TELUS Corporation
FCF Recalibration Trims Price Target; Short-, Medium- and Long-term Outlook Fully Intact
Our view: While our price target decreases from $34 to $33 on a lower (but still robust) FCF trajectory, we continue to believe TELUS remains on a significantly higher growth trajectory to that of telecom peers, translating to industry-leading NAV growth and attractive capital returns.
Key points:
• TELUS remains our best idea in telecom. We view 2022 as a pivotal turning point for TELUS as the company transitions into a new post- FTTH build / 5G phase. The provision of 2023 guidance confirms that the company has emerged with a distinctively different financial and operating profile relative to most global telecom peers. With FTTH coverage reaching ~85% of the targeted broadband footprint, enhanced capex flexibility should enable TELUS to capitalize on 5G without meaningful capital constraints, opportunity costs or FCF impairment. Longer term, under certain competitive and regulatory conditions, we continue to see strong strategic and financial rationale for TELUS to explore a transformational re-organization that can fully unlock the value of core infrastructure assets and core technology assets.
• Unpacking lower than forecast FCF guidance for 2023. Management expects an increase in FCF from $1.3B in 2022 to ~$2B in 2023E. Acknowledging a robust uptick YoY, FCF guidance was below our overly aggressive $2.6B estimate which we attribute mainly to two factors: (i) ~$300MM-$400MM in higher cash interest expense largely reflecting an understated "normalized" annualized run-rate exiting 2022 due to the impact of virtual power purchase agreements; and (ii) with TELUS' FCF definition fully adjusting for IFRS 16 and IFRS 15 (i.e., the most conservative FCF definition among peers), the combination of working capital (contract assets/device financing in anticipation of continued heavy promotional activity), higher cash restructuring costs (in part due to the integration of tuck-in acquisitions) and $75MM in additional capex earmarked for real estate development in the wake of the ongoing copper de-commissioning program. While aligning our forecast to this second bucket of puts/takes is fairly routine for all telecom companies in our coverage, we have recalibrated our FCF forecast to incorporate the higher cash interest trajectory.
• And upwards and onwards in 2024 and beyond. Management reiterated expectations for continued industry-leading revenue, adjusted EBITDA and FCF growth looking out through the medium-term driven by: (i) double-digit organic revenue growth and/or acquisition synergies at TELUS International, TELUS Health and TELUS Ag; (ii) accelerating B2B growth across SMB, enterprise and government; (iii) the flow-through of industry-leading wireline RGU growth; (iv) some normalization in non- operating FCF items versus 2023E; and (v) sustained industry-low capex intensity (13% in 2023E versus ~16%-19% normalized for peers).