UBS Analyst Downgrades Telus on Threat from Shaw

With Shaw Communications Inc. (SJR) now offering digital telephone service to 90% of the homes where it offers cable, the company appears ready to push further into these existing markets. It also boasts phone subscribers in 15% of these homes.

So with faster penetration expected from its rival, things will likely get worse for Telus Corp. (TU) in 2008, according to UBS analyst Jeffrey Fan. He is downgrading his rating on Telus shares to “neutral” from “buy,” while cutting his price target to C$46 per share from C$49. This implies a C$5 discount linked to the threat of new wireless competition.

The analyst also reduced his first quarter earnings per share [EPS] estimate to C$0.87 from 90¢, and to C$3.58 from C$3.62 for 2008.

But the news is not all bad for Telus. It had strong data subscriber additions last quarter, so Mr. Fan expects average revenue per user [ARPU] declines will be stable at -1.2%. Meanwhile, ARPU growth is expected to be 37%, but lower voice ARPU of -5.5% may offset that gain.

The one area of potential upside he sees this quarter is wireless ARPU, but margins could remain pressured due to higher year-over-year churn, higher gross additions, and retention and subscriber acquisition costs.

Mr. Fan also pointed out that Telus shares offers an attractive dividend yield and moderate dividend growth.

The company is set to report first quarter results for 2008 on May 8.