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Morningstar | Solid 3Q for Telus Displays Signs of Our Long-Term Thesis; Maintaining CAD 49 FVE

In what has recently been a very strong environment for Canadian wireless carriers, narrow-moat Telus was the latest company to post excellent results, and it seems all the major carriers are currently winning. But while Telus' absolute numbers were undoubtedly strong, we think aggressive competition from Shaw is beginning to show up in stagnant average billings per user growth and a very slight uptick in postpaid churn. Offsetting that, we believe Telus is poised to make major strides in its wireline business, and like in wireless, our thesis is already showing signs of playing out. While wireless competition tempers our enthusiasm on Telus a bit, we like its strategy and see the shares as mildly undervalued compared with our CAD 49 fair value estimate.

Telus' wireless customer growth hit its highest quarterly level since 2010, leading to high-single-digit revenue and EBITDA growth year over year. The firm added 109,000 postpaid subscribers, and its 0.87% postpaid churn again led the industry by over 20 basis points, despite being up year over year for the third straight quarter (though just one basis point this quarter). However, we think Telus is more vulnerable to Shaw's aggressive wireless insurgence than others due to its overlapping wireline footprint, so we expect ABPU growth to remain meager long term.

In wireline, we believe Telus is seeing the spoils of its fiber-to-the-home buildout, which now covers nearly 60% of its high-speed broadband footprint and gives it a much more competitive offering against its cable competition. Segment revenue grew 8% (excluding revenue from the sale of Telus Garden) on the back of accelerating growth in both high-speed Internet and TV subscriber additions (36,000 and 18,000 net adds, respectively). Given the enhanced quality of its product, we expect Telus to take wireline share from Shaw in western Canada while also increasing average revenue per home, given that it can charge higher prices for the superior service.

Adjusted wireline EBITDA margin was notably weak in the quarter--down close to 200 basis points year over year to 26.2%--but we aren't overly concerned for one quarter's result. Telus' wireline segment houses several other businesses, notably Telus International and Telus Health. Those are both lower-margin businesses than the core wireline TV and broadband business, and they frequently bolt on small acquisitions, which can initially be dilutive. Management's goal is to eventually get wireline EBITDA margin up to about 35% from the mid to high 20% range it has historically been. At this point, that target sounds aggressive to us and may be a much longer-range target. However, it emphasizes that may moving parts exist in wireline that could make margins volatile on a quarterly basis. We project adjusted wireline EBITDA margin of just under 28% in 2018 and rising to about 30% by 2022, driven mostly by lower costs associated with a fiber footprint versus Telus' older copper network.