After the Canadian telecommunications sector had a “solid showing” in 2022, Canaccord Genuity analyst Aravinda Galappatthige thinks this year “could be different.”
“On one hand, one can argue that the inherent defensive traits of the Telecom sector could be helpful against a potentially soft economic backdrop, in turn driving the case to be overweight the sector through 2023 as well,” he said. “However ... we see the prospect of moderating wireless returns through the year due to a recent uptick in promotions/discounting and likely a more intense competitive environment going forward, lapping of stronger comps and easing year-over-year tailwinds from international roaming. In fact, we see ARPU [average revenue per user] growth reverting back toward 0 per cent and potentially going negative by year end. While volumes would be assisted by immigration, rebounding churn can impact profitability as well. In wireline, promotional activity is already elevated and B2B is still soft. On another note, it is clear that Telecom balance sheets would be more levered than they had been for over 15 years, owing to M&A and spectrum auctions, potentially discouraging more risk-averse investors. In fact, we see Rogers, Quebecor, TELUS and BCE heading into the 3.8GHz auction in late 2023 with leverage ratios north of (and in some cases well north of) 3 times net debt/LTM [last 12-month] EBITDA.”
Mr. Galappatthige thinks there’s “a strong case to overweight” Telus Corp. as the new year begins, naming it his “sector pick for the year ahead, owing to its notably superior growth credentials (we are looking for double-digit EBITDA growth in 2023), a sharp upswing in FCF starting 2023 on the back of a step down in capex, attractive yield and dividend growth, and generally solid execution.”
Keeping a “buy” recommendation for Telus shares, he raised his target by $1 to $34. The average on the Street is $32.87.
“In our view, the underperformance of the stock in Q4/22 further adds to its attractiveness as we believe it was partly the result of fund flows out of the stock toward Rogers/Shaw-driven catalysts,” said Mr. Galappatthige.