TELUS Raises 2011 Guidance

Dec.14.10 | About: TELUS Corporation (TU)
All prices in Canadian dollars unless otherwise indicated.
It’s going to be hard to go on holiday this Saturday, with all the warm and cheery news from Corporate Canada these days.
TELUS (NYSE:TU) this morning, in a fit of BCE-envy (NYSE:BCE), had its own financial guidance raising announcement, saying EPS could be $3.50-$3.90 next year, versus $3.10-3.30 estimated to wind up 2010.
The multiple on the stock (close of $46.41 on the voting shares) is now 12.5 on the midpoint of the range, which is very inexpensive for a 2011/10 EPS growth rate of 15.6 percent.

The current $2.10 dividend rate would imply a dividend payout ratio of 54% to 60% of 2011 EPS, close to the lower half of the company's policy range of 55-65 percent. This would indicate a small dividend hike could be in the offing when the company releases its 2010 year-end in February.
We’ve recently reaffirmed our positive view on TELUS, and today’s improved 2011 outlook is satisfying, to say the least. Thirty-one cents of the average 50 cents increase in expected 2011 EPS was from lower financing costs.

As in the case of Bell Canada, part of the bump in earnings guidance was also due to an early $200 million pre-payment to cover TELUS' pension plan obligations deficit. The company did not specify how much of the EPS bump was from pension payments, but 2011 Free Cash Flow improved by a reduction in cash taxes of $170 million.

In 2011 TELUS will have covered 97% of its combined pension plan obligation deficitwhereas Bell Canada will still be faced with an estimated $1.6 billion shortfall.

On this morning's conference call, CFO Robert McFarlane indicated that HSPA+ network handsets were declining in price and, with a strong Canadian dollar, wireless margins would be buoyed in 2011.

TELUS voting stock is up 49 cents to $46.90, with the gain probably being limited by the conference call beginning at 11am. The Non-Voting “A” shares are at $44.67 up 60 cents. TELUS’ 2010 closing estimates were left unchanged from the November 5, 2010 announced versions in the Q3 report.
Here are a few numbers for 2011 over 2010 released today (midpoint to midpoint):
  • 2011 Revenue up 2.5% to $10.075 billion.
  • 2011 EBITDA up 3.4% to $3.775 billion.
  • 2011 Wireless Revenue up 5.0% or $250 million to $5.275 billion.
  • 2011 Wireless EBITDA up 8.6% or $175 million to $2.200 billion.
Clearly, wireless is expected to be highly profitable in 2011, with revenues still growing, in spite of the company recently announcing lower early-termination penalties and other relaxed features of its mobile customer agreements. The company guided 2011 ARPU (Average Revenue Per User) in a range of slightly down to slightly up, in spite of increased wireless price competition.
Note that U.S. electronics retailer Best Buy (NYSE:BBY) said Q3 comparative sales for its wireless and mobile were up 30% over last year. Best Buy did say, however, that the same top line headwinds that caused it to drop its 2011 financial guidance this morning also exist in Canada to some extent. Best Buy operates Future Shop up here.
TELUS also said Free Cash Flow, a key metric for dividend paying stocks, would be up 7-27% in 2011 over the guided 2010 range of $930 million to $1.03 billion.
TELUS FCF was $826 million for the first nine months of 2011 and $339 million in Q3.
Before deducting the total pension pre-payment expense of $340 million in 2011, Free Cash Flow is expected to be $1.385-1.585 Billion, or $4.30-4.92 FCFPS.
Here’s a quick take on TELUS’ valuation:
  • Voting Stock price @ $46.
  • Market capitalization = $14.8 Billion on 322 million shares*.
  • Net debt = $6.9 Billion (Q3 2010).
  • Total Enterprise Value = $21.7 Billion *.
  • EV/EBITDA 2011g = 5.75 *.
  • Price/FCFPS 2011g = 10 times *.
*This assumes all shares are Voting but would be lower considering Non-Voting shares trade at about a $2 discount to the Voting shares.
We rate TELUS a "Hold."
Disclosure: I am long TU.