Company Profile

BCE Inc. is a Canada-based Integrated Telecommunications Services company. The company operates in three broader segments viz Bell Wireless (accounted for 50% of the BCE's total revenue), Bell Wireline (37%), and Bell Media (13%). 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.

Investment Rationale

• Investment Grade Credit Profile: The group received a decent credit rating from various rating agencies with a stable outlook. DBRS Limited, Moody’s Investors Service, Inc. and S&P Global Ratings Canada assigned a long-term debt credit rating of BBB (high), Baa 1 and BBB+, respectively.

• Increasing subscriber base: BCE wireless and retail Internet, TV and residential NAS connections totalled at 18.9 million at the end of Q1FY20, up 2.0% over Q1FY19. The total includes 9.9 million wireless customers (up 5.2%), 3.6 million retail Internet subscribers (up 3.9%) and 2.8 million retail TV subscribers (down 0.4%).

• Continuous investment in infrastructure: The company’s capital expenditures totalled $783 million during the quarter. Capital investment was driven by network capacity enhancements to manage increased demand owing to increased remote working alongside continued investment in the fibre and LTE networks and preparations for mobile 5G. The company has withdrawn its guidance for FY20 but stated that it would continue to invest in infrastructure.

• Stellar dividend growth and pay-out policy: BCE has a pay-out policy of 65-70% of the free cash flow, and since 2009, the company's dividend payment has registered a growth rate of 128%, which is exceptionally high. Also, the company is increasing its dividend by at least 5% for last 12 years. The group declared a dividend of CAD 0.835/share for Q2FY20, up 5% against the same quarter of the corresponding financial year.

• Strong Balance Sheet and liquidity position: The company’s robust balance sheet is strengthened by a healthy liquidity position and an investment-grade credit rating profile, providing the company with a solid financial position and a greater degree of overall financial flexibility. Further, the company has a long-term debt maturity profile with no maturities until the second quarter of 2021. Also, the company has a strong liquidity position (CAD 3.2 billion) with cash and cash equivalent of CAD 2.7 billion as on March 31^st, 2020. The group’s interest coverage ratio at 8.61 x stood substantially above the target of 7.5x.

BCE’s Key Focus Areas in FY20

• The company is focusing on further deployment of direct fibre to more homes and businesses within its Wireline footprint and fixed WTTP technology in rural communities. In 2020, the group has invested ~800 million in digital infrastructure to bring direct fibre connections to more than 475,000 residential and business locations over the next five years. 

• For FY20, the company is focusing on maintaining its leadership position in the internet market with the help of more advanced products. The company is planning to introduce more 4G LTE and LTE-A devices and 5G devices, as well as new data services. The company is also planning to invest in direct fibre expansion and modern solutions in key portfolios such as Internet and private networks, data centre and cloud services, unified communications, security services and IoT to improve the customer experience and increase overall customers spending on telecommunications products and services. 

Q1FY20 Financial Highlights:

On May 07th, 2020, the company reported its financial results for the quarter ended on March 31^st, 2020.

Source: Company filing. 

• Amid COVID-19 led disruption, the company delivered a positive service revenue and adjusted EBITDA growth during the period under consideration, driven by expansion in broadband wireless, Internet and IPTV subscriber base and partially supported by a 2.6% reduction in total operating costs.

• Operating revenue for Q1FY20 was slightly lower at CAD 5.7bn against CAD 5.7m in Q1FY2019, because of the adverse impact of COVID-19 on the group's Media segment.

• During the first quarter of FY20, the company’s adjusted EBITDA improved by 1.4% to CAD 2.44bn driven by robust YoY growth of 4% in Bell Wireless and 0.5% in Bell Wireline. However, the group's media segment was negatively impacted by an industry-wide deceleration in advertising on account of COVID-19 led disruption.

• The company also reported that it has a strong liquidity position of CAD 3.2 billion. The company believes that a strong liquidity position is likely to help it sail through the COVID-19 disruption. The company is confident enough to generate substantial free cash flow to execute planned capital expenditure in FY20 and common share dividend payments.

• The group accelerated its investment in network capacity reliability and redundancy as it witnessed an unprecedented surge in network usage during 1QFY20 owing to remote working and self-isolation activities.

• During the period under review, the company bagged 19,595 net new wireless customers, 22,595 net new retail Internet customers; 2,852 net new IPTV customers, respectively. Its total wireless customer base surged by 5.2% on a YoY basis to 9,977,557 at the end of Q1.

Recap of FY19 results: In FY19, BEC reported operating revenue growth of 2.1% to CAD 23.96bn, which was broadly in line with the target growth of 1%-3%. Its wireless, wireline and media operating segments all contributed to revenue growth, and adjusted EBITDA surged by 6% to CAD 10.10bn. Led by decent performance of the company at EBITDA,  the group’s free cash flow increase by 7% to CAD 3.8bn. Net Earnings for the period under consideration surged by 9.4% to CAD 3.25bn vs CAD 2.97bn reported in the same period of the corresponding financial year. Adjusted earnings per share for the period stood at CAD 3.50, which was in line with the guidance provided. 

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 18.65% of the total shareholding. RBC Wealth Management is the entity holding maximum shares in the company at 3.53%. RBC Dominion Securities is the second-largest shareholder, with a holding of 2.19%.

Source: Thomson Reuters.

Stock Performance

1-Year Price Chart as on April 08^th, 2020 (After the Market Close). Source: Thomson Reuters.

At the time of writing (as on May 08^th, 2020, after the market close), shares of BCE traded at CAD 56.75, up 0.37%. In a year-over period, BCE's shares registered a 52w High of CAD 65.45 and a 52w low of CAD 46.03. At the last traded price, its shares traded approximately 13% below its 52w high level and about 23.3% above its 52w low price level. However, on a YoY basis and YTD basis, BCE shares are featuring a negative price return of 5% and 5.6%, respectively; however relative performance was modestly better than the benchmark index and other sector competitors.

Valuation Methodology (Illustrative): EV/EBITDA

*All forecasted figures have been taken from Thomson Reuters.

Stock Recommendation

The company's outlook for FY20 has built on the decent financial results achieved in 2019 and Q1FY20 by all of its operating segments including a) higher wireless subscriber net additions and operating profitability, b) steady wireline adjusted EBITDA growth; c) retail broadband Internet and TV market share gains enabled by the increase in direct fibre and Wireless Home Internet footprint. Further, the company's robust balance sheet built upon a healthy liquidity position and an investment-grade credit profile is likely to benefit the company in FY20 by allowing it to invest in infrastructure and thereby generating cash flow. Moreover, BCE is offering a lucrative dividend yield of 5.87%, with a proven track record of growth in the dividend distribution. Also, amid falling interest market environment, the company is offering a significantly higher dividend income opportunities with a greater margin of safety. Also, the company has strong free cash generation capacity; therefore, it can easily manage its interest liabilities without hampering its growth plans. The company has debt securities maturing until Q2 2021. We have valued the stock using EV/EBITDA methodology and considered Telus Corp (TSX: T), Rogers Communications (TSX: RCI.B) and Shaw Communications (TSX: SJR.B) as a peer group. We have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the above factors, we have given a Buy recommendation at a closing price of CAD 56.75 (as on May 08th, 2020)

Disclaimer

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