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In Assessing Canadian Telecom Exposure, BCE Has Some Interesting Attributes.

|Includes: BCE Inc. (BCE), RCI, TU

Currently, in seeking more exposure to the Telecom industry, BCE has caught my eye. There are many positive attributes that BCE has to offer the investor. With an attractive yield of 4.6% supported by strong fundamentals and increasing free cash, the company has garnered some personal interest.

BCE Inc is a communications company, providing residential, business and wholesale customers with a solutions for all their communications needs. It has three business segments: Bell Wireline, Bell Wireless and Bell Media.

BCE trades in Canada(TSE:BCE) as well as the United States (NYSE:BCE).

Valuation

In the section below, I will use the Discounted Cash Flow valuation model to estimate the current value of BCE's shares as well as using the model to estimate future valuations.

I believe using the Discounted Cash Flow valuation model for BCE to be fair because DCF analysis can help one see where the company's value is coming from and can generate an opinion based on that. (Please note all numbers are in Canadian Dollars)

    FY2017 FY2017 FY2018
  FY 2016 TTM 2% growth EBITDA 5% growth EBITDA Analyst Estimates FY 2018
Operating Income $4,930      
Taxes $1,033      
Unlevered Net income $3,897.00      
         
D&A $3,484      
EBITDA $8,414.00 $8,582.28 $8,834.70 $9,316.00
         
Free Cash Flow 2,874 $2,874.00 $2,874.00 $2,874.00
WACC 7.56% 7.56% 7.56% 7.56%
Terminal Value 8.42X EBITDA $70,845.88 $72,262.80 $74,388.17 $78,440.72
Sum of Parts $73,719.88 $75,136.80 $77,262.17 $81,314.72
         
Net Present Value $68,538.38 $69,855.71 $71,831.70 $75,599.40
         
Total Debt $20,349.00 $20,349.00 $20,349.00 $20,043.00
Cash and Cash Equivalents 615 $615.00 $615.00 $615.00
Net Debt $19,734.00 $19,734.00 $19,734.00 $19,428.00
         
Equity Value $48,804.38 $50,121.71 $52,097.70 $56,171.40
Shares Outstanding 870 870 870 870
         
Price Value $56.10 $57.61 $59.88 $64.56
Current Price $59.20 $59.20 $59.20 $59.20
Difference -5.24% -2.68% 1.15% 9.06%

Even though there are variations in calculating this formula, this model is based off of a terminal value of $70,845 billion and a WACC of 7.56%. The terminal value of$70,845 billion is based on the company trading at 8.62x EBITDA. 8.62x EBITDA is the trading average for the telecom industry. Using this valuation method, I currently have a value for BCE at ~$56.10 CDN.

Risk Moving forward

One of the main risks to keep an eye on moving forward is Canadian government regulations regarding opening up more competition in the wireless market. Currently the market is dominated by 3 main players in Canada. BCE, Telus (NYSE:TU) and Rogers (NYSE:RCI). If the Canadian government were to allow more competition from companies south of the 49th or overseas this would present strong challenges for the 3 main players in the Canadian Telecom industry.

Conclusion

Even though my analysis states that BCE is overvalued at the is point, it still has many attractive qualities if one is looking to add exposure to the telecom space. If I were to buy BCE, I would want to pick it up below $56.00 CDN. In my opinion that would equate to fair value.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Currently I do not own shares in BCE, Telus or Rogers in the accounts I manage.