BCE's Solid Credentials Reaffirmed With Improvements In All Key Indicators

Aug.29.14 | About: BCE Inc. (BCE)


Company offers solid yield backed by hefty free cash flows.

Lower wireless penetration compared to U.S. and expected increase in demand for data offers compelling outlook for industry.

Wireline results were slightly softer than expected due to aggressive competition from cable companies and continuous decline of voice revenues.

BCE Inc. (NYSE:BCE) is the largest telecommunication company in Canada - the company provides wireless, high speed internet, TV, data and voice services to its subscribers. I'm bullish on the company because it continues to deliver solid growth in the wireless segment. BCE reported strong postpaid net ads, which were accompanied by rising ARPU and lower churn. It also offers a sustainable dividend yield with the potential for price appreciation. Overall industry dynamics are also favorable for the company's future growth.

Competitive Industry
Canadian regulators have been trying to add new players to the industry to increase competition. To attract new players, they are willing to offer favorable conditions, which include the acquisition of new spectrum and lower roaming charges. Currently, a smaller player Quebecor has shown interest in developing a nationwide business, but I believe it is too early to consider Quebecor a threat to the three telecom giants in the country. However, one thing is for sure that regulatory bodies will offer their complete support in this endeavor.

I believe there are a lot of growth opportunities available in the wireless segment due to the lower wireless penetration as compared to the U.S. Furthermore, the demand for data is expected to rise with the passage of time, which will result in an increase in ARPU, as the larger the data bucket the more the cost. Competition is very fierce in the U.S. telecom space. Competition is not very strong in Canada and companies are not snatching each other's subscribers on lower priced packages and early termination fess. Overall, Canadian telecom companies offer better growth opportunities than their peers in the U.S.

Subscriber Growth
The company reported outstanding second quarter results for the wireless segment. BCE reported postpaid net ads of 66K in the second quarter, and this has brought the postpaid smartphone mix to 75%. Strong subscriber growth was accompanied by a 4.6% YoY growth in blended ARPU. It has been the 18th straight quarter of rising ARPU and the highest YoY growth in nearly 7 years. Furthermore, the churn rate also fell by 11bps YOY and reached 1.16%. So, all important indicators have improved and this has helped bring EBITDA margins to 47.5%, the highest in the last 10 years.

I expect the wireless segment will continue to drive growth because of postpaid subscriber gains accompanied by the price increases. Also, the iPhone 6 is expected to launch in the third quarter, which represents upside potential for the company in the second half of the year.

Furthermore, 4G LTE service is now available to 82% percent of the population. The company is planning to use the 700MHz spectrum to support its 4G LTE service in rural areas. The low bandwidth spectrum is expected to increase coverage, which means lower costs for the company. Its deployment is expected to be complete by the end of next year.

In the wireline segment, both revenues and EBITDA experienced a YoY decline of 1% and 3%, respectively. The slowdown was primarily driven by severe competition from cable companies and the continued decline of voice revenues. The TV and broadband net additions were also on the lighter side in the second quarter, as shown in the figure below.

Source: Company Earnings Report

Siim A. Vanaselja, Chief Financial Officer, said in the earnings call: "We expect to see good improvement in Wireline financial performance through the third quarter and the fourth quarter." Management seems to have a positive outlook for the segment, but I believe pressures will continue to persist in the short term. The cable companies are competing aggressively with their low prices and bundled offers. Also, BCE is investing to increase its fiber footprint so the high rollout cost will continue to pressurize margins. However, in the long run, the company could benefit from its fiber assets and increase its market share in the industry.

Dividends and Valuation
The company offers an attractive dividend yield of 5% with a decent payout ratio of 60% (Dividends Paid/Free cash flows). I expect the company will continue its healthy free cash flow generation due to the attractive opportunities available in the wireless segment. Furthermore, the company's recent deal with Bell Alliant also will be accretive to free cash flows. BCE agreed to buy minority public shares for $31 per share, which will definitely raise its leverage but reduce the pressure on free cash flows. So, I believe the company will continue to offer its sustainable quarterly dividends of $0.6175.

I have used a discounted free cash flow analysis to determine the share price of the company. In the model, I have used WACC of 7.5% to discount the free cash flows and a terminal growth rate of 1% to calculate the terminal value. The figures for total debt and outstanding shares have been taken from Yahoo Finance. My price target comes out to be $46.90, which means price appreciation of 5.25%. Overall, BCE offers a compelling total return of 10.25%.




Terminal Value of FCF

Estimated Free Cash Flow





Discount Factor





Present Value





Click to enlarge

Total Value to firm = $3,014+$2,964+$2,886+$44,842=$53,706 million
Total Debt= $17,210 million
Total Value to firm - Total Debt = Total Equity value
$53,706 - $17,210= $36,496 million
Share Outstanding = 778.15 million

Target Price = Total Equity Value/Share Outstanding
$46.90 = $36,496/778.15

Final Words
All key indicators, such as postpaid net additions, ARPU and churn rate have shown improvements in the second quarter. The company also offers a solid yield, which is backed by hefty free cash flows. Furthermore, the lower wireless penetration compared to the U.S. and the expected increase in demand for data portrays a compelling outlook for the industry. However, wireline results were slightly softer than expected due to aggressive competition from cable companies, but it is expected to gradually improve as the company increases its fiber footprint.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.