TELUS Corporation

TELUS Corporation (TSX: T) is one of Canada's largest wireless service providers and has more than nine million mobile phone subscribers nationwide, constituting about 30% of the total market.

Key Highlights

• Increase in Cash Balance: At the end of Q3FY21, the group reported its cash balance of CAD 1,864 million, significantly higher than CAD 848 million available at FY20 end. A higher cash balance indicates higher liquidity.
  

• Impressive Dividend Yield: The company reported a dividend distribution of CAD 773 million in 9MFY21 compared to CAD 694 million in pcp. The stock of T carries a dividend yield of ~4.50% on an annualized basis, which looks impressive considering the ongoing interest rate scenario.

• Consistent Growth in Customer Connections: Over the last eleven quarters, the company has witnessed constant growth in its customer base, indicating organic growth and is a key positive. Notably, at the end of Q3FY21, the company reported its total customer connections of 16.615 million, the highest in the last eleven quarters.

Source: Company Report

Q3FY21 Financial Highlights

• T announced its quarterly result, wherein the company posted operating revenue and other income of CAD 4,251 million, higher than CAD 3,981 million in pcp. The increase was driven by 8.8% y-o-y growth in service revenues due to an increased subscriber base.
• Operating income climbed to CAD 692 million from CAD 617 million in Q3FY20. However, the period was marked by an increase in operating expenses (CAD 3,559 million v/s CAD 3,364 million in Q3FY20) due to higher goods and services purchased and higher employee benefits expenses.
• Net income was recorded at CAD 358 million, as compared to CAD 321 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Reports)

Risks Associated with Investment

The company's operations require high-capital investment, and a delay in project execution might dampen its return ratios. Moreover, a change in consumer preference might be alarming and might impact the demand for its products.

Valuation Methodology (Illustrative): Price to CF-based

Stock Recommendation

The company reports higher profit margins than the industry median, which is a key positive and indicates improved efficiencies. Notably, its Q3FY21 gross margin and EBITDA margins were 61.9% and 36.8%, compared to the industry median of 60.6% and 35.1%, respectively. Moreover, the net margin stood at 8.4% during the period, compared to the industry median of 8.0%.

We have valued the stock using the Price to CF-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Rogers Communications Inc, BCE Inc, etc. Considering the aforesaid facts, we recommend a 'Hold' rating on the stock of T at the last closing price of CAD 29.13 on November 19, 2021.

One-Year Technical Price Chart (as on November 19, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Extendicare Inc. (TSX: EXE) is a Canada-based company that offers senior care across Canada. Its primary business segments include long-term care (LTC), retirement living, and home health care.

Key Highlights 

• An Income Play:Despite this challenging environment, the company maintained its dividend payment, reflecting its financial strength and suggesting that the group is a friend of income investors. At the last traded price of CAD 7.13, the stock offered a dividend yield of 6.73%, which looks lucrative considering the current interest rate environment.

• Improving Occupancy in LTC and Retirement Segments: The company saw an increase in admissions in Q3FY21 as a result of a significant decrease in COVID-19 cases in the general population, increased vaccination rates, and the easing of pandemic-related restrictions on admissions to LTC homes, resulting in an average LTC occupancy of 89.0%, up 360 basis points from Q2FY21 and 610 basis points from Q1 FY21. Furthermore, the firm anticipates that average occupancy levels will continue to rise as long as the neighbourhood's COVID-19 patient count stays low.
  

• Recovering Average Daily Volumes: As demand for the company's home health care services recovers and employees return to work, the average daily volumes (ADV) have steadily recovered to pre-pandemic levels in Q2FY21, which is a critical positive. In the reported quarter, the group's average daily volumes in home health care were up 11.4% compared to Q3FY20.
  

• Rich Pipeline: Currently, the organization is investing to satisfy present and future demographic demands for senior services. It commenced work on a new 256-bed LTC facility in Stittsville, Ontario, on October 29, 2021. This home will be built alongside our two other work-in-progress (WIP) projects in Kingston and Sudbury. Over the next two years, Extendicare plans to break ground on six more construction projects.

Financial Overview of Q3FY21

Source: Company 

• In Q3FY21, the company reported Revenue of CAD 310.1 million, increased by CAD 13.3 million or 4.5%, against CAD 296.8 million in Q3FY20. This increase in revenue was primarily driven by an 11.4% increase in home health care ADV.
• EBIDTA in Q3FY21 decreased by CAD 44.5 million and stood at CAD 19.3 million against CAD 63.8 million in the previous corresponding period. The fall in EBITDA was primarily due to higher operating expenses.
• The company reported a net income of CAD 6.0 million in the reported quarter compared to CAD 34.5 million in pcp, primarily due to the above-stated reasons.
  

Risks Associated with Investment

The company is subject to general business risks, including those inherent in the seniors' living sector. These risks include changes in government regulation and oversight, changes in consumer preferences, fluctuations in occupancy levels and business volumes, competition from other senior care providers, changes in neighborhood or location conditions and general economic conditions. 

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

Stock Recommendation

The company reported subdued Q3FY21 financial numbers, owing to higher operating expenses mainly due to COVID-19 related costs. However, as the COVID-19 cases and outbreaks within its LTC homes and retirement communities have decreased, it expects lower operating expenses down the line. We believe lower operating expenses will enable the company to post healthy margins and bottom-line. The group also witnessed steady recovery in ADV to pre-pandemic levels, which is a key positive. Moreover, its robust pipeline will also contribute to healthy cash flows once the new facilities turn operational. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 7.14 on November 19, 2021. We have considered Medical Facilities Corp, Sienna Senior Living Inc etc., under its peer group for comparison purposes.

Year Technical Price Chart (as on November 19, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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