Scotia Capital Maher Yaghi reduced his forecast for Canada’s largest telecommunications companies in response to recent “sizable” moves to adjust their wireless pricing levels to compete with Freedom Mobile’s relaunch.
“Unlike price discounting to stimulate demand, recent reductions are offering more data for fewer dollars which, over time, could lead to dilution to ARPUs [average revenue per user],” he said. ”We review in this biweekly these trends and posit that, if sustained, we could begin to see ARPU degradation late this year and becoming more visible in 2024. As such, we have adjusted down our ARPU forecasts by 1-2 per cent for 2024 and updated our models and valuation decks appropriately.”
“We discussed in reports earlier this year a potential for elevation of competitive pressures from QBR’s entry in ON and the West. It did not take long post closing of the Freedom acquisition for prices to begin falling as RCI and BCE jockey to close the door on Freedom before it can gain any momentum in the marketplace. While the wireless market is accustomed to promotional periods to drum up demand, this time around the quick reductions in prices are more intense. Historically, companies were able to boost ARPUs even while providing more data through two slightly different strategies. 1) Offering more data for more dollars or 2) offering more data for the same dollars stimulating demand as phone usage increases. The problem with the recent price war is that we are seeing plan prices now offering more data for fewer dollars and this is why we see this environment as more risky to ARPUs going forward.”
Mr. Yaghi warned that these price reductions are likely to remain in place as long as Freedom keeps its lower rates, saying “what we are seeing is a proactive move by incumbents to collapse the pricing on the different brands in order to consolidate subscribers around specific banners.”
“Rogers’ management said it clearly in a recent conference that they are trying to focus on the Rogers brand,” he said. “We argue that if this is the stated goal then it will take many quarters in order to achieve this objective and hence this new pricing structure could likely be structural and not a short term promotional effort.”
“While a 1-2-per-cent ARPU reduction is not that large in the whole scheme of things, the impact on valuation for the sector is more related to risk levels perceived by the market. As we have been arguing since February, we continue to recommend investors to be cautious and maintain an underweight position in the Canadian telecom sector. In addition to wireless pricing, we see risks as well from the upcoming CRTC review into FTTH and HSIA later this year (see report for more details). In addition, Canada 10 year yields remain elevated. The combination of these 3 issues are keeping us guarded at this point in time.”
Given his lower 2024 outlook, Mr. Yaghi cut his targets for these companies:
- BCE Inc. ( “sector perform”) to $63 from $64. The average on the Street is $65.21.
- Rogers Communications Inc. ( “sector outperform”) to $72.75 from $75.75. Average: $73.45.
- Telus Corp. ( “sector outperform”) to $29.50 from $31. Average: $31.13.
“We continue to recommend investors to be underweight the Canadian telecom sector until valuations become more appealing,” he concluded.