Take a pass on BCE, Canaccord Genuity says

BCE Inc.’s (BCE Stock Quote, Chart News: TSX:BCE, NYSE:BCE) first quarter earnings arrived yesterday in line with expectations, but while the stock is down 12 per cent on the year, it’s still not time to buy, says analyst Aravinda Galappatthige with Canaccord Genuity, who in a client update on Thursday reiterated his “Hold” recommendation with a lowered price target of $56.00.

Telecom company BCE announced its Q1/18 financials on Thursday, showing revenue growth of almost five per cent and earnings up over three per cent. Adj. EBITDA was $2,254 million, up 4.4 per cent year over year and a little under Galappatthige’s projected five per cent growth.

“Following a period of some softness where we saw organic wireline EBITDA declines, and prior to Q3/17 – some loss of share to the cablecos, we believe BCE is well placed to demonstrate some notable improvement in the upcoming quarters,” says the analyst.

“First, with the GTA-wide launch of the all-fibre internet product, we expect the current internet net add momentum to potentially improve through Q2-Q4. Second, management alluded to genuine improvement in the B2B (Enterprise) side of the business, indicating the best returns in eight quarters and highlighting the likelihood of positive profitability growth in wireline in the upcoming quarters,” he says.

“Third, it appears that Bell has some runway before its cable competitors brings in X1 – which is likely to be a late 2018 event. In the meantime, some of the newer products such as Bell Alt TV appear to be gaining traction and Satellite TV trends are improving, as well. Finally, there are also signs that competitive intensity both in Ontario and Quebec is perhaps a little more moderated than one may have feared coming into 2018. While there are sporadic promotional blips, particularly in Ontario, it appears less aggressive than what we saw last year,” says Galappatthige.

The analyst notes that interest rate hikes have weighed on BCE and its share price, saying, “While we recognize that there may be a time in the future for a tactical shift from the wireless heavy names (TELUS, RCI.b) to BCE, we do not believe we are there yet.”

The analyst has adjusted his valuation multiples to reflect the rising interest rate environment and now uses a blended 2019E EV/EBITDA of 7.8x (previously 8.1x) to arrive at his new $56.00 price target (previously $59.00), which represents a projected return of 10.9 per cent at the time of publication.