Post by
Al42 on Feb 10, 2024 7:20am
From RBC
February 8, 2024
BCE Inc.
Underlying Growth Intact; Trimming Price Target on
FCF Recalibration
Our view: Q4/23 results and 2024 revenue and EBITDA growth guidance
were in line with our expectations. Following a recalibration of our FCF
forecast (mainly restructuring charges and working capital), our price target
decreases from $59 to $57.
Key points:
• Navigating a slower revenue environment. We believe BCE is well
equipped to navigate a slower revenue environment leaning on a scale
advantage, continued FTTH investment and Internet market share gains,
the realization of cost efficiencies, and an extensive array of tactical
initiatives across wireless, wireline and media. We believe underlying FCF
in the current growth environment should continue to support low-single
digit dividend growth underpinned by ongoing structural cost efficiencies
and what is likely a permanent step-down in capex following three years
of elevated FTTH investment. While we see more attractive growth and
valuation set-ups elsewhere in the sector at the moment, we continue
to view BCE as a higher-quality core holding that is well positioned to
benefit from network convergence and long-term growth in 5G B2B (IoT,
MEC, private network, cloud, security).
• A recalibration of our FCF forecast. For 2024, management expects FCF
growth of -11.0% to -3.0% translating to $2.8B-$3.1B versus $3.1B in
2023. While the previously-announced ~$500MM reduction in capex
YoY initially pointed to FCF growth for 2024, FCF will be impacted
by a ~$365MM working capital drag combined with an incremental ~
$320MM in cash severance (the restructuring program of which was
widely anticipated with working capital and restructuring costs included
in the company's FCF definition). With working capital and restructuring
impacts of this magnitude unlikely to be recurring going forward, our
forecast translates to normalized mid-to-high single digit FCF growth
beginning in 2025E translating to a gradual decline in the dividend payout
ratio from ~100%-120% through the 2021-2024E period to 98% in 2025E
and 91% in 2026E. Assuming no meaningful changes to the growth,
competitive, interest rate or regulatory environments, key underlying FCF
drivers through the medium term will be lowering the cost to serve and
a further step-down in capex upon completion of the fiber build.
• Other notables from the quarter. (i) excluding a $300MM reduction in
revenues in 2024 due to The Source/Best Buy partnership, underlying
growth guidance is consistent with that in 2023; (ii) excluding the impact
of higher cash severance in 2024, underlying FCF guidance would have
been flat to +7%; (iii) Bell Media announced its intention to divest 45 of
its 103 radio stations to seven buyers; (iv) management indicated that
the building blocks are now being put in place to transition from "Telco
to Techco"; and (v) adjusted EBITDA margins and leverage are expected
to be stable YoY in 2024.