Interesting read from BofA Securities After a “tough” 2024, BofA Securities analyst David Barden thinks Canada’s telecommunications companies are likely to face a “still-challenging” 2025.
“Robust subscriber growth was offset by falling prices, driven by in uptick in competitive intensity across both wireless and wireline as the industry adjusts to a consolidated fourth provider attempting to offset in-footprint broadband losses with wireless gains,” he said. “As growth challenges have persisted, balance sheet strength and the sustainability of capital returns to shareholders are increasingly in focus. Looking ahead to 2025, we believe investors will remain cautious on the sector and gravitate to stocks that can deliver free cash flow growth, de-lever, and sustain steady capital returns to shareholders.”
In a research report released Tuesday, Mr. Barden warned companies across the sector are going to face the need to absorb both price and volume shocks over the next 12 months and thinks asset monetizations are coming to address leverage concerns.
“At the top of this list is the reset of immigration policy, shifting it from a major tailwind to a major headwind,” he said. “Government cuts to immigration and the goal of reducing the percentage of the population who are nonpermanent residents from 7.1 per cent to 5.0 per cent by 2026 will have a meaningful negative impact on wireless providers. Achieving this government goal requires a net outflow of nonpermanent residents compared to large inflows in recent years. Assuming most of these individuals have wireless service, the industry should experience an uptick in churn in 2025/26. Gross and net additions should also be negatively impacted as population growth slows as the government resets new immigration levels downward over a two year period. Rogers is the wireless market share leader in the immigration segment and would be the most impacted, in our view.”
“Elevated leverage and slowing growth will increase focus management teams on monetizing non-core assets. This process is already underway. In 2024, RCI sold its longheld Cogeco shares and BCE announced the sale of NorthwesTel and MLSE (Maple Leaf Sports & Entertainment). RCI continues to work on selling excess real-estate and all three national providers have spoken openly about exploring tower monetization. TELUS is executing on a divestiture strategy enabled by its fiber deployment as it decommissions copper and redevelops excess central offices.”
Mr. Barden downgraded BCE Inc. (BCE-T -3.12% decrease) to “underperform” from “neutral” with a $36 target, down from $45 and below the $39.26 average on the Street, according to LSEG data..
“We are downgrading BCE to Underperform from Neutral due to 2025 growth headwinds coupled with high leverage and the dividend at over 120 per cent of free cash flow at the midpoint of 2024E guidance. We believe risks are to the downside until BCE can share a plan to address leverage and dividend concerns. In 2024, BCE announced two divestitures (NorthwesTel and MLSE), one acquisition (Ziply), paused dividend growth until YE2025, and introduced a discount on its DRIP to conserve cash. Collectively, these measures slightly improve BCE’s growth prospects but slightly increase net leverage and do not change underlying issues. Until there is clarity on lowering leverage and achieving a sustainable dividend, we see BCE shares underperforming its peers. Our C$36 price objective is based on a forward price to FCF multiple of 9.0x and implies a forward EV/EBITDA multiple of 7.0x. Our target p/fcf multiple is below the historical average reflecting risks associated with leverage and a potential dividend cut.,” he said.
He lowered Rogers Communications Inc. (RCI-B-T -2.93% decrease) to “neutral” from a “buy” recommendation with a $55 target, down from $65 and under the $57.61 average.
“We are downgrading Rogers (RCI) to Neutral from Buy to reflect 1) outsized exposure to a Government-led downward reset in immigration levels, 2) uncertainty surrounding its growing investment in Sports assets, and 3) higher than originally forecast leverage. In addition, the tailwind from Shaw merger synergy realization has largely flowed through margin results. We see increased pressure to reduce debt as, 1) margin growth slows, 2) four player wireless competitive intensity remains high, and 3) RCI’s market leading position among new Canadians becomes a growth headwind. We are lowering our price objective to C$55 from C$65 (to US$39 from US$50). The price objective is based on 10x forward free cash flow which is a discount to the historical average, but which we believe accurately reflects market uncertainty, elevated leverage, and rising sports investments,” he said.
Mr. Barden named Telus Corp. (T-T -0.53% decrease) his top pick in the space for 2025 with a $24 target, down from $25 and a “buy” rating. The average is $23.58.
“We expect TELUS to report strong free cash flows as it ramps-up copper decommissioning, executes on its real-estate monetization program, and continues to load subscribers on its fiber network while navigating changes to the immigration landscape,” he said.