Report
Matthew Dolgin
EUR 850.00 For Business Accounts Only

Morningstar | BCE Remains Our Favorite Canadian Telco After Strong Quarter, but It's Approaching Our CAD 63 FVE

BCE's first-quarter results showed encouraging signs supporting our thesis that it is the best-positioned Canadian telecom firm we cover, with a vastly improving fixed-line network leaving it in a stronger competitive position and a first-rate wireless network that is less susceptible to Shaw's insurgence. With the firm tracking our full-year estimates and maintaining its guidance, we don't plan to make material changes to our forecast, and we don't expect any change to our CAD 63 fair value estimate apart from a potential time value of money increase. The stock of this narrow-moat firm has now entered 3-star territory, but it remains our top pick among Canadian telecoms.

Revenue fell slightly short of consensus, but it beat our estimate and is tracking our full-year forecast for 2%-3% growth this year. We don't expect much better than 3% top-line growth during any year of our forecast, as wireline challenges, including churn of satellite and voice customers especially, should hold revenue growth back. Adjusted EBITDA margin was 42%, but the 170-basis-point year-over-year expansion is artificially high due to the newly adopted IFRS 16 accounting standard that puts operating leases on the balance sheet. We will adjust our margins to reflect the accounting change, but it won't have any economic impact or affect our valuation. Still, we think greater efficiencies in the wireline segment can lead the firm to modest margin expansion over the next few years.

Wireline margin, which was less affected by IFRS 16 than the wireless and media segments, expanded by 150 basis points in the quarter. We think it can continue to expand 40-50 basis points annually, as the firm's fiber to the home, or FTTH, buildout results in better pricing and lower cost. However, revenue growth may remain challenging with secular trends away from voice and television service. Segment revenue grew 2.5% year over year, hurt by voice revenue that declined 5% and losses of satellite TV customers that outweighed Internet-protocol TV gains. Still, we see the benefits of FTTH taking hold, as the the firm added over 22,000 new high-speed Internet customers, better than its biggest competitor by over 50% and consistent with our projection. It leaves the firm on track to meet our estimate of over 115,000 new additions this year, as the first half is traditionally seasonally weak.

Wireless performance was also encouraging, with 50,000 net postpaid subscriber additions, 1.2% average billings per user, or ABPU, growth, and postpaid churn of 1.07%, BCE's lowest quarterly level since at least 2014. We expect new customer additions in the Canadian wireless industry as a whole to be cooler this year than in 2018, but BCE's performance positions it well. It more than doubled Rogers' first-quarter net additions (its other big competitor, Telus, is yet to report) and came in only 18,000 less than the year-ago period, despite not having the government contract additions it had last year. With a top Canadian network and a footprint that we believe skews toward the eastern half of the country, given its wireline footprint, we think BCE has advantages over every competitor. Our forecast (averaging over 300,000 net additions annually) reflects the strong positioning, but we will continue to consider the state of the industry as further spectrum auctions occur. BCE chose not to participate in the recent 600 MHz auction, so we think it is imperative for it to be a major participant in higher-band auctions over the next couple years. Either way, we think competition will be intense, leading us to believe the firm will only be able to increase ABPU 1%-2% annually.
Underlying
BCE Inc.

BCE is a telecommunications and media company providing wireless, wireline, Internet and television (TV) services to residential, business and wholesale customers in Canada. As of Dec 31 2017, Co. operated three segments: Bell Wireless, which provides wireless voice and data communications products and services; Bell Wireline, which provides data, Satellite TV service and connectivity, and includes Co.'s wholesale business, which buys and sells local telephone, long distance, data and other services from or to resellers and other carriers; and Bell Media, which provides conventional, specialty and pay TV, digital media and radio broadcasting services and out of home advertising services.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Matthew Dolgin

Other Reports on these Companies
Other Reports from Morningstar

ResearchPool Subscriptions

Get the most out of your insights

Get in touch