Telus International’s growth plan is right on track, says National Bank

National Bank Financial analyst Richard Tse has maintained his call on TELUS International (Telus International Stock Quote, Chart, News, Analysts, Financials NYSE:TIXT), reiterating his “Outperform” rating on the stock with a target price of US$40/share to yield a potential 28.2 per cent return in his latest analysis on Friday.

Telus International offers services covering digital transformation solutions, digital strategy and consulting and customer experience solutions, with currently over 600 customers across over 20 countries worldwide and serviced by 50 global delivery centres. The Company serves technology, communication and media, fintech and financial services, travel and hospitality, games, e-commerce and healthcare sectors.

Tse’s viewpoint comes after Telus International slightly exceeded industry targets in its most recent quarterly financial reports.

“Revenue and profitability came in ahead of both our and consensus estimates, while cash flow was in line with our expectations,” Tse said. “Management also raised guidance on the back of the strong results. We also note the company increased headcount by 4,784 team members (+9.3 per cent quarter-on-quarter) in the quarter, which we believe is a strong leading indicator for its outlook.”

TELUS International beat multiple National Bank financial benchmarks for the quarter, reporting $533 million in revenue against National Bank’s projection of $523 million and the consensus projection of $529 million. Adjusted EBITDA came in at $131 million compared to National Bank’s projected $123 million and the consensus estimate of $124 million, with adjusted EPS coming in at $0.24/share compared to the projected $0.21/share from both Tse and the Street. (All figures in US dollars.)

Cash flow from operations produced the most significant win, with TELUS reporting $96 million in cash flow compared to a quarter-over-quarter projection of $36 million and $50 million year-over-year projection.

The new quarterly numbers prompted revisions in Tse’s figures, with revenue now projected to come in at $2.18 billion for 2021, a 37.9 per cent increase over the $1.58 billion in revenues from 2020, before a forecasted jump to $2.56 billion in 2022. Adjusted EBITDA is forecast to grow on a similar trajectory, according to the analyst, taking a jump from 2020’s $391.2 million total to a projected $533.9 million for 2021 (36.5 per cent year over year increase), then jumping again to a forecasted $659.4 million in 2022.

Cash is also a strong focal point for TELUS International, as Tse projects it to move from $263 million in 2020 cash flow from operations to $479 million by 2022, while the company’s free cash flow is projected to spike from 2020’s $203.8 million to $370.1 million by 2022.

Consequently, the company’s valuation ratios are projected to show an even greater value in the company going forward, with the EV/Sales multiple dropping from 5.9x in 2020 to a projected 4.3x in 2021, then again to 3.7x by 2022. The EV/EBITDA multiple projects to follow a similar sliding scale, with Tse forecasting a drop from 23.9x in 2020 to an estimated 17.5x in 2021, then dropping again to 14.2x by 2022.

The P/E multiple (44.0x in 2020, estimated 32.4x in 2021 and 24.4x in 2022) and P/FCF per share multiple (41.0x in 2020, 41.4x projected in 2021, 22.6x projected in 2022) are also in strong shape for the company.

TELUS has been busy, having recently completed the acquisition of Playment, a data annotation and vision tools company specializing in 2D and 3D image, video and LIDAR (light detection and ranging) in July.

“We are very excited to welcome Playment and its highly engaged, world-class product and engineering team to our TELUS International family today. The acquisition will meaningfully accelerate our company’s computer vision capabilities and further bolster our position at the forefront of our global peers with respect to technology innovation, strategy excellence and talent,” said Jeff Puritt, president and CEO of TELUS International in the company’s July 6 press release.

“As one of the key enabling technologies for today’s advanced AI applications, computer vision is among the most revolutionary technologies of our generation with applications across every sector of the economy. The technology has become increasingly valuable to tech firms and the wider market as brands seek to uncover solutions for scenarios that typically require complex human judgement from visual and spatial patterns to solve nuanced business challenges, and build innovative, market-leading smart products and services,” Puritt said.

On the second quarter results, Puritt said the results show the success of the company’s strategy to diversify its revenue streams.

“This significant and sustained organic growth, in concert with our ongoing, successful acquisition activity, is key to strengthening our company’s already robust technology stack in order to remain on the leading edge of digital CX innovations and to anticipate and fulfill our clients’ future needs for incremental new economy services to keep up with the evolution of consumer behaviour shifts,” said Puritt in the second quarter press release.

Overall, Tse and his National Bank colleagues maintain their strong belief in TELUS International going forward on account of the company’s positioning within particular growth segments of IT services.

“All in, we continue to believe TELUS International is a company that’s been able to leverage its roots in Customer Experience,” Tse said. “Time has allowed the Company to hone and fortify its offering which has shown in its execution with expectations of outsized growth versus the sector. We reiterate our Outperform rating on TIXT and price target of US$40 based on our multistage DCF.”

Telus International closed Wednesday trading at $30.34/share on the New York Stock Exchange, down 21 cents from its opening figure, and down 6 cents when evaluating its overall change through 2021.