Telus Corp T.T

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EQUITY RESEARCH
January 11, 2023 Rating Change - Upgrade
2023 Telecom Outlook & Q4 Preview

Expect Telecom To Outperform Amid Macro Uncertainty
Our Conclusion

With interest rate expectations stabilizing and the market posture remaining defensive, we expect the telecom sector to do well in 2023. Fundamentally, the sector remains solid and we are expecting average wireless service revenue growth of 7% and a 3% increase in Internet subscribers. Our top picks are RCI and T, and, as of January 11, we upgrade T from Neutral to Outperformer. We see RCI benefiting from the resolution of the Shaw transaction, while we consider T undervalued post the recent TIXT sell-off 

Key Points
Capital Intensity Starting To Decelerate: With TELUS and BCE’s fibre
programs nearing completion, we expect industry capital intensity to
decelerate to 17% in F2023 from 19% in F2022. We expect this should lead to more normalized dividend payouts at the telcos, and forecast an average payout of ~90% in the sector in F2023. Over time, we expect the cablecos to invest in DOCSIS 4 and fibre to respond to the telcos’ market share gains. However, we see this investment as gradual, with the first move to DOCSIS 4 (mid-split) achievable within existing capex plans.

Finally A Rogers/Shaw Resolution? With the Tribunal ruling in favour of
the merger, we view the Shaw acquisition as nearing completion. If the
Bureau’s appeal is granted, we expect the process could stretch to mid-
2023. If the appeal is not granted, we believe a close prior to January 31 is possible, depending on the timing of ISED approval. With this Telecom
Outlook, we are incorporating 50% of the potential Freedom upside into our QBR price target, which moves to $35 (prior $29).

Expect A Limited Impact From Rising Rates: With interest rate hike
assumptions stabilizing, we foresee limited impact from rising rates in 2023. Our coverage carries primarily (86%) fixed rate debt, with only 5% of industry debt due in 2023. We regard Cogeco as the most impacted by rising rates, with 62% of its debt being floating rate, and we expect an average interest rate increase of 70 bps in F2023. The 1.8% dividend spread between Canadian telco dividends and the 10-year yield is ~50 bps below the average yield observed between the GFC and the COVID-19 pandemic, while the cableco yield is roughly in line with the U.S. 10-year yield.

Upgrading TELUS: We upgrade TELUS to Outperformer (from Neutral); our price target of $31 is unchanged. TELUS’ TI subsidiary has been impacted by slowdown-related concerns in its core tech and games vertical. At current levels, TI is trading at a significant discount to peers despite above average growth and margins. We expect solid execution in TELUS’ core telecom and view TI as undervalued at these levels.

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