TELUS Corporation (TSX: T) is one of the largest wireless service providers in Canada and has more than nine million mobile phone subscribers nationwide, constituting about 30% of the total market.

Why should investors’ book profit?

• Higher Debt to equity: At the end of Q3FY21, the company reported a D/E ratio of 1.37x, which is higher than the industry median of 0.95x. A higher D/E ratio is an alarming sign as it hinders the overall financial flexibility of the firm. Moreover, higher leverage would likely lead to increasing in finance costs, resulting in lower profitability.
  

• Lower liquidity profile: The company reported a quick ratio and current ratio of 0.75x and 0.85x, respectively, in Q3FY21, as compared to the industry median of 1.05x and 1.30x, respectively. The above indicates that the company is struggling to meet its short-term liabilities with its current assets.

• Slide in ARPU: For 9MFY21, the company reported a sluggish average revenue per user (ARPU) of CAD 56.94 million, reflecting a 1.1% decline on y-o-y basis due to reduced roaming revenue on account of travel restrictions.
  

• Decline in Internet net additions: For both Q3FY21 and 9MFY21, the company reported internet net additions of 46,000 and 109,000, reflecting a lower user addition of 4000 for each period on y-o-y basis, primarily due to pandemic-related demand decline, higher deactivations and lower market demand relative to the subdued switching activity. Continuation of the above trend might dampen the company’s upcoming growth prospects.
  

 Valuation Methodology (Illustrative): Price to Earnings-based

Stock Recommendations:

The company’s operation requires high-capital investment, and a delay in project execution might dampen the company’s return ratios. Moreover, a change in consumer preference might be alarming and might impact the demand for the company’s products. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit downside (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 ‘Sell’ rating on the stock of T at the last traded price of CAD 29.53 on December 08, 2021.

One-Year Technical Price Chart (as on December 08, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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