Encouraging Future Looms For BCE

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 |  About: BCE Inc. (BCE), Includes: RCI, VZ
by: Equity Watch

BCE, Inc. (NYSE:BCE) is one of the largest telecommunications service providers in Canada. I'm bullish on the company because of its strong wireless and media growth. Moreover, the company offers an attractive dividend yield, along with a potential for price appreciation of 10.5%. The company only generates around 28% of its revenues from its wireless business, which means that the company has the potential to drive further growth in this segment and reduce its high exposure in the wireline segment.

Financial Performance

The company managed to beat analyst expectations by reporting an EPS of $0.71. Both Bell Wireless and Bell Media experienced significant YoY revenue growth of 5.4% and 4.7%, respectively. Increased usage of smartphones and data services continues to be the driving force behind Bell Wireless. These two sectors were primarily responsible for the 1.5% YoY growth in operating revenues, which would eventually translate into the bottom line of the income statement. The negative take away from the second quarter earnings is the slowdown in the wireline segment, which constitutes around 49% of BCE's revenue breakdown, but only the TV segment showed remarkable improvement, with an increase of 53% in net subscriber additions. Other important indicators such as average revenue per unit, churn rate, postpaid smartphones base have been steady. LTE coverage has been expanded to 73% of the population, up by 24% YoY, which will result in net additions along with the lower churn rate.

Metrics

2Q'13

Growth Rate -YoY

Blended ARPU

$56.85

2.7%

Postpaid Churn rate

1.27%

0.01 pts

Smart Phones (% of postpaid base)

70%

15 pts

Click to enlarge

Forecast

After the acquisition of Astral Media, the company updated its future guidance for 2013 for revenue growth to be between 2%-4%, with EBITDA growth being 3%-5%. BCE is expecting that the acquisition of Astral Media will help the company in terms of operational efficiency, cost savings and productivity gains.

Discounted Cash Flow

I have used free cash flow estimates until 2016 and a 7.52% WACC (using cost of equity of 9.25% and cost of debt of 3.5%). Furthermore, I have used a terminal year growth rate of 0.5%.

2014

2015

2016

Terminal Value of FCF

Estimated Free Cash Flow

$2,750

$3,025

$3,356

$51,690

Present Value

$2,558

$2,616

$2,696

$41,580

Click to enlarge

Total Value to firm = $2,558+$2,616+$2,696+$41,580=$49,450 million
Total Debt= $14,374 million
Total Value to firm - Total Debt = Total Equity value
$49,450 - $14,374= $35,076 million
Share Outstanding = 775.9 million

Target Price = Total Equity Value/Share Outstanding
$45.20 = $35,076/775.9

My price target is $45.2 per share. Based on my price target, we can expect price appreciation of 10.5%. Furthermore, with a dividend yield of 5.50%, the company offers striking total return.

Threat of Foreign Invasion

As mentioned in my previous article, Verizon Communications Inc. (NYSE:VZ) is looking to expand its operations in Canada. The U.S. telecommunications giant has shown an interest in acquiring Wind Mobile and Mobilicity. However, the most recent development is that VZ has decided to delay its acquisitions till January 2014 as the company is waiting to participate in the 700MHz auction to get equipped with the much needed spectrum so that it can penetrate the wireless market. Verizon's way into Canada has been assisted by several Canadian government regulations aimed at promoting competition in the country. These regulations include access to spectrum at lower cost, ability to buy Canadian wireless companies (which local companies cannot) and access to carrier networks of local companies. All of these initiatives are posing a serious threat to wireless incumbents in Canada and pressuring their stock prices well before VZ starts to offer its services in the North.

However, I believe that things will not be as simple as they look for Verizon. Firstly, BCE, along with other stakeholders, has managed to build public pressure on the government to provide a level playing field for all players. Furthermore, a survey conducted by Nano research highlights that 82% of Canadians think that there should be no favors given to foreign companies, and only 2% think otherwise. Lastly, Rogers Communications Inc. (NYSE:RCI) has floated another idea that small wireless companies could be bought out in private equity bids.

What are the options?

If the government fails to provide a level playing field for Canadian incumbents, there are several other strategies that can help challenge VZ more aggressively. Canadian companies could offer serious discounts, which could make it difficult for new entrants to compete in a low pricing environment. They could also offer attractive bundled products, which would discourage customers to leave their current networks. Domestic telecommunication companies could also participate in joint ventures, which will increase network facilitation. Similarly, the extent to which major carriers participate in roaming agreements with Verizon will also be important in determining the growth of VZ subscribers.

Recent News

With the induction of the Bell TV app, customers have the flexibility to enjoy popular channels outside their homes on their tablets and smartphones. Furthermore, it also helps improve customer care services, as users can now manage their accounts and services in a more effective manner. Moreover, the Canadian Society of Corporate Governance (CSCS) and the Canadian Coalition for Good Governance (CCGG) have acknowledged the company for its outstanding corporate governance.

Conclusion

An attractive dividend yield, strong wireless momentum and growth in the media segment, along with the acquisition of Astral Media, paint an encouraging outlook for the company. However, if VZ manages to penetrate Canadian markets with favorable government regulations, it will be a game changer, forcing the competition to heat up, which will result in driving down revenues. Otherwise, BCE is comfortably placed and well equipped to take advantage of the growth opportunity available in wireless segment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.