BCE Inc.

BCE Inc. (TSX: BCE) is one of Canada’s leading communications company, which provides advanced Bell broadband wireless, TV, Internet and business communications services alongside Canada’s premier content creation and media assets from Bell Media.

Key Highlights:

• An Income Play: The company has a strong history of consistent dividend payout, which is a key positive from the income investors’ point of view. During FY20, the company paid a cash dividend of CAD 2,975 million, higher than CAD 2,819 million in FY19. At the last price traded, the BCE stock was offering a dividend yield of ~6.05%, which is lucrative considering the current interest rate scenario.

Source: Refinitiv (Thomson Reuters)

• FY21 Guidance indicates Revival of Demand: Despite a tepid FY20 performance, the group is expecting a demand revival in FY21. Revenue and adjusted EBITDA is expected to grow by 2% to 5% from FY20. The company expects its Adjusted EPS to grow by 1% to 6% over FY20. Free cash flow is expected in between CAD 2,850 million to CAD 3,200 million.                      

Source: Company Report

• Reduction in Debt: The company’s operations are capital intensive in nature, and most of the players issue debt for the expansion. Notably, BCE has successfully reduced its total debt by ~5% and ~11%, respectively, from Q3FY20 and Q1FY20. The company reported total debt of CAD 26,323 million in Q4FY20. 

• Industry Beating Margin profile: The company not only reduced its total debt, but also reported a better margin than the industry median. In FY20, EBITDA margin and operating margin stood at 42% and 19.9%, respectively, higher than the industry median of 34.3% and 11.9%. Moreover, the company reported its net margin at 10.8% in FY20, as compared to the Industry’s negative net margin of 3%.                     

Source: Refinitiv (Thomson Reuters)

Q4FY20 Financial Results:

• BCE announced its quarterly result, wherein the company posted Operating revenues of CAD 6,102 million, decreased slightly from CAD 6,275 million in the previous corresponding period (pcp). The decrease was mainly due to COVID-19 adverse impact on consumer and commercial activity, including wireless product sales and roaming volumes, media advertising demand and business customer spending. Service revenue declined 2.8% to CAD 5,090 million and product revenue by 2.7% to CAD 1,012 million.
• Adjusted EBITDA was recorded at CAD 2,404 million, down 3.2% on y-o-y basis.
• The company reported Net earnings of CAD 932 million, surged 28.9% on y-o-y basis, supported by a realized gain on the sale of Bell data centres to Equinix in Q4FY20 coupled with lower non-cash media asset impairment charges and decreased income taxes from the previous corresponding quarter.

Source: Company Report

Risks: The sector requires huge capital investments, 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.

Valuation Methodology (Illustrative): Price to Earnings-based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The company recently reported the roll-out of  400G wavelength service by using WaveLogic 5 Extreme technology, which is expected to enhance the connectivity speeds for its customers. Moreover, the above service is deployed across 17,000 km fibre infrastructure and is expected to deliver 4x data speed and 50% more capacity per wavelength. The company is optimistic about its performance in 2021 and provided a decent guidance. Moreover, the stock is offering a lucrative dividend yield which is a positive for the income seeking investors. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered peers like Quebecor Inc, Rogers Communications Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of BCE at the last closing price of CAD 57.87 on April 26, 2021.

One-Year Price Chart (as on April 26, 2021). Source: Refinitiv (Thomson Reuters)

TELUS Corporation

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.

Key Updates:

• Consistent Dividend Payment backed by stable Cash flows: The company reported a consistent dividend payment during the last 10-years, supported by impressive cash flows. Notably, free cash flow was recorded at CAD 1,435 million in FY20, significantly higher than CAD 932 million in FY19. Moreover, the stock carries a dividend yield of 4.8%, which is decent considering the persisting interest rate scenario.               

Ten years dividend history; Source: Refinitiv (Thomson Reuters)

• Diversified Revenue-base: In the past, the company made prudent investments decisions through investing in advanced broadband technologies, including its PureFibre services, which is expected to provide better yields after the ongoing roll-out of 5G. Moreover, the company’s presence across healthcare, agriculture segments, would continue to mitigate the company’s dependency across one revenue segment. The rising trend of using digital health services and virtual care is expected to support the company’s performance. 

• Impressive Guidance: The management targets its FY21 revenue to grow by 8% to 10% over FY20, while adjusted EBITDA is targeted at higher than 6% to 8% over FY20. The company would spend almost 2,750 million for capital expenditure and is looking for a free cash flows of ~CAD 1,500 million for FY21.         

Source: Company Report

FY20 Financial Highlights :

• The group announced its full-year result, wherein the company posted operating revenue and other income of CAD 15,463 million, slightly higher than CAD 14,658 million in FY19.
• Operating income slide to CAD 2,482 million from CAD 2,977 million in FY19. The period was marked by an increase in operating expenses (CAD 12,981 million v/s CAD 11,681 million in FY19) due to higher goods and services purchased and higher employee benefits expenses.
• Net income was recorded at CAD 1,260 million, as compared to CAD 1,776 million in FY19.
• Cash and temporary investments, net was reported at CAD 848 million, while total assets stood at CAD 43,332 million.

Source: Company Report

Risk:  In the recent past, the company reported an increase in total debt, which could dampen the overall financial flexibility. Moreover, an increase in debt would lead to higher finance costs.

Valuation Methodology (Illustrative): Price to CF-based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendations:

The corporation made total net additions of 175,000 wireless connections in FY20. Mobile phone net additions were 87,000 reflecting an increase of 17,000 from FY19. Mobile connected device net additions were 88,000 in fourth quarter of 2020 reflecting an increase of 28,000 than FY19. The above figures look impressive considering the recent economic scenario. Moreover, the group has enhanced its latest offerings across urban and remote places. Recently, the company made capital investments of CAD 2.0 billion and implemented PureFibre and 5G networks across Mékinac and des Chenaux RCMs, which would allow its consumers to access high-speed internet with download speeds of up to 1.7 Gbps. Moreover, the stock is offering a decent yield amid a low interest rate environment. We have valued the stock using Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Shaw Communications Inc, Verizon Communications Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 25.75 on April 26, 2021.

One-Year Price Chart (as on April 26, 2021). 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.