Company Reports

Telus reported a decent start to 2024. Wireless performance held up despite heightened industry competition, and broadband customer additions remained strong. Telus’ fiber network investment continues to pay off. Now, as its buildout nears its end, the firm is in a good position to continue to expand cash flow and profits. We’re maintaining our CAD 33 fair value estimate and believe shares are undervalued.

The Big Three Canadian telecom firms have all sold off substantially over the past month after members of Parliament summoned the three CEOs to testify before a House of Commons committee. The CEOs were grilled on March 18 and the MPs have not yet taken action. While vilifying telecom firms is popular, and consumers undoubtedly desire lower prices, we don’t expect major regulatory changes. We’re maintaining our fair value estimates of CAD 78 for Rogers, CAD 33 for Telus, and CAD 60 for BCE.

Telus reported a very good fourth quarter, outperforming major rivals BCE and Rogers. Of the three, Telus had the best telecom revenue and EBITDA growth and added the most internet and wireless phone customers. With capital spending resetting at a lower level as the firm nears the end of its fiber network building, the firm is also in a good position to grow free cash flow and profits in a competitive industry from which we don't expect robust top-line growth. We're maintaining our CAD 33 fair value estimate and believe the shares are undervalued.

Telus is one of the three dominant Canadian wireless carriers, but we think its wireline unit is its standout business. Telus has replaced most of its legacy copper network with fiber, significantly upgrading the quality. We think this move has set Telus up for a prolonged period of success. Telus has already taken significant market share from Shaw (now owned by Rogers), its primary competitor in the western Canadian geographies where it competes. In addition to further success we expect in adding subscribers because of the better capability the fiber network offers, we believe the fiber network gives Telus more pricing power and is more efficient, leading to reduced costs.

Our takeaway from Telus’ third-quarter results was strikingly similar to peer BCE’s report a day earlier. Telus posted good telecom results that saw it continuing to add broadband customers to its fiber network and a near-record number of mobile phone subscribers. But Telus’ results also showed signs of increasing wireless competition after Quebecor entered the national market in the spring. Customer churn took a notable tick up, and average revenue per user, or ARPU, declined. The competitive environment and limited ability to expand ARPU have been part of our thesis for the Big Three Canadian wireless carriers. We’re maintaining our projections and our CAD 33 fair value estimate for Telus. We see each of the Big Three as undervalued.

We think Telus’ wireline unit is its best business and the one most likely to drive future returns. The firm has replaced most of its legacy copper network with fiber, significantly upgrading the quality. We think this strategy has set Telus up for a prolonged period of success. Telus has already taken significant market share from Shaw, its primary competitor in the western Canadian geographies where it competes. In addition to further success we expect in adding subscribers because of the better capability the fiber network offers, we believe the fiber network gives Telus more pricing power and is more efficient, leading to reduced costs.

Telus again posted good results, with the acceleration in customer additions not unexpected considering the market tailwinds in Canada. However, Telus struggled with costs, and some of its side businesses performed poorly, particularly Telus International, or TI, in which Telus owns a 55% economic interest. The firm announced a workforce reduction program of about 6,000 employees, which we estimate to be about 5% of the company’s total, including TI. The struggles and restructuring led to management materially reducing its sales, EBITDA, and free cash flow guidance for 2023. The stock did not decline on the news, making us think a lot of bad news is already anticipated. However, we’re maintaining our CAD 33 fair value estimate and believe the 20% decline in the shares over the past year is overdone.

We think Telus’ wireline unit is its best business and the one most likely to drive future returns. The firm has replaced most of its legacy copper network with fiber, significantly upgrading the quality. We think this strategy has set Telus up for a prolonged period of success. Telus has already taken significant market share from Shaw, its primary competitor in the western Canadian geographies where it competes. In addition to further success we expect in adding subscribers because of the better capability the fiber network offers, we believe the fiber network gives Telus more pricing power and is more efficient, leading to reduced costs.

As has been the case in recent quarters, Telus’ wireless net additions, which tend to dominate the headlines, didn’t keep pace with Rogers’. However, Telus posted industry-best growth in average revenue per wireless phone customer, or ARPU, while maintaining a steady pace, and the firm’s wireline business continues to impress with its consistent success in taking broadband share while continuing to add television subscribers. Overall, revenue growth was very good across business lines while margins held up pretty well. We’re raising our fair value estimate to CAD 33 from CAD 32 and believe Telus’ stock is the most attractive of the Big Three Canadian telecom companies.

We think Telus’ wireline unit is its best business and the one most likely to drive future returns. The firm has replaced most of its legacy copper network with fiber, significantly upgrading the quality. We think this strategy has set Telus up for a sustained period of success. Telus has already taken significant market share from Shaw, its primary competitor in the western Canadian geographies where it competes. In addition to further success we expect in adding subscribers because of the better capability the fiber network offers, we believe the fiber network gives Telus more pricing power and is more efficient, leading to reduced costs.

We think Telus’ wireline unit is its best business and the one most likely to drive future returns. The firm has replaced most of its legacy copper network with fiber, significantly upgrading the quality. We think this strategy has set Telus up for a sustained period of success. Telus has already taken significant market share from Shaw, its primary competitor in the western Canadian geographies where it competes. In addition to further success we expect in adding subscribers because of the better capability the fiber network offers, we believe the fiber network gives Telus more pricing power and is more efficient, leading to reduced costs.

Telus' fourth-quarter earnings met our expectations on the top line, but margins came in weaker than we expected. The telecom business remains strong—with mobile again trailing Telus' competitors in a strong environment and fixed-line outperforming—but peripheral businesses remain a key component of the firm's performance. Those other businesses contribute to both higher growth but also weaker margins than Telus' peers. Still, we think Telus is very well positioned, as the fast-growing businesses should juice EBITDA growth, and the completion of the firm's network overhaul with fiber should lead to more cash available to return to shareholders. We are maintaining our CAD 32 fair value estimate and think the stock is undervalued.

Telus continued its trend of good telecom results in the third quarter, with very strong wireless subscriber additions and growth in average revenue per wireless user (wireless ARPU) as well as continued gains with TV and internet customers as the firm nears completion of its fiber network overhaul. As the fiber building dwindles and the firm is on the cusp of significantly less capital need, it is choosing to expand its exposure to peripheral businesses rather than simply enjoy the spoils of what we think is best-in-class telecom positioning. The decision may prove to be very lucrative for shareholders, but it increases the risk and makes for a business that is much more opaque. We are maintaining our CAD 32 fair value estimate and prefer the stocks of competitors BCE and Rogers at current levels.

We think Telus’ recently enhanced fixed-line network provides the most opportunity for the company’s business. Telus has made a considerable investment over the last several years to improve its wireline network with fiber to the home. It now passes roughly 80% of its high-speed internet footprint with fiber, and we think the FTTH strategy sets Telus up for continued success. In the years since the fiber buildout began, Telus has already taken significant market share from Shaw, its primary competitor in the western Canadian geographies where it competes. In addition to further success we expect in adding subscribers, we believe the higher-quality network gives Telus more pricing power and is more efficient, leading to reduced costs.

Telus had a good second quarter, and the firm is tracking our full-year projections. Its wireless business was not as strong as Rogers or BCE’s on any metric, though some of the lag in average revenue per user growth stems from Telus’ wireless ARPU holding up better during the pandemic. The fixed-line business again led the industry. Revenue streams outside traditional telecom continue to power Telus’ relatively high total sales growth (7% year over year) and are not pressuring margins. Relative to our unchanged CAD 32 fair value estimate, we believe Telus is modestly undervalued. As with the other major Canadian telecom companies, we think its stock is worth buying at any material discount.

Quebecor has agreed to buy Shaw’s Freedom Mobile for CAD 2.85 billion in a deal that is contingent on regulatory approval of the Rogers/Shaw merger, which we now think is more likely in light of this agreement.

The agreement to buy LifeWorks for CAD 2.9 billion, including the assumption of debt, will materially expand Telus’ health business and is consistent with the latter firm’s recent interest in further developing its nontelecom businesses. At a purchase price that equates to roughly 15 times adjusted 2021 EBITDA—comparable with the low-double-digit trailing multiple we have determined is appropriate for Telus’ total health business—and represents less than 5% of Telus’ enterprise value, we believe the move creates more potential upside than downside for the stock. We are not changing our CAD 32 fair value estimate for Telus, but the stock now looks attractive.

We generally think all the major Canadian telecom companies have strong businesses and are worthy of investment at the right price. We favor the businesses of the three biggest wireless providers—Rogers, BCE, and Telus—the most. We see them as low-uncertainty stocks with stable businesses and narrow moats. Recently, the stock market has favored stability, to the benefit of the Big Three. BCE and Telus look fairly valued relative to our CAD 67 and CAD 32 fair value estimates, respectively. Rogers has only recently dropped materially below our fair value estimate due to uncertainty surrounding its Shaw acquisition, which won’t materially change our CAD 70 fair value estimate regardless of how the deal plays out. The selloff makes Rogers’ stock attractive currently, in our view.

We think Telus’ recently enhanced fixed-line network provides the most opportunity for the company’s business. Telus has made a considerable investment over the last several years to improve its wireline network with fiber to the home. It now passes roughly 80% of its high-speed internet footprint with fiber, and we think the FTTH strategy sets Telus up for continued success. In the years since the fiber buildout began, Telus has already taken significant market share from Shaw, its primary competitor in the western Canadian geographies where it competes. In addition to further success we expect in adding subscribers, we believe the higher-quality network gives Telus more pricing power and is more efficient, leading to reduced costs.

Nothing in Telus’ first quarter was especially notable, as it has lulled us into expecting that it will consistently add mobile phone and fixed broadband customers at a steady clip while juicing revenue growth with its peripheral businesses. With no change to our long-term thesis—we expect the firm to continue mirroring its major competitors’ performances in wireless while taking wireline broadband share—we’re maintaining our CAD 32 fair value estimate.