Canada’s big 3 telecoms poised for comeback

Typically considered a low-volatility sleepy sector, telecom is expected to make gains in coming quarters to provide investors with much-sought free cash flow and dividends, says Craig Jerusalim, senior portfolio manager, Canadian equities at CIBC Asset Management.

“While the industry hasn’t done itself any favours with respect to competitive intensity, there is a good possibility that the worst of the sector’s malaise is behind them,” he said in an Aug. 1 interview.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Following decades of competition for market share, the sector remains an oligopoly, with Rogers, Telus and BCE dominating the space, as well as Quebecor in Quebec. While Quebecor has been driving down prices since it acquiring Freedom Mobile, Jerusalim said it likely won’t reprice too low because then Telus, Rogers and BCE could target it.

“There seems to be a thawing of the competitive intensity and wireless, which could be positive for all players, effectively seeing a rising tide lift all ships,” he said.

The sector’s year-over-year improvement should be celebrated by investors, Jerusalim said. “The culmination could be that ARPU — that is the average revenue per user — could actually show increases for the first time in two and a half years, a clear directional change in momentum for the downtrodden sector.”

So what’s the catalyst for this change? Jerusalim said it’s a combination of factors for each of the key players.

“Rogers is working on uncovering untapped value in a consolidated Maple Leaf Sports and Entertainment property, and certainly isn’t being hurt by the recent success of the Toronto Blue Jays,” he said.

Meanwhile, Telus has the best growth and capital intensity profile that will generate excess free cash flows for investors, Jerusalim said.

“Telus also just announced an accretive tower monetization with the case that quickly improves their balance sheet, edging them towards three-and-a-half time leverage by the end of the year,” he said. “They also have an interesting call option on healthcare at some point down the road, and the highest dividend yield of the group that is still growing around 7% per year.”

Following a dividend cut, BCE’s dividend yield is now sustainable, he said. “They are most likely going to have to invest heavily in their U.S. fibre [optic] operations, a strategy that I think will pay off over the long term, but will take a lot of trust and time to play out.”

There have also been some positive regulatory moves, particularly in the fibre-to-the-home strategy, which allows fibre-optic cables to deliver TV, phone and internet services directly to consumers’ homes.

“The government chose not to impose draconian prices on the incumbents to rent out their pipes, but instead settled on a more manageable $70 per megabit that will likely limit significant reselling activity,” he said.

Compared to the industry’s U.S. peers, Jerusalim said Canadian telecom is trading at a rare discount.

“The average premium for the Canadian group has been approximately 15% to 20% over the past 20 years when measured on an enterprise-value-to-EBITDA basis — a metric that incorporates both earnings and balance sheet leverage,” he said. “Today that premium has completely evaporated and is trading at a discount to the U.S. peers.”

So while there are a few headwinds facing Canadian telecom, including reduced immigration, the use of eSIMs, and limited cross-border travel to the U.S., these factors should be offset by strengthening performance by key players, he said.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.