” he said. “We also highlight that both TELUS and BCE are reaching the latter stages of their fibre related capex spend, suggesting a meaningful FCF uptrend post 2022, in our view, not to mention better product driven competitive positions (i.e., higher speeds that can compete with cable). We believe this can elongate the current phase of Telcos gaining share from cablecos, particularly in terms of internet sub growth. We think BCE may have significant room for sub gains as its fibre deployments progress in Montreal and subsequently in the 905 regions. In the West, we do not expect to see Shaw initiate any major efforts to recapture share from TELUS in the near term given the impending transaction, and even beyond that point, the merged entity itself could take some time to move.”