BMO Tim CaseyNovember 7, 2022 | 09:35 ET~ TELUS T-TSX TU-NYSE Rating Outperform Price: Nov-6 $28.70 Target ↓ $35.00 Total Rtn 27%
Q3 Beat; Wireless Strong, Dividend Raise Bottom Line: TELUS showed strong growth momentum in Q3 with results above Street expectations.
Core telecom operations performed well with service revenue and EBITDA growth of 7% and 8%, respectively. Subscriber loading was better than expected and churn remained stable.
The company raised its dividend by 3.7%.
We remain Outperform on TELUS based on their dividend growth profile, differentiated asset mix, strong track record, and an accelerating FCF growth beginning in 2023.
Key Points Consolidated results beat. Revenue increased 10%, Adj. EBITDA was up 11%, and Adj. EPS was $0.34 vs. consensus of $0.33.
Reported FCF was up 63%. FY2022 guidance was updated to reflect the acquisition of LifeWorks, with revenue growth of ~8% (consensus +6%), Adj. EBITDA growth tightened to 9-10% (consensus +9%), and FCF of $1.3B (consensus $1.3B).
Capex direction (~$1B decline in 2023) was reaffirmed as fibre investments near completion. Wireless results were solid.
TELUS posted another strong quarter with continued growth in service revenue, subscriber metrics and EBITDA growth. Wireline results were in line with stronger-than-expected results in video and voice, offset by weaker internet loading.
Acquisitions in growth segments. TELUS completed the acquisition of LifeWorks in September, which contributed modestly to growth in the quarter. The company is targeting ~50mm in synergies in the near term and ~$200mm by 2025.
In October, TI announced the acquisition of WillowTree, which should enhance their design and build capabilities and provide some revenue and cost synergies.
DLCX (TI) results improved but may face some near-term headwinds.
We believe results continue to demonstrate attractive growth and FCF conversion metrics but will face some near-term headwinds influenced by reduced customer spending due to the current macroeconomic environment. Revenue and EBITDA were up 15% and 36%, respectively, ahead of Street expectations. Growth was driven by organic and acquisition gains in tech and games (TIAI) and financial services.
Forecasts and Valuation. We revised our model to reflect slower growth at TIXT. Our consolidated EBITDA in 2023E declined by 1%. We forecast 13% EBITDA growth in 2023E and a significant increase in FCF.
We continue to view TELUS as a premium name in our sector with high growth prospects, supported by continued 7-10% dividend growth through 2025.
Our target price reflects ~8.5x our 2024 EBITDA. Key Changes Target $35.00↓ $37.00 Estimates Q4 / 22E 2022E 2023E Revenue $18,424 $20,595 Previous $18,500 $20,809 EBITDA $6,640 $7,313 Previous $6,622 $7,348 EPS $0.30 $1.27 $1.48 Previous $0.29 $1.23 $1.49 Telecom/Media/Cable Tim Casey, CFA Analyst tim.casey@bmo.com (416) 359-4860 Drew J. Reichert, CPA Associate drew.reichert@bmo.com (416) 359-4291 Legal Entity: BMO Nesbitt Burns Inc. 38 36 34 32 30 28 26 24 22 May Nov May Nov 15 10 5 0 LHS: Price (C$) / RHS: Volume (mm) Source: FactSet 2YR Price Volume Chart Company Data in C$ Dividend $1.35 Yield 4.7% AD Vol. (mm) 3.57 Shares O/S (mm) 1,420.2 Market Cap (mm) $40,759 Net Debt (mm) $23,661 BMO Estimates in C$ (FY-Dec.) 2021A 2022E 2023E 2024E Revenue $17,258 $18,424↓ $20,595↓ $22,333↓ EBITDA $6,069 $6,640↑ $7,313↓ $7,938↓ EPS $1.07 $1.27↑ $1.48↓ $1.75 CFPS $3.25 $3.80↑ $3.95↓ $4.23↓ EV $53,857 $56,511↓ $56,158↓ $54,730↓ Consensus Estimates 2021A 2022E 2023E 2024E EPS $1.25 $1.42 $1.63 Valuation 2021A 2022E 2023E 2024E EV/EBITDA 8.9x 8.5x 7.7x 6.9x P/E 26.8x 22.6x 19.4x 16.4x P/CFPS 8.8x 7.6x 7.3x 6.8x QTR. EPS Q1 Q2 Q3 Q4 2021A $0.27 $0.26 $0.29 $0.23 2022E $0.30a $0.32a $0.34a $0.30 Our Thesis TELUS is rated Outperform based on business mix, balance sheet stability, and future growth opportunities. TELUS has been the most consistently solid operator with a compelling mix of dividend yield, dividend growth (+7-10%), and share buybacks. This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst Certification, please refer to page(s) 8 to