Telus is a buy, Echelon Wealth Partners says

Telus Corporation’s (Telus Stock Quote, Chart, News: TSX:T) first quarter results showed the telco posting subscriber numbers across wireless and wired divisions slightly above forecast, marking solid execution over the quarter, says Rob Goff of Echelon Wealth Partners.

The analyst’s research note on Thursday reiterated his “Buy” recommendation and $52.00 target price for Telus.

Like its three competitors, Telus has seen more subscribers than projected, gaining 48,000 new wireless subs on contract, 13,000 more than the consensus estimate but behind Rogers (95,000 new subs), BCE (68,487 new subs) and Shaw’s regional carrier, Freedom Mobile (93,000 new subs).

Goff says that lower capital expenditures ($650 million versus last year’s Q1 of $742 million) supports the thesis that Telus is entering a phase of declining capex and chronic free cash flow.

“We look for TELUS’ turn to post dividend FCF as a positive catalyst given past concerns towards the disciplined dividend growth model despite incurring cash flow deficiencies,” the analyst writes. “Across the large capitalization telecom providers, we continue to see wireless as the core growth vehicle. Consequently, we continue to forecast more aggressive returns for TELUS and Rogers with Rogers taking our top ranking.”

Goff notes that at $3,377 million, Telus’ Q1/18 revenue showed a modest increase (compared to his estimate of $3,399 million and the consensus $3,219 million), while EBIITDA slightly underperformed at $1,303 million (compared to his $1,365 million and the consensus $1,243 million).

“Our current/one-year DCF valuations on TELUS are $54.32/$60.54 based on 8 per cent discount rate and 7.25x EV/EBITDA terminal valuation,” says the analyst. “TELUS’ current and one-year DCF valuations offer a buffer from our target price, providing a margin of safety greater than its Canadian peers.”

“We note that Canadian spreads have narrowed from their three year average, and caution that further government rate increases can be a harbinger for telecom underperformance. In six of the seven years when government bond yields declined in the last decade, telecom services outperformed, versus their underperformance in the three years where yields increased,” he says.

Goff’s $52.00 target represents a projected return of 18 per cent at the time of publication.