Company Overview: TELUS (TO: 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 (from internet protocol, TV, IT and cloud-based services, security, customer care and business services or CCBS and other telecom services).

Stock’s Details

Investment thesis:

We believe TELUS Corporation remains well positioned to gain market share in 2020 on the back of its growing asset base, evolution to 5G and expansive fibre footprint. Further, investments in broadband technologies and distribution deals with popular content providers bode well for growth. Though the growth in ARPU and ABPU could moderate, increase in the subscriber base is likely to drive revenues and margins.

• Wireless business to drive growth: We believe TELUS remains well positioned to gain from the continued growth in data usage and increase in the adoption rate with the growth in population. The company’s continued investment in network infrastructure and spectrum allows it to enhance the coverage, speed, and reliability of its network, which is key to drive subscriber growth. We believe the company’s superior network quality and its coast-to-coast coverage is likely to boost high-value customer additions in 2020. Moreover, as 5G takes centerstage, TELUS is likely to benefit from its expansive and deep fibre footprint. For instance, the company’s generational and superior fibre build is nearing completion. These investments are likely to play a pivotal role for TELUS as it evolves to roll out its 5G network. Moreover, we expect the company to benefit from its investments in new sources of wireless revenue like Internet of Things (IoT), machine-to-machine (M2M), and security applications.

• Wireline business remains resilient: The traditional wireline telecom market remains highly competitive with the market reaching its maturity. Further, the voice revenues are going down, reflecting a transition to wireless and VoIP services. Despite challenges, TELUS continues to gain market share, though at a moderate pace, through the expansion of its infrastructure. As the popularity of viewing TV and on-demand content gains pace, the company’s Optik TV and Pik TV platforms provide it with a competitive advantage over peers. The company’s flexible pricing plans, strong content, distribution deals with popular content providers like Crave TV and Netflix and flexibility to stream these contents on multiple devices bodes well for growth.

• Dividend play: TELUS Corporation is a shareholder-friendly company, which simply means that the company continues to boost shareholders’ return through consistent growth in dividends and share repurchases. Since 2004, TELUS has returned about CAD 18 billion in the form of dividends and share buybacks. Out of CAD 18 billion, the company paid dividends of CAD 12.5 billion. In 2019, the company paid CAD 1.3 billion in dividends. In 2019, TELUS declared a dividend of CAD 2.2525 per share, implying a year-over-year increase of 7.3%. Moreover, for the first quarter of 2020, the company declared a dividend of CAD 0.5825 per share (pre-share split), implying a year-over-year increase of 6.9%. The company’s targeted dividend payout ratio stands between 60% to 75% of free cash flows, which is encouraging. Moreover, its dividend yield remains lucrative at 4.81%. Further, free cash flows are expected to be higher in 2020, which is likely to boost shareholders’ return. Management expects free cash flows to be in the range of CAD 1.4 billion to CAD 1.7 billion in 2020, as compared to CAD 0.93 billion in 2019.

• Growth to accelerate in 2020: Management expects its operating revenue growth to accelerate in 2020, reflecting continued momentum in the data services revenues across wireless and the wireline businesses. Besides, recent acquisitions and investments in advanced broadband technologies are likely to supplement growth. Management expects its operating revenues to increase by 6% to 8% in 2020 as compared to a 2% growth registered in 2019. Further, adjusted EBITDA is likely to remain strong and expected to come in the range of 5% to 7% in 2020.

Risks: TELUS, like most of its peers, continues to lose voice subscribers in the wireline segment. Moreover, heightened competitive activity is leading to a moderation in the ARPU and ABPU, which could hurt the revenue growth rate.

A quick look at 2019 numbers: In 2019, the company generated operating revenues of CAD 14.66 billion, up 2.0% on a year-over-year basis. Total subscribers came in at 15.17 million, up from 13.95 million. Adjusted EBITDA jumped 8.4% CAD 5.69 billion, while adjusted EBITDA margin expanded 180 basis points to 38.8% in 2019. Adjusted net income increased 1.4% year-over-year to CAD 1.73 billion. Adjusted basic EPS remained more or less stable at CAD 2.86, as compared to CAD 2.85.

(Source: Company Reports)

Key Financial Takeaways from 4QFY19 Period Ended 31 December 2019:

TELUS Corporation reported operating revenues of CAD 3.9 billion in the fourth quarter, which implies a year-over-year increase of 2.5%. Higher wireless network revenues along with growth in the wireline data services revenue, supported top-line growth. Adjusted EBITDA increased by about 7.9%, reflecting growth in wireless network revenue owing to an increase in subscriber base. Besides, growth in wireline data service margins and benefits from CCBS and health businesses further supported the growth in adjusted EBITDA. Adjusted net income fell 2.2% year-over-year to CAD 400 million. However, the decline was due to the higher D&A expenses on account of an increase in the asset base.

(Source: Company Reports)

Segment details: In the wireless segment, network revenue increased by 1.5%, driven by a 5.5% increase in the subscriber base in the last 12 months. However, lower mobile phone ARPU remained a drag. The external wireless operating revenue inched down 0.5% as benefits from growth in network revenues were offset by a decline in equipment and other service revenues.

(Source: Company Reports)

In the wireless segment, the group added 130,000 net new subscribers, which includes 70,000 net additions in the high-quality mobile phone and 60,000 in the mobile connected devices.

Mobile Phone Subscribers (000s) (Source: Company Reports)

In the wireline segment, external operating revenues increased 6.6% year-over-year, owing to a 10.8% increase in the data services revenues. Higher revenues from its internet and third wave data service and customer care and business services (CCBS) supported the top line. However, industry-wide weakness in the voice service revenues remained a drag. 

(Source: Company Reports)

The wireline segment marked net additions of 46,000 in subscriber base that include 28,000 net additions in the Internet, 15,000 in TV and 15,000 in the Security. However, voice services lost 12,000 subscribers.

(Source: Company Reports)

During the quarter, the company invested CAD 742 million in the network and IT support infrastructure, up 4.4% year-over-year. Free cash flow was CAD 135 million, up from CAD 132 million in the year-ago quarter. At the end of the quarter, the company’s net debt to EBITDA ratio stood at 3.20x, up from 2.54x in the prior-year period.

Key Metrics:  In FY19, the company had a gross margin and EBITDA margin of 58.8% and 38.8%, which is higher than the FY18 figure of 54.8% and 37.0%, respectively, representing decent fundamentals. The company debt-to-equity multiple in FY19 stood at of 1.76x, higher than the debt-to-equity of 1.38x in FY18. Net margins in FY19 stood at 12.2%, as compared to 11.5% in FY18.

Key Metrics (Source: Thomson Reuters)

Key Valuation Metrics (Source: Thomson Reuters)

Recent Updates:

(a) On February 26, 2020, the company announced the completion of its CAD 1.5 billion equity offering. Under the program, the TELUS sold about 28,750,000 of its common Shares for gross proceeds of CAD 1.5 billion.

(b) On February 04, 2020, the company confirmed the closure of its previously announced acquisition of Competence Call Center (CCC).

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 22.6% of the total shareholding. RBC Global Asset Management Inc. and RBC Dominion Securities, Inc are the company two largest shareholders holding maximum shares in the company at 3.56% each.

Top Ten Shareholders (Source: Thomson Reuters)

Valuation Methodology:

EV/EBITDA Multiple Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: As on 28 February, the stock has a market cap of ~CAD 29.41 billion with a PE multiple of ~16.7x and an annual dividend yield of ~4.81%. We have valued the stock using relative valuation methods, i.e., EV/EBITDA and for the said purpose, we have considered peers like Rogers Communications Inc (TO: RCIB) and BCE Inc (TO: BCE). Notably, TELUS Corporation’s stock trades at a lower valuation multiple when compared to peers. With expected acceleration in revenue, EBITDA, and free cash flow, we expect the multiple to expand to ~8.4x. TELUS Corporation’s competitive advantage with the peers in wireline business and continued growth in the wireless segment is likely to support the upside in its stock. We have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the current market price of CAD 48.44 per share, down 3.7% on 28 February 2020.

1-Year daily price chart (as on February 28, 2020). Source: Thomson Reuters.

​Disclaimer

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