Target Price: $42
Current Price: $39
Target Return: 8%
Earnings Results Analysis
TELUS consolidated Q4 results were mixed, with revenue below our expectations and EBITDA above our expectations. Wireline results came in a bit better than wireless, as wireless results appears to have been more adversely affected by the slowing Alberta economy. Subs additions, ARPU expansion and churn are favorable.
Guidance for 2016 indicates a revenue growth of 2-3%, EBITDA excluding restructuring growth of 3-6%, and EPS growth of 5 -12%.
TELUS has been a consistent performer with solid growth in revenue, EBITDA and EPS. It continues to reward shareholders with dividend growth and share buyback program. The recent results has shown increased competition in the wireless segment and economic headwinds in Alberta. We believe the guidance issued by the company is quite conservative to reflect the uncertainy. We have adjusted our valuation to reflect the potential risk exposures. Our target price is $42, and TELUS is rated Outperform.
Q4/15 Results & 2016 Guidance Highlights
§ Q4/15 results mixed with revenue growth slightly below and EBITDA slightly above expectations - Revenue grew 3% to $3,217 million (consensus $3,233 million) and adjusted EBITDA excluding restructuring grew 5% to $1,077 million (consensus $1064 million).
§ Mixed 2016 guidance: slightly soft revenue offset by improved cost efficiencies -Management provided 2016 guidance: 1) Consolidated revenue growth of 2 to 3%, compared to 4.2% in FY15. 2) Consolidated EBITDA growth, excluding restructuring cost, of 3 to 6%, implying an improved EBITDA margin of 36.2% to 36.7%. 3) Earnings per share growth of 5 to 12%. 4) Capex growth of 3% to approximately $2.65 billion.
§ Continued Dividend Growth - TELUS confirmed its intention to raise its dividend by around 10% (semi-annually with Q1 and Q3 results) in 2016, which is consistent with our expectations. TELUS also announced that it will provide a guidance on dividend growth and share buyback beyond 2016 on its Q1 earnings release and AGM in May 2016.
§ Wireless results were soft due to increased competition in the last quarter as a result of the "double cohort" as well as weak economic conditions in Alberta.
§ Wireless revenue grew 3% to $1,595 million, and adjusted EBITDA excluding restructuring improved 3% to $653 million. EBITDA margin continues to improve, increasing 40 bps to 37%.
§ Blended ARPU increased 0.6% to $63.74.
§ Postpaid additions and total net additions were +62k and +36k. Blended churn improved 11bps to 1.32%.
§ Management mentioned subscriber additions and ARPU are both affected by the Alberta downturn.
§ For 2016, TELUS estimates wireless revenue to grow 2-3% to $6425-6490 million and EBITDA excluding restructuring to grow 3-6% to $2975-3060 million, reflecting stable growth in subscribers, ARPU, data revenues and improvement in cost efficiencies.
§ Shaw Communications, a key competitor of TELUS, announced acquisition of WIND Mobile. This would change the competitive landscape in the wireless market over the short to medium term.
§ We continue to see a decline in voice offset by growth in internet and TV.
§ Revenue expanded 4% to $1,489 million and adjusted EBITDA excluding restructuring improved 8% to $424 million. EBITDA margin excluding restructuring grew 1.1% to around 28%
§ Data service and equipment revenue increased 9% to $991 million, driven by growth in internet and TV subscribers. TV subs increased by 25k while internet subs expanded 22k
§ Voice revenue dropped 9% to $358 million.
§ For 2016, TELUS estimates wireline revenue growth of 2-3% and wireline EBITDA excluding restructuring to grow 3-6%. Margin is expected to improve from expansion of Optik TV and business process outsourcing.
§ Net debt at Dec 31, 2015 stood at around $11.9 billion, representing 2.6x LTM EBITDA. The company's long-term leverage policy range is 2.0-2.5x
Forecast and Valuation
Our target price of $42 implies 8.1x 2016E EBITDA, 2.9x 2016E Revenue and 16.2x 2016E EPS. These multiples are in line with the valuation of its comparable companies.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.