Telus Corporation (TSX:T)(NYSE:TU) is one of the top three telecommunications companies in Canada with 7.9 million wireless subscribers, 3.2 million wireline network access lines, 1.4 million internet subscribers, and 0.9 million TV subscribers. The product line-up includes wireless, data, internet protocol, voice, television, entertainment and video.
Q2 profit better than expected
Profit for the second quarter of the 2014 fiscal year amounted to $387 million which was 9.3% (adjusted basis) higher than the year before. EBITDA, a key and relevant performance measure, increased by 7.5% and adjusted profit per share amounted to $0.63 or 16.7% higher than the year before. This was better than generally expected.
Telus is forecasting profit per share growth of between 11-20% for the full year and indications are that this target will be reached.
Sound all around operational performance
In the wireless segment, the operating metrics all moved in the right direction with the number of users increasing by 2.2%, average revenue per user up by 2% and user churn slightly down. Even more positive from the business profitability perspective was the solid increase in the number of post-paid users, who bring considerably higher average revenues than prepaid users. The EBITDA in this division increased by 6.3% and margins expanded slightly, compared to the previous year.
One problem area seems to be Public Mobile which was acquired in November 2013 and has made a negative EBITDA contribution of $12 million in the first six months of the financial year. The migration of the Public Mobile customers to the Telus network is expected to be completed by the third quarter of 2014 – which will hopefully eliminate the profit drag.
The wireline division fared equally well with strong year-over-year subscribers increases recorded in the high speed internet (+5.6%) and TV categories (+16%). The secular decline in local and international fixed phone lines continued although the rate of decline moderated somewhat. EBITDA in this division increased on an adjusted basis by 3.1%.
Excellent cash flow generation and solid balance sheet leading to increased dividend
Despite much higher capital expenditures (+24.5%) during the quarter, the cash-generating capability of the company remain solid with free cash flow (that is operating cash flow minus capital expenditures) increasing by 9.4% compared to a year ago. This is a key driver for the regular payment of dividends which was increased with 11.8%.
The company also continues to buy its own shares in the market and has completed the acquisition of 10.7 million shares for $410 million since the start of 2014. This action has reduced the outstanding number of shares by 1.7%, which is a contributing factor for the solid growth at the per share level.
Attractive business and attractive valuation
The positive investment case for Telus is based on the sound historical track record, competitive market position, strong operational cash flow and considerable distributions to investors through dividends and share repurchases. On the negative side, one has to be aware of the limited domestic growth opportunities and the real threat of a government-favoured fourth national telecommunications player.
The valuation of the company is reasonable with an EV/EBITDA valuation of around 7.3 times, a price/earnings ratio of 15 times and a dividend yield of 4.0% for the next 12 months. This valuation is currently at a slight premium to the Canadian peers.
The share price has declined by around 10% over the past few weeks, mainly over fears that increased competition down the line will negatively impact company profits. This may have created an excellent investment opportunity.
