Telus Corp (TSX:T) is Canada’s leading diversified communications and information technology company.  The company, through its Wireless segment, generates revenues from mobile (data and voice) and equipment sales. The wireline segment includes voice and data revenues, which comes from internet protocol, TV, IT and cloud-based services, security, customer care and business services or CCBS and other telecom services.

Investment Rationale

• Expanding reach in the 5G Space: In June 2020, the group has launched the first wave of its 5G network in Vancouver, Montreal, Calgary, Edmonton, and the Greater Toronto Area and continue to expand to an additional 26 markets across Canada throughout the remainder of 2020. TELUS 5G is being made available at no additional cost on their Peace of Mind plans. Also, the rollout of 5G network is bolstering wireless data consumption and increasing the company’s market share in terms of subscriber base. In the second quarter of FY20, the group’s wireless subscriber base improved by ~ 5% to 10.37 million and the company has a market share of ~ 29% in the wireless space.

• Higher demand for Wireless services: Amid COVID-19 pandemic, the group has continued to see unparalleled demand in all facets of its network, including an increase in wireless voice calls, short message service (SMS) traffic, multimedia message service (MMS) traffic, home internet usage, voice network traffic, and usage of 1-800 phone numbers and teleconference bridges, compared to the same period last year. Since mid-2013, the company has invested more than CAD 4.9 billion to acquire wireless spectrum licences in spectrum auctions and other private transactions. This has more than doubled Telus’ national spectrum holdings in support of their top corporate priority to put customers first. Wireless data consumption has been increasing rapidly, and the trend is expected to continue as the industry is transitioning to 5G, and the company has responded by investing to extend its coverage and capacity of the network quality to support the additional data consumption. This includes investments in wireless small cells connected directly to fibre technology to improve coverage and capacity utilized in their 5G network launch

• An income Play: At the last traded price of CAD 24.21 (on August 21, 2020), the company is offering a dividend yield of 4.81%, which is significantly higher given the lower interest rate environment in the economy. Further, the company has a track record of consistent dividend payment and dividend growth over the past many years. Further, the board of Telus has declared a quarterly dividend of CAD 0.29125/share, payable on October 01, 2020. Telus dividend yield of 4.81% is approximately 8.4 times of the Canada 10 Years Government Bond yield of 0.55% and 1.34 times of the benchmark TSX Composite Index dividend yield of 3.54%, respectively.

• Relative Price Strength and Upside Momentum: Telus shares are registering relative strength on the stocks exchange against the sector peers. Its shares have registered a price return of 3.28% and 7.36% over the last 1-Month and 3-Month basis and outperformed the sector peer in the same time period. Also, on a YoY basis, its shares are up by 1.45% and outperformed the benchmark index by 6%. These price performance shows relative price strength in the stock over the peers. Further, at the last traded price, its shares traded well above the short-term as well as long-term support level of 10-day, 30-day, 50-day and 200-day SMAs, which reflects an uptrend in the stock.

• Crossover is Forming on the Daily Price Chart: A moving average cross-over pattern in forming on the daily price of Telus, as the shorty-term 50-day moving average of CAD 23.40 is very close of crossing over long-term 200-day moving average of CAD 24.07. Crossovers are generally considered to be strong breakout in the stocks and considered as a bullish indicator among the traders’ community.

• Risk Associated to the Investment: The business of the Telus Cop is highly exposed to regulatory and competition risks. Constraining of domestic telecom practices by elected officials and regulatory decisions, reviews, and government activity, domestically and internationally, may have strategic, financial or operational impacts on the group. Competitor expansion, activity, and intensity (pricing, bundling), as well as non-traditional competitors, disruptive technology and disintermediation, may alter the nature of the market and impact the group’s market share.

2QFY20: Financial Highlights

Source: Company Filing.

The group’s operating revenue for the quarter under consideration improved by 3.6% to CAD 3,728 million against CAD 3,597 million reported a year ago. This was mainly driven by 17.1% surge in the group’s wireline segment revenue to CAD 1,961 million and partially offset by 7.6% revenue decline in the wireless segment revenue to CAD 1,846 million on a YoY basis.

Consolidated EBITDA declined by 1% in the second quarter over the corresponding previous year financial quarter, driven by 5.3% reduction in the Wireless EBITDA, which was partially offset by 7.7% EBIDTA growth in the Telus Wireline segment to CAD 489 million. Consolidated EBITDA margin shrunk 1.7 percentage points to 36.5% against the 38.2% reported in the same quarter of the previous financial year, mainly because of 2.1% slump in the Wireline EBITDA margin and partially supported by 1.1% improvement in the Wireless EBITDA margin.

Source: Company filings

The group’s capital expenditure in the Wireless segment increased to CAD 234 million, which was 4.9% higher against the year-over period; however, capex in the Wireline segment reduced by 4.6% on a YoY basis to CAD 522 million. The group’s consolidated capex during the second quarter of FY20 reduced by 1.8% to CAD 756 million due to timing of fibre build activities and lower success-based capital congruent with the decline in gross loading during the pandemic. Capital expenditures increased by CAD 5 million in the first six months of 2020, due to increased investments in its 5G network, in addition to investments to increase system capacity and reliability during the pandemic.

Further, the capital expenditure intensity in the wireless segment during the second quarter of FY20 soared to 13% against 11% recorded a year ago, though, in the wireline segment, the capex intensity has reduced to 27% against 33% in the same period of the corresponding previous financial period.

The group’s free cash flow increased by CAD 187 million in the second quarter of 2020 and CAD 579 million in the first six months of 2020, resulting primarily from decreased income tax payments as there was a higher final income tax payment of CAD 270 million in the first quarter of 2019 for the 2018 income tax year in addition to the deferral of income tax instalment payments into the third quarter of 2020; the timing related to devise subsidy repayments and associated revenue recognition and TELUS Easy Payment device financing program; and lower restructuring and other costs disbursements. The free cash flow increases in the second quarter of 2020 and the first six months of 2020 TELUS Corporation – Management’s discussion and analysis – 2020 Q2 Page 16 of 53 were partly offset by increased interest paid. The group’s subscriber base improved by 8% from 14.254 million to 15.41 million.

Source: Company filings

Net income attributable to Common Shares decreased by CAD 227 million in the second quarter of 2020 to CAD 290 million and CAD 305 million in the first six months of 2020 to CAD 640 million. These decreases resulted from the after-tax impacts of lower Operating income and higher Financing costs.

Stock Performance

At the closing (on August 21, 2020), shares of Telus traded approximately 0.25% higher against the previous trading session at CAD 24.21. Over the last year, its shares have tested a 52W high price of CAD 27.45 on February 11, 2020 and a 52W low price of CAD 18.55 on March 16, 2020. At the last closing price, Telus shares have traded approximately 12.73% below its 52W high price level and traded approximately 30.55% above its 52W low price level, reflects that the stock is more tilted towards its 52W High price level.

1-year Price Chart (as on August 21, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Telus shares are featuring a positive price return on 1-Month, 3-Month and YoY basis, and outperformed the sector peers at the same time.

Top -10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 24.45% stake in the company. RBC Dominion Securities, Inc. and TD Asset Management Inc. holds the maximum interests in the company at 3.68% and 3.48%, respectively.  Further, 7 out of top-10 shareholders have increased their stake in the company over the last three months, with Capital Research Global Investors and 1832 Asset Management L.P.  are among the top investors in the company which have increased their stakes by 8.94 million and 2.72 million, respectively. The institutional ownership in the Telus stood at 56.81%, and ownership of the strategic entities stood at 0.16% respectively.

Source: Refinitiv (Thomson Reuters).

Valuation Methodology (Illustrative): EV/EBITDA based valuation metrics

*Note: All forecasted figures have been taken from Refinitive Thomson Reuters)

Stock Recommendation: The expansion of 5G network is crucial growth drivers for the company's future performance. In June 2020, the group has launched the first wave of its 5G network in Vancouver, Montreal, Calgary, Edmonton, and the Greater Toronto Area and planning to launch the 5G services in additional 26 markets across Canada throughout the remainder of 2020.

Further, despite a modest quarter amid a challenging business environment, the group's balance sheet remained resilient to meet its short-term and long-term obligations. Also, the company is constantly reducing its net debt over the past quarters and at the end of the of Q2FY20 the group's net debt reduced by 1.8% to CAD 17,664; however, on YoY basis, it is still 6.4% higher. However, despite relatively higher debt proportion in the balance sheet, the company has the strong cash flow to service its debt obligation, with an interest coverage ratio of 7.2 times (greater than 2 times, considered adequate cash flow to service debt), and total net debt is 3.06 times of the EBITDA, reflects that debt is quite manageable. Further, at the last traded price, the stock was offering a dividend yield of 4.81%, which is lucrative from an income investor's point of view considering the current interest rate environment in the industry.

Moreover, a moving average cross-over pattern in forming on the daily price of Telus, as the shorty-term 50-day moving average of CAD 23.40 is very close of crossing over long-term 200-day moving average of CAD 24.07.  Crossovers are generally considered to be a strong breakout in the stocks and considered as a bullish indicator among the traders' community.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a "Buy" recommendation at the closing price of CAD 24.21 (as on August 21st, 2020), with lower double digit upside potential, based on the NTM EV/EBITDA multiple of 9.4x, based on the NTM EV/EBITDA multiple of 9.4x on the FY20E EBITDA.

*Recommendation is valid at August 24, 2020 price as well.

Disclaimer

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