BCE Inc.

BCE Inc. (TSX: BCE) is a communication service provider, which offers wireless, broadband, television, and landline phone services in Canada. It is one of the big three national wireless carriers, with nearly 10 million customers and controls about 30% of the market. 

Key Updates:

• 5G to drive future growth: The company continues to expand 5G offerings to new centres. The company reported that the current 5G users are consuming 2x more data which is resulting in ~20% higher monthly recurring revenue.
• Improved IT Supports: The company has recently added IT support, which would accelerate the company’s access to thousands of poles throughout the Québec province. The customers would get improved services through a dedicated technical and decision-making resource person assigned to projects. The above addition would help the company to improve access to its structures and help its consumers with access to high-speed Internet.
• Consistent Dividend Payment: The company paid a consistent dividend over the years, which indicates stable cash flows and operational resiliency. At the last closing price, the BCE stock was offering a dividend yield of 6.09%, which is lucrative, considering the prevailing interest rate environment.

(Source: Refinitiv, Thomson Reuters)

Q3FY20 Financial Highlights:

• BCE announced its quarterly results and posted a 2.6% y-o-y decline in revenue of CAD 5,787 million. The decline was primarily attributable to particularly lower media advertising demand, coupled with a slide in the wireless roaming volumes, and reduced or delayed spending by business customers. However, an 8% y-o-y increase in the product revenue to CAD 863 million supported the company’s top-line.
• Adjusted EBITDA declined 4.4% on y-o-y basis to CAD 2,454 million, due to a slide of 4.4% at Bell Wireless, 1.6% at Bell Wireline and 21.2% at Bell Media.
• Net earnings stood lower at CAD 740 million, as compared to CAD 922 million in the previous corresponding period (pcp). The decrease was primarily attributable to a lower adjusted EBITDA, increase in other expense on account of net mark-to-market losses on derivatives used to economically hedge equity settled share-based compensation and higher depreciation and amortization.
• Free cash flow stood at CAD 1,034 million, down 11.5% from Q3FY19.

Q3FY20 Financial Snapshot (Source: Company Reports)

Risks: The company recently announced the waiving of residential Internet overage fees till January 4, 2021 and is offering a variety of free television programming across multiple media platforms. The above strategy may take a toll on the company’s cash flows and margins.

Valuation Methodology (Illustrative): Price to Earnings based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The company reported a stable top-line, despite the current economic downturn, which indicates the resumption in consumer and commercial activity with a gradual easing of COVID restrictions. During the quarter, the company reported additions in retail Internet of 63K or 8.1% on y-o-y basis while IPTV net additions stood at 19k from pcp, which is encouraging. Moreover, the company has a strong financial position with ~CAD 5.2 billion of available liquidity, which seems sufficient to meet the current working capital requirements and capital expenditures. We have valued the stock using EV to EBITDA-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered industry (Telecommunication Services) median on NTM basis. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 54.66 on December 23, 2020.

BCE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Power Corporation of Canada

Power Corporation of Canada (TSX: POW) is a diversified holding company with interests in financial services, communications, and other business sectors through its controlling interests in Power Financial.

Key highlights 

• An Income Play: The group has a consistent track record of dividend payment. Further, the company announced an increase in its quarterly dividend by 10% to CAD 0.447 per common share payable on 1st February 2021, with a record date of 31st December 2020. At the last traded price, the stock was offering a dividend yield of 6.23%, which is lucrative considering the current interest rate environment.

• Focusing on Cost Reduction: The management took some prudent steps to minimize the operating expenses, which would enhance the margins ahead. To date, the group have implemented actions to achieve 47% of the targeted expense reductions, or CAD 23.5 million on an annual basis.

Source: Company

• Healthy growth in AUM: Despite market volatility, the group’s assets under management increased in the reported quarter, which is a key positive. We believe the trend is likely to continue in the foreseeable future. At the end of the Q3 2020, the group reported total AUM at 196.4 billion, higher than CAD 188.3 billion in Q2 2020. This growth was mainly driven by innovative product offerings coupled with its constant emphasis on high-net-worth and mass affluent client segment. 

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the group reported a total net premium of CAD 9.9 billion against CAD 9.3 billion in the previous corresponding period. 
• The group reported a dip in its Net Investment Income (NII) which stood at CAD 2.2 billion in Q3 2020, against CAD 3.5 billion in the pcp. The decline in NII was primarily due to the change in fair value through profit or loss.
• In Q3 2020 the group's total operating expenditures stood at CAD 13.5 billion against CAD 14.1 billion in Q3 2019.
• The group's net earnings were CAD 884 million as against CAD 975 million in the previous corresponding period, primarily due to low NII. 

Risks associated with investments: The group’s business is significantly exposed to the volatility in the global capital markets, which could impact the performance. 

Valuation Methodology (Illustrative): Price to Book Value 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

With expanding of Mackenzie’s capabilities, the group is likely to offer global private equity, private credit, and infrastructure investment solutions to its potential customer base. Furthermore, with the recent acquisition of Personal Capital, the Company intends to offer leading-edge digital experience with personalized advice from human advisors. The group is highly poised to deliver improved prospects in the foreseeable future. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 29.20 on December 23, 2020. We have considered Genworth MI Canada Inc, IGM Financial Inc, AGF Management Ltd, etc. as the comparison's peer group.

1-Year Price Chart (as on December 23, 2020). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.