Analysts Optimistic on Canadian Telecom

While doubts about the C$52-billion leveraged buyout led by the Ontario Teachers’ Pension Plan have left shares of BCE Inc. (BCE) more than 15% below the offer price of C$42.75, Canada’s largest telecom company hopes to show that it is on solid footing when it reports fourth quarter results today.

Ahead of this report, UBS analyst Jeffrey Fan upgraded BCE to a “buy” with a target price of C$42.75.

The implied probability of the deal going through based on the stock price recently rose to 45% from 25%, he told clients in a note. This is still too low and the deal should close under the current terms sometime around mid-April, he added. Meanwhile, the fundamental downside Mr. Fan attributes to BCE shares is C$30.75.

He also likes the prospects for other players in the telecom and cable space such as Telus Corp. (TU) and top pick Rogers Communications Inc. (RCI), predicting that both will begin to outperform when uncertainties surrounding their wireless businesses are removed by mid-2008.

After comparing the performance of the Canadian telecom sector to the broader market, global telecom sectors and other industries in Canada, Mr. Fan concluded that Canadian telcos have underperformed. As a result, he sees a buying opportunity.

For wireline-weighted names Bell Aliant Regional Communications Inc. [BA.UN/TSX] and Manitoba Telecom Services Inc. [MBT/TSX], he noted that both have attractive yields, but the latter has less uncertainties. Mr. Fan also sees valuation support for Quebecor Inc. (IQW) and Shaw Communications Inc. (SJR).

Other than his “neutral” rating on Bell Aliant, every other name in the sector is now rated “buy” at UBS.

“We believe investors should overweight the telecom and cable names for their defensive nature [stable cash flows and dividends] and given their under-performance over the past 3 months and year-to-date,” Mr. Fan wrote in a note Monday.

UBS is forecasting a recession in the U.S., but not for Canada. However, if Canada did see a slowdown, the firm’s analysis of the 2001-2002 cycle shows that the impact on telco subscriber performance and earnings would be limited.

Over at RBC Capital Markets, analyst Jonathan Allen also expressed his optimism ahead quarterly results for the telcos. He rolled ahead his valuations, which led to a C$1 price target increase for both Rogers to C$61 and Telus to C$54. Bell Aliant meanwhile was cut by C$2 to C$32 and MTS remains at C$52.

As for BCE, Mr. Allen expects that investors will likely pay little attention to its results, although he sees solid subscriber additions from Bell Mobility.

However, David Lambert at Canaccord Adams suggested that even if Bell Mobility’s wireless additions in the quarter match those of Rogers, his model suggests that BCE’s wireless revenue growth may not offset a forecasted decline of 5.9% in its wireline revenues.