BCE Inc. (TSX: BCE) is a Canada-based Integrated Telecommunications Services company. The company is Canada's largest communications company, providing advanced broadband, wireless, TV, Internet, and business communications services. The company's wireless segment provides voice, data, and other communication services, while the Wireline segment provides access to internet and IPTV along with local and long-distance telephone services. The media segment provides streaming services, conventional TV, radio broadcasting and digital media services.

Revenue Segment

Business Segment

Source: Annual Report (FY19)

Investment Rationale

• A Solid Income Play: Regardless of the economic cycle and industrial trend, BCE has consistently paid a dividend to its shareholders over the past 20-years. Also, at the last closing price, the stock was offering a dividend yield of ~6.04%, relatively higher given the lower interest rate environment led by the flow of cheap money in the market from central banks. Also, BCE’s dividend is approximately 2x of the TSX Composite median dividend yield of 3.3%.

20-Years Dividend History. Source: Refinitiv (Thomson Reuters)

• Increasing Dividend amid Challenging Operating Environment: The board has declared a dividend of CAD 0.8325 for the fourth quarter of FY20, 5% higher on a YoY basis, which is encouraging from an income investor’s standpoint. This reflects a healthy financial position and stronger free cash flow generation ability of the company. Further, BCE’s dividend coverage ratio stood gigantically higher at 77.10 times, which is noteworthy.

• Continue to Grow Broadband Market Share: BCE Inc continues to grow broadband market share and delivered 210,000 total net wireless, retail Internet, and IPTV customer additions in Q3. Consistent with BCE’s focus on profitable wireless subscriber growth, BCE added 128,000 new net postpaid and prepaid customers this quarter, comprised entirely of mobile smartphone subscriptions. BCE delivered very strong wireline subscriber results with an industry-leading combined 82,000 retail Internet and IPTV net additions.

• Bolstered Free Cash Flow: Regardless of the effects of COVID-19, the company generated over CAD 1 billion of free cash flow this quarter, bringing year-to-date cash generation to more than CAD 3.25 billion, 14% higher than the last year. Further, the company expects free cash flow to moderate in Q4 as it has further step-up capital spending and as accounts receivable and inventory levels grow with an increase in sales activity. Strong free cash flow generation contributed towards maintaining a very healthy liquidity position of CAD 5.2 billion at the end of Q3, which does not include the approximate CAD 940 million in net cash proceeds received from the recently concluded sale of Bell data centres to Equinix.

• 5G Network Continues to Rapidly Expand: Bell’s 5G network continues to rapidly expand and is Canada’s fastest. Bell provides download speeds up to 1.7 Gbps. Their footprint would continue to grow into 2021 and beyond as true stand-alone 5G networks are deployed using mid-band 3500 MHz spectrum. Further current 5G device users were consuming 2x more data with ~20% higher monthly recurring revenue.

• Stronger Customer Activity: Trends showed good sequential improvement in Q3 with stronger customer activity, including ongoing steady traction for digital channels, continued low churn, and an ABPU decline that is moderating. Store traffic improved noticeably with the reopening of stores and sales activity steadily picked up with each passing week as the level of competitive intensity and number of promotional offers increased. The company added 133,000 new smartphone customers this quarter. In prepaid, BCE added 41,000 new customers, another very good quarter which the company believe led the industry once again.

• TV Advertising Demand Picked Up: Coming to Bell Media, TV advertising demand picked up in several key categories, especially with the return of live sports and increased spending by advertisers. Radio and out-of-home advertising have been slower to rebound as radio listenership has declined during the pandemic and some key out-of-home advertising places as well, such as restaurants and airports - those have severely impacted by lockdown measures, but the company is seeing momentum return to outdoor categories such as street furniture and billboards. Also, the company rebranded French-language conventional network V as Noovo and witnessed the strongest Y-o-Y audience growth among all French conventional TV networks.

• Risk Associated with Investment: The company is exposed to a variety of risks, including credit risk, interest rate risk, forex risk, intense competition, and legal risk. Any delay in 5G implementation might affect the performance.

Financial Highlights: Q3FY20 (Figures in CAD)

Source: Company Presentation 

• The company reported sequential quarter improvement across all Bell operating segments.
• Consolidated revenue was down 2.6% year-over-year, which translated into a 4.4% decline in adjusted EBITDA.
• Net earnings for the third quarter under consideration were down 19.7%. This was a result of lower year-over-year EBITDA and a non-cash net mark-to-market equity derivative loss resulting from the decrease in BCE’s share price this quarter compared to a gain last year.
• However, despite a soft earnings BCE generated over CAD 1 billion of free cash flow this quarter, even with lower EBITDA flow-through and higher cash taxes.

Wireless financials

• Segment return to positive revenue growth in Q3, led by improved service revenue decline vs. Q2FY20. However, service revenue was down 4.3% year-over-year on account of COVID-19 related impacts primarily from an approximate 70% decline in roaming due to global travel restrictions as well as lower data coverage, driven by customer rate plan optimization and ongoing adoption of unlimited plans. Product revenue increased 11.9% on higher mix of premium smartphones, more customers on higher-value plans and stronger y/y consumer electronics sales at the source.
• Adjusted EBITDA declined 4.4% on a YoY basis.

Wireline financials

• In business wireline, the company’s results this quarter reflected slower customer spending on business service solutions and data equipment, which declined 5% and 10% respectively in the quarter; however, overall performance continued to hold up well despite COVID-19.
• Wireline EBITDA decreased 1.6%. This represents a notable sequential quarterly improvement as operating costs were stable year over year despite the COVID-19 related cost impacts.
• Internet revenue was up 10% on a YoY basis.

Media financials

• A much better quarter for Bell Media as advertising demand has improved across all media platforms with the resumption of live sports programming and the gradual reopening of the economy.
• The company witnessed a smaller YoY revenue decline of 16% compared to 31% last quarter. Advertising revenue decreased 22% in Q3, a significant recovery from the 51% decline the group saw in Q2, with the biggest improvements coming in TV, most notably sports, entertainment and news.

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters).

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 20.60% of the total shareholding. RBC Wealth Management, International is the entity holding maximum shares in the company at 3.62%. Capital Research Global Investors is the second-largest shareholder, with a holding of 3.10%. The institutional ownership in the company stood at 51.02% and strategic ownership stood at 0.07% respectively.

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The group focus in the third quarter of FY20, was all about building momentum back into the business, and although the effects of COVID are still obviously present. The company reported progress on the sequential-quarter basis as they experienced a notable improvement in their operating performance this quarter due to the success of their broadband strategy, the reopening of retail stores, the step-up in economic activity, the return of live sports programming, and overall disciplined execution in a competitive market. This contributed to stronger financial results across all Bell operating segments in Q3 compared to the previous quarter. Further, BCE’s 5G network continues to rapidly expand and is Canada’s fastest.

Moreover, the company has a strong financial position with CAD 5.2 billion of available liquidity to support capital investments and dividend payments during COVID recovery, manageable net debt, with Net debt leverage ratio, stood at 2.9x together with no significant debt maturities until Q4FY22.

More importantly, BCE’s shares could be under income investor’s radar, with 6.04% yield and consistent track record of dividend payment over the past 20-year regardless of the economic cycle.

Therefore, based on strong fundamentals, improved financials on a sequential-quarter basis, expanding 5G network and valuation, we have given a “Buy” recommendation at the closing price of CAD 55.11 on January 11, 2021. We have used the industry median (Telecommunication Industry) EV/Sale multiple for the valuation purpose.

1-Year Price Chart (as on January 11, 2021). Source: Refinitiv (Thomson Reuters).

*Recommendation is valid at January 12, 2021 price as well.

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