Telus Corporation (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 (from internet protocol, TV, IT and cloud-based services, security, customer care and business services or CCBS and other telecom services).

Investment Rationale:

• Value migration in the telecom sector is expected to benefit Telus: A new era has begun for iPhone with 5G. TELUS will offer the new iPhone 12 lineup, including iPhone 12 Pro, iPhone 12 Pro Max, iPhone 12, and iPhone 12 mini. The company is excited to deliver the latest 5G-ready iPhones to Canadians, all on the fastest network in Canada and the world. What makes the group’s 4G LTE network fastest in the world makes their 5G network experience even better. Further, as the company continue to build out their 5G technology in communities across Canada, they are building upon that strength, speed, and performance.

• Expanding 5G Reach: The company is expanding its next generation 5G network to Leduc, allowing businesses and residents to access the fastest network in Canada. According to the latest report released by opensignal, Telus is the sole Global Winner in terms of speed with a score of 75.8 Mbps and its closest rival being its Canadian peer, Bell. Further Telus did extremely well on two fronts: on the one hand, users observed the fastest average overall download speeds on its network, and it also placed as a Global High Performer in Video Experience and Upload Speed Experience. At the same time, Telus’s scores beat all the other national operators in the region on four out of five measures of the Mobile Network Experience.

• Consistent Track Record of Dividend Payment: At the last traded price of CAD 23.98 (on October 16, 2020), the stock was offering a lucrative dividend yield of 4.85%, which is significantly higher given the lower interest rate environment. Further, the company has a track record of consistent dividend payment over past 20-years and dividend growth at the same time. Telus dividend yield of 4.86% is approximately 1.34 times of the benchmark TSX Composite Index dividend yield of 3.57%. Lucrative dividend yield followed by a consistent track record of dividend payment would bring the stock in the investor’s limelight.

      

20-Years of Consistent Dividend Track Record. Source: Refinitive (Thomson Reuters). 

• Stock is Hovering above the Crucial Support Levels: At the last closing, its shares settled above the crucial short-term as well as long-term support levels of 30-day, and, 200-day SMAs, implies a bullish trend in the stock. And, the leading momentum indicator, Moving Average Convergence Divergence (MACD) is rising above its 9-day SMAs, and the difference between 12-day and 26-day EMAs is positive, which is a bullish indicator.

Technical Price Chart. Source: Refinitiv (Thomson Reuters)

• Risk Associated to the Investment: Telus business is exposed to a variety of risks ranging from Regulator, Competition, rapidly changing technology, taxes, currency exchange, general macro-economic condition and many more. Further, Systems and technology innovation, maintenance and management may impact its IT systems and network reliability, as well as their operating costs.

2QFY20: Financial Highlights

Source: Company Filings

• The group’s total customer connections improved to 15.41 million against 15.27 million reported in the previous quarter and on a YoY basis subscriber base improved by 8% from 14.254 million to 15.41 million respectively.

Source: Company filings

• 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, which was 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, partially supported by 7.7% growth in the Telus Wireline segment to CAD 489 million. Adjusted EBITDA margin shrunk 1.8 percentage points to 37.2% against the 39.0% reported in the same quarter of the previous financial year, mainly because of 2.1% percentage points slump in the Wireline EBITDA margin and partially supported by 1.1% improvement in the Wireless EBITDA margin.

Source: Company filings

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

Stock Performance

Over the past 20-year. Telus shares have delivered approximately 212% return to its shareholders (including dividend), which implies a Compounded Average Return (CAGR) of 12.2%. Further, in a year over period, despite steep volatility, Telus featuring a positive price return and outperforming its peers by higher single digit number at the same time and outperforming the index as well. The stock has generated a positive price return over the past 1-month, and 3-month period.

Telus’ 20-Year Total Return (as on October 16^th, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

In a year over period, its shares have tested a 52W High of CAD 27.74 (on February 11, 2020), and a 52W low of CAD 18.55 (on March 16, 2020). At the last traded price of CAD 23.98, its shares settled approximately 29% above its year’s low and 13.55% below its year’s peak.

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, 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%.

Source: Refinitiv (Thomson Reuters).

Valuation Methodology (Illustrative): EV to EBITDA Based Valuation Metrics

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

Stock Recommendation: 5G technology is evolving rapidly, and the group's award-winning wireless networks are strengthened by globally unmatched fibre infrastructure that not only provides world-leading performance for Canadians at home but also creates the backbone for a 5G-enabled wireless world by leveraging the incredible capacity of fibre in concert with the speed and reliability of Canada's superior LTE networks. 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. Also, A New Era for iPhone with 5G is likely to boost the group's financial performance.

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.

The company has a competitive edge over the industry, with a decent margin profile. EBITDA margin reported by the company at the end of June quarter stood at 38.9%, well ahead of the industry medina of 34.1%, operating margin of 17.3% vs industry margin of 11.6% and net margin of 8.6% whereas industry average of 4.3% respectively.

Source: Refinitiv (Thomson Reuters), Kalkine Group

Therefore, based on the above rationale and valuation done, we have given a "Buy" recommendation at the closing price of CAD 23.98 on October 16th, 2020.

1-year Price Chart (as on October 16, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

 

*Recommendation is valid at October 19, 2020 price as well.

*Please be aware dividend is variable and not guaranteed.

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