TELUS (TU) is a Canadian telecommunications company, the smallest one among the Big Three. With $11.2B in revenues and $4B in EBITDA in the last twelve months, TELUS boasts 13.2 million customer connections, including 7.7M wireless subscribers, 3.4M wireline network access lines, 1.4M Internet subscribers and 712K TELUS TV users. The company operates in two large segments: Wireless and Wireline. The Wireless segment provides voice and data services to 7.7M customers coast-to-coast with its 4G network, which includes 4G LTE and nationwide HSPA+, CDMA, and Mike® iDEN network technologies. TELUS together with BCE (BCE) and Rogers Communications (RCI) introduces Canadians to the newest smart phones available in the market. In the Wireline segment, TELUS is a full-service exchange carrier in provinces of British Columbia, Alberta, and Eastern Quebec. The company provides its customers there with residential phones, Internet access, and television and entertainment services. Nationally, TELUS offers telecommunications and IT solutions to small and large businesses. TELUS Health provides claims management solutions, hospital and hospital-to-home technology, electronic health records, and other services.
TELUS's stock has been under pressure recently for the same reason as BCE's and Rogers's shares: Verizon (VZ). Although the price plummeted 17% from its peak, it is still less than Rogers's 25% free fall and comparable to BCE's 15% decline. At the current price, TELUS offers a 4.28% dividend yield, the lowest one among the Three:
It is needless to say that the valuations have become depressed since the news about Verizon's potential entry into Canadian marketplace. I wrote more about it in my previous article on Rogers. I will no further discuss the matter with the readers, although they may read about the Canadian reaction to such news in The Star. I shall jump straight to valuation.
Financials and Valuation
TELUS has increased its EBITDA by $700M since 2005 to $4B from $3.3B, while increasing revenues by over $3B and Net Income by $500M in the same timeframe. EBITDA margin has slid to 36% from 41% in 2005, EBIT has remained largely unchanged at ~20%, and Net Income is at 12% right now. The implied ROE is 17.6%, the lowest among the Three:
Historical EV/EBITDA multiple is presented below:
Readers may notice that the graph is a bit volatile. The main explanation for that are changes in the number of shares outstanding in the last 5 years. Shares outstanding play a role in the computation of market capitalization, which is a variable of the Total Enterprise Value equation. Here is a chart that shows volatility in that:
As of August 28, 2013, the total enterprise value of TELUS is approximately $29.5B and consists of the following components:
The analysis consists of two parts: DCF model in conjunction with SOTP (70-30), available in the downloadable workbook, and P/E sensitivity table. Data used in the Excel sheet comes from annual reports, Bloomberg, and other electronic sources. EPS estimates are provided by analysts from major banks and brokerages; data is accessed through TD Waterhouse trading platform.
The output of the model is given below:
Fair value per share consists of the following drivers:
The distribution of the value drivers is as follows:
- Terminal Value represents over 50% of the fair value. This is the highest score among the Three. It is also the riskiest value driver among the rest as it is subject to market fluctuations
- Dividends are the second largest component of the value structure. It is the highest among the Three due to the high payout ratio (59% vs. Rogers's 47% and BCE's 66% in fiscal 2012)
- There is no share repurchase program in place for TELUS, although the company buys back stock from time-to-time as seen in the Y-chart
P/E Sensitivity Table
Given below are EPS estimates provided by a number of analysts from various financial institutions:
(click to enlarge)
Earnings are projected to grow fast in the next 3 years, while for the last year the estimates are scarce. In my DCF model, EPS growth is approximately at the Low Estimate's rate. Here are the results at current P/E levels, discounted by WACC where necessary:
Compared to the current price of ~$31, TELUS's stock is trading at a discount to the 2013, 2014, and 2015 present values.
The following technical picture is presented by analysts of Recognia Inc. and is accessed through the TD Waterhouse trading platform:
Investors should be looking at volumes when the price reaches either of the two price boundaries (support/resistance). Trading on high volume may indicate that the price is soon to break out of the channel and start a trend.
On August 29, 2013 I received a copy of the fresh Wall Street Journal. On the front page I saw the news about Verizon's decision to buy out Vodafone's stake in Verizon Wireless. This deal will require about $100B in financing from Verizon. I quickly checked VZ's financials to find that the company has $1.8B in Cash, $24B in Long-term debt, and $8B in Short-term borrowings. It is most likely that the company will have to further leverage its balance sheet, making it unlikely to enter Canada's marketplace. I have decided to postpone the writing of the piece to see the market's reaction in regards to TELUS's, Rogers', and BCE's shares. On that day, TELUS's shares jumped 2.75%, BCE's went up 2.0%, and Rogers's shares closed 2.6%. The next day the stocks experienced slight downward pressure and closed lower.
The reason for this activity is probably market's speculation that Verizon will not have enough dry powder to compete with the Big Three. While Verizon's pro-forma balance sheet is not available for review, the situation evened out significantly: the Three are waiting for the January 2014 spectrum auction, while Verizon is occupied with the minority interest (worth $53B on the balance sheet as of 2013Q2).
TELUS experiences the highest growth rates among the Three, but remains the smallest in terms of total number of customers. Arguably, TELUS will be the most affected company among the Three because of its high reliability on the Wireless segment and poorer business diversification. However, the stock is now trading at a significantly larger discount to its fair value compared to its two Canadian peers.
I issue a "BUY" recommendation on TELUS's stock in light of recent developments south of border. The upside is almost 14% (to fair value). Cautious investors are recommended to buy shares in chunks and finish accumulating positions by the end of January 2014.