EUR 850.00 For Business Accounts Only

Morningstar | We See Positive Signs Sprouting Underneath BCE's Mixed 3Q Headline Results; Maintaining CAD 62 FVE

With revenue up over 3% from the same period last year, narrow-moat BCE beat consensus estimates on the top line, but it slightly missed EBITDA expectations as various factors resulted in a 30-basis-point year-over-year drop in adjusted EBITDA margin to 42.1%. Still, the firm is tracking our full-year projections and showing signs of executing on the strategy that supports our positive thesis. We are maintaining our CAD 62 fair value estimate and find the stock undervalued at current levels.

We think BCE has a big opportunity in wireline because of its fiber to the premises, or FTTP, buildout, which gives the firm a product that can compete on quality with cable offerings, such as Rogers', and we see encouraging news. During the quarter, the firm added 48,000 high-speed Internet customers, bringing the year-to-date total to 80,000, nearly as many as each of the past two full years, when net adds were under 90,000. BCE also added over 40,000 net new IPTV subscribers, leading to a TV base that grew despite ongoing satellite losses. BCE now reaches over 4.4 million locations with FTTP and, on the back of its fiber footprint, is now offering fixed wireless in some rural areas. We expect BCE to continue improving its broadband penetration, resulting in our projection of over 100,000 net additions in both high-speed Internet and IPTV each year through 2022. We project wireline margins to be flat in 2018 versus 2017, as we expect higher advertising costs and more promotional rates, which weighed on third-quarter margins, as FTTP rolls out. Over time, we expect margins to head up.

BCE also posted good wireless subscriber metrics. It added 135,000 postpaid customers, besting industry leader Rogers during the quarter, and held churn to 1.14%, slightly better than the year-ago period and continuing to pace below the 1.19% we expect this year. We believe BCE currently has a better wireless network than Rogers, and we expect it to take some share over the next few years.

A key component of BCE's wireless segment is now prepaid customers. With the Lucky Mobile brand that BCE launched in late 2017, the firm is making a concerted effort to become a bigger player in the prepaid market, which it had largely overlooked in recent years. Though prepaid customers weigh on ABPU (average billings per user) and margins, management sees them as valuable because they can ultimately funnel into the highly sought-after postpaid customers. Like other areas of the business, BCE is executing on this front, adding 43,000 customers and reducing churn. Combined, the 178,000 wireless net adds BCE realized in the quarter was a company record and foreshadows a bright future, in our opinion.

The higher proportion of prepaid customers, in addition to subscribers added under the government contract BCE won last year, weighed on wireless ABPU, which was down 0.7% year over year to CAD 69.28. Despite the drop, the company is still tracking our full-year ABPU forecast, which calls for 1.3% ABPU growth to CAD 68.65. The government contract and strategy to pursue prepaid customers were well known and led us to believe BCE would trail competitors in that metric in 2018. Though the deleterious effect of the government contract on ABPU growth will cease after this year, we expect the renewed focus on prepaid customers will be an ongoing weight. We project average ABPU growth of only about 1.5% each year throughout our forecast.