Desjardins Desjardins Securities analyst Jerome Dubreuil expects competition to “heat up” among Canadian telecom companies in 2023.
“Given the protracted RCI/SJR merger proceedings, we expect RCI and QBR to hit the ground running with new offers shortly after the deal closes, which we expect to occur either in the last few days of 2022 or in 1Q23,” he said. “We expect this could lead to pricing pressure, especially in wireless, but wireline may not be spared either. That said, we expect wireless subscriber growth to remain strong across the sector in 2023. We have reduced our risk-free rate assumption to match government yields but have slightly reduced our estimates to reflect the additional competition we expect in 2023.”
In a research report released Wednesday, the analyst said the wide range in telecom multiples “creates compelling outperformance potential for stock pickers vs indexers in 2023.”
He named Quebecor Inc. his top pick in the sector for the year, maintaining a “buy” recommendation and $35 target. The average target is $33.35.
“We see QBR as an underappreciated way to play the expected closing of the RCI/SJR merger,” he said. “With the terms of the Freedom deal significantly derisking QBR’s national ambitions, we believe the market could warm up to the idea of a new, long runway of growth as more guidance is provided about integration costs, which we expect to be manageable. RCI is #2. In addition to the upside we see on the SJR deal closing, we believe RCI’s medium-term downside is limited given its large discount to the Big 3 peers. T is #3. T should continue to grow in 2023 (especially apparent with our newly introduced 2024 estimates), but investors may still be digesting the ROIC prospects of its tech investments.”
Mr. Dubreuil cut his target for Cogeco Communications Inc., ranking No. 4 out of his six stock pecking order, to $101 from $103. The average on the Street is $91.52.
He maintained his targets for
- Rogers Communications Inc. ( “buy” and No. 2) at $73. Average: $70.27.
- Telus Corp. ( “buy” and No. 3) at $33. Average: $33.
- Shaw Communications Inc. ( “buy” and No. 5) at $40.50. Average: $40.20.
- BCE Inc. ( “hold” and No. 6) at $66. Average: $66.61.
For IT services companies, Mr. Dubreuil sees a “a good mix of growth and resilience.”
“While 2022 has been a difficult year for tech investors, the IT services sector has been relatively resilient although performance has been mixed, with large caps outperforming and small caps following the broader tech market trend. We maintain our positive stance on the sector given attractive valuations, a still-tight labour market, continued strength in digital transformation services and decent FCF support,” he said.
He named Quisitive Technology Solutions Inc. (QUIS-X) his top pick with a “buy” rating and $1.40 target, below the $1.56 average on the Street.
“QUIS remains our top pick heading into 2023 with its low valuation (trading at 6.4 times EV/FY23 EBITDA vs global IT services peers at 9.3 times), strong organic growth of 16 per cent and PayiQ (previously LedgerPay) optionality,” said Mr. Dubreuil. “We see 2023 as another year of strong organic growth in both the Cloud (as demand for digitization projects continues) and Payments (uniquely benefiting from inflation) segments with the potential for M&A in 2H23 acting as a potential catalyst, assuming steady deleveraging in 1H23. Most noteworthy, with the PayiQ pilot progressing full steam ahead as we close 2022, we see 2023 as PayiQ’s ‘coming-out party’ as management continues making investments in sales and marketing, and steps on the gas pedal toward commercialization.”
He raised his target for CGI Inc. , which is No. 3 on his pecking order of four stocks, to $136 from $130 with a “buy” rating. The average is $129.62.
He maintained his targets for these companies:
- Converge Technology Solutions Corp. ( “buy” and No. 2) at $8. Average: $8.77.
- Alithya Group Inc. ( “buy” and No. 4) at $3.75. Average: $3.61.