EUR 850.00 For Business Accounts Only

Morningstar | Telus' 2Q Shows Faster Wireline Gains, More Muted Wireless Growth; Profit Suffers; FVE Up to CAD 49

Narrow-moat Telus' second quarter was a microcosm of what we think is its long-term story, with impressive gains in broadband subscribers and wireline revenue per user but wireless subscriber numbers that were more pressured than the rest of the industry. Consolidated revenue grew over 5% versus last year's second quarter, slightly exceeding consensus estimates, but net income and EBITDA fell short, as adjusted EBITDA margin contracted by about 60 basis points to 37.2%. Nothing in the report changes our long-term thesis, and wireline gains seem to be coming faster than we anticipated. As a result, we are increasing our fair value estimate to CAD 49 per share. We see the shares as fairly valued at current levels, but we like Telus' prospects and would look to pick this name up on a pullback.

We thought Telus' wireline performance was impressive. We expect Telus to take share in its western Canadian wireline footprint over the next several years as it upgrades its network by building fiber to the home, or FTTH. At the end of the second quarter, Telus reached 1.65 million households with FTTH, and we expect fiber to reach over 2 million homes by the end of 2019. We assumed the increased fiber footprint would lead to mid-single-digit broadband growth and higher pricing, but results are exceeding our expectations. Telus has grown high-speed Internet subscribers by about 5% in each of the first two quarters of 2018, including the traditionally weak second quarter, and we estimate average data revenue per user, though not a clean number due to other revenue sources, was up 9% this quarter and 5% last, after averaging no growth over the last four years. The only wireline disappointment we saw was EBITDA margin down 200 basis points from 28% a year ago and tracking behind the 28% we project in 2018. Due to other lower-margin businesses included in this segment and what we assume are increased expenses with the fiber rollout, we don't think it's indicative of weakness.

Telus added 87,000 postpaid wireless subscribers in the quarter, behind the 122,000 that both Rogers and BCE posted. Wireless revenue was up 4% and is tracking our full-year forecast, and EBITDA margin expanded 80 basis points, which was better than we expected. Our view is that Telus is most susceptible to Shaw's insurgence (with its Freedom Mobile brand) because of their overlapping wireline footprints. We think Shaw's brand familiarity, opportunity to bundle (though it is not yet doing so), and ability to allow customers to take advantage of Wi-Fi in the west make it a stronger competitor in that market, where we think Telus is the current wireless leader for many of the same reasons. Wireless churn ticked up slightly in the quarter (to 0.83%), though Telus continues to lead the industry by a wide margin on that metric. Though we expect churn to stay relatively low, we think Telus' inability to gain as big a share of new subscribers over the next several years will result in its continuing to trail BCE and Rogers on subscriber growth. We project wireless subscriber growth and ABPU growth to each average below 2% over the next five years in an increasingly competitive market.