From Todays Globe Scotiabank analyst Maher Yaghi has upgraded his rating on Telus Corp. (
) to “sector outperform” from “sector perform”, believing that valuations are attractive and the outlook has improved for the telecom on a number of fronts. His one-year price target is C$24, which would represent about a 15% return.
One factor working in the telecom’s favour is the CRTC decision on Friday to maintain interim rates at current levels for what smaller internet providers will have to pay to use the established fibre networks of their larger rivals. This “underscores the regulators’ commitment to encouraging network investments while at the same time offering a path forward for competitors to launch innovative converged products out of home. While there was a real possibility that the CRTC would take a more aggressive approach, we are encouraged that it saw fit to continue to provide network builders with the needed returns to continue to deploy capital,” said Mr. Yaghi.
“Simply put we believe BCE and TELUS have dodged a big bullet here. While these rates are still interim rates, the language included in the decision indicates that the CRTC has a good line of sight on the costing done so far hence it would surprise us to see those rates decline materially when rates are finalized in a few months,” he added.
Mr. Yaghi does not expect Telus’s third-quarter results to show many positive divergences from past trends, including intense competition. But he sees several positive catalysts in the near future:
“We think we are touching bottom on the level of ARPU (Average Revenue Per User) y/y declines. We expect the strongest of the y/y declines to have either occurred in Q3 or to occur in Q4. As we cycle into 2025 the rate of the decline should begin to ease as a majority of the subscriber base would have already started to take advantage of the lowered priced services offered in the market. We don’t expect ARPU to show actual growth in Canada until late 2025 however the second derivative of the decline is likely upon us in the coming months.
Valuation. When we downgraded TELUS at the beginning of the year, the stock was trading at a significant premium vs its intrinsic EV/EBITDA multiple. The premium was close to 0.5x however this spread has completed collapsed since then and the stock is now trading at a level commensurate with the company’s expected growth rate.
Management has been very aggressive on cost-cutting and restructuring the business to reduce the cost to serve in wireless in order to offset ongoing pricing pressures. While we expect topline growth to be close to flat in Q3, EBITDA growth should be in the top quartile for the industry due to improved margins.
Another factor that caused us to downgrade the stock was the fast slowdown in Fixed data services as broadband was seeing a negative repricing. We were worried as well that an aggressive rate setting approach by the CRTC on FTTH (fibre to the home) would cause even more damage to Canadian broadband pricing. At this point we don’t think this is a likely outcome. While we expect encroachment potentially from Quebecor or BCE trying to sell bundles in Western Canada, the expected return we expect that TELUS would be able to capture on FTTH within a wholesale framework will be compensatory enough for the amount of capital that was deployed.”
Mr. Yaghi maintained a “sector perform” rating on BCE Inc. (
), the equivalent of a hold, with a price target to $50.50.
While he admits BCE’s sizable 8.8% dividend yield is very hard to ignore, two things are keeping him from upgrading the stock at this stage:
“In Q3 we expect the company to report flat growth in wireless and wireline service revenues but also flat to 1% growth in EBITDA for the telecom segment. While BCE did undertake a meaningful restructuring early this year, unlike TELUS and Rogers we are not seeing the same flow through to earnings yet. Some reasons for this divergence possibly include the significant subscriber cost of acquisition the company is investing to gain share in FTTH especially in Quebec and a slower move to reduce cost to serve in wireless (TELUS has put significant effort to promote Public Mobile and Rogers is culling prepaid from Fido and the Rogers brand; Bell is still selling prepaid on its premium label).
The company’s dividend distribution ratio remains clearly too high and continues to get exasperated by the yearly dividend increases. In a recent report we showed that at this stage we need BCE to stop growing the dividend for a few years and potentially implement a DRIP to steer the ship towards a more sustainable path. Clarity on the outlook for the dividend and taking action to make it more sustainable long term are key in our mind to meaningfully de-risk the potential for a dividend cut down the road.”
The average analyst price target on Telus is C$24.46, according to LSEG data Monday morning. The BCE average target is C$49.96, which is down 63 cents over the past month.