EUR 850.00 For Business Accounts Only

Morningstar | T Updated Forecasts and Estimates from 21 May 2019

Telus posted an excellent first quarter, driven primarily by wireline, and outperformed its peers in terms of revenue growth and margin expansion. However, wireless results were somewhat soft and blurred by a change in reporting that resulted in less disclosure regarding mobile phone customers. We think the quarter supports our thesis that Telus will take wireline share due to its fiber-to-the-premises build-out, but it is the most vulnerable of the big three Canadian wireless firms to Shaw's aggressive push into wireless. We plan to maintain our CAD 50 fair value estimate and narrow moat rating, leaving the shares fairly valued, in our view.

Consolidated revenue grew 3.8% year over year and adjusted EBITDA margin expanded 180 basis points, although we estimate the expansion would've been only 30 basis points after adjusting for the newly implemented IFRS 16 lease accounting standard, which has no economic impact. Telus' first-quarter results were better than those of Rogers (flat revenue, 40 basis points of margin expansion) and BCE (2.5% revenue growth, 170 points of margin expansion), both of which also implemented IFRS 16 in the quarter. We forecast Telus to lead the industry with 4% revenue growth in 2019 while expanding like-for-like EBITDA margin by 60 basis points.

Telus disclosed that it added 11,000 mobile phone subscribers in the quarter versus a net loss of 3,000 mobile subscribers in the year-ago period. However, it changed its wireless reporting structure, so it no longer breaks down prepaid versus postpaid subscribers, and churn and average billings per user will no longer be comparable to prior periods or competitors. While the first quarter was not a great start on mobile phone adds, it will not cause us to revisit our forecast for over 200,000 additions in 2019. The first quarter is typically slower--under last year's reporting structure, Telus added only 5,000 subscribers in the first quarter but reached 347,000 for the year.

Telus' 11,000 phone additions (which would've been 12,000 under the old structure) trail BCE's 38,000 gain in the first quarter but outpaced Rogers' 33,000 loss. However, Rogers' loss was entirely attributable to prepaid customers (although its postpaid additions were also light), so we don't think the comparison tells the whole story. Mobile phone churn for Telus was 1.02%, but the firm disclosed that under the prior reporting structure, postpaid churn was 0.88%, maintaining its industry-best status. We project mobile phone additions to be lower across Canada in 2019, but we think, despite a best-in-class network, that Telus has the additional challenge of being more susceptible to Shaw, given the firms' overlapping wireline footprints. Despite being a national carrier, we believe Telus has greater wireless share over its wireline footprint because it can bundle offers and piggy back on its fixed-line network. We think Shaw can follow a similar playbook and find more success where it has a fixed-line presence.

Wireline was the quarter's standout, increasing revenue nearly 6.5% year over year. However, two thirds of the 9% adjusted EBITDA growth was due to IFRS 16, meaning that wireline margins contracted slightly on a like-for-like basis compared with last year's first quarter. Nonetheless, we see only positive news in wireline, as last year's first-quarter margin was 200 basis points higher than the full-year number, and other businesses in wireline, like Telus Health and Telus International, are likely lower margin and can cause the segment margin to fluctuate. We project like-for-like wireline adjusted EBITDA margin expansion of 50 basis points in 2019.

Impressively, the firm added 17,000 television subscribers, bucking an industry trend of losses, and 22,000 high-speed Internet customers, on track to exceed (given seasonal factors) our 44,000 and 93,000 net addition projections for TV and Internet, respectively. We think the strength is directly attributable to the improved network quality that Telus' FTTP build-out enables. FTTP now covers 63% of Telus high-speed Internet footprint. The firm expects to cap that penetration at 75%, an achievement we expect to occur in 2020. We think FTTP will drive further share and margin gains for Telus.