Outsized revenue growth expected for TELUS International, says National Bank

After investor meetings with management, National Bank of Canada Financial Markets analyst Richard Tse has shored up his confidence about TELUS International (Telus International Stock Quote, Chart, News, Analysts, Financials NYSE:TIXT), maintaining an “Outperform” rating and target price of $50.00/share in an update to clients on Monday.

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.

Tse’s updated analysis comes after he, along with other National Bank of Canada analysts, met with Telus International management, with Tse saying,

“Overall, everything we heard reinforced our investment thesis on the name with an increasingly positive bias each time we “meet” this Company given the consistent messaging. That messaging is to drive profitable growth for a name that’s positioned in the growth segments of IT Services. Those in-demand services such as Content Moderation, Digital CX and Data Annotation are increasingly being coupled with advanced technologies like AI,” Tse wrote.

“As TI increasingly overlays unique technology to its services, we see the potential for margin expansion,” Tse added. “Together, the combination of outsized revenue growth and potential for expanding margins represent an opportunity in this stock.”

Over the course of the meeting, Tse noted a number of key takeaways and insights from the TELUS International team.

In particular, Tse noted TELUS International’s acknowledgment that wage inflation had impacted their business to the point of issuing slightly softer EBITDA guidance for the upcoming quarter, but given the company’s place in the technology services industry, the news wasn’t a surprise to Tse, who indicated that the company could potentially see an increase in its margins through automation in the future.

On the topic of company expansion, Tse’s understanding was that acquisitions remain a key growth driver for TELUS International, with the company having a number of potential targets, but going about its business in a disciplined manner, which led to the company having $86 million in cash flow from operations in its most recent quarterly results. 

In the meetings, TELUS management indicated an expectation for increased breadth and velocity of acquisitions over the next 12 months, per Tse, and the company not ruling out the possibility of tucking in other TELUS assets.

Though acquisitions play a key role in the company’s growth, Tse also singled out the company’s positive organic growth, driven by strategic decisions to pursue select markets, with the recent acquisitions of Lionbridge and Playment providing a solid base for one of TELUS International’s leading growth markets, the Tech and Games sector.

TELUS International’s most recent quarterly financial results were released on November 5, headlined by revenue of $556 million for 30 per cent year-over-year growth, paired with adjusted EBITDA of $137 million, good for a 23 per cent year-over-year increase.

“Our unique caring culture is the bedrock of our success, enabling TELUS International to attract, engage and retain top global talent,” said Jeff Puritt, President and CEO of TELUS International in the release. “Without a doubt, our team is the driving force behind our ability to anticipate and meet our clients’ need for more complex end-to-end digital transformation services and the accelerated adoption of next-gen digital customer experience solutions across all sectors of the global economy.”

Tse forecasts the company’s financial future to remain in 10 figures, as he projects the company’s revenue to reach $2.19 billion in 2021 for a potential year-over-year increase of 38.5 per cent, punctuated by another jump to a projected $2.57 billion in 2022, yielding potential year-over-year growth of 17.2 per cent. (All figures in US dollars.)

Meanwhile, Tse’s belief in potentially expanding margins partially plays out in his EBITDA projections, with his 2021 projection of $538.7 million hovering at roughly the same margin (24.6 per cent) as 2020 before jumping to a projected $649.2 million in 2022, producing a margin of 25.3 per cent.

From a valuation perspective, Tse’s analysis shows TELUS positively all the way around, as he projects the company’s EV/Sales multiple to drop from the reported 6.3x in 2020 to a projected 4.5x in 2021 before lowering again to a projected 3.9x in 2022. The EV/EBITDA multiple follows a similar path, with Tse projecting a drop from the reported 25.4x in 2020 to a projected 18.5x in 2021, then falling again to a projected 15.3x in 2022.

“All in all, we 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.”

Overall, Telus International’s share price is up 11.7 per cent on the New York Stock Exchange, though its momentum has slightly cooled after reaching a high point of $39.69/share on October 25.

At press time, Tse’s $50.00 target represented a projected one-year return of 50.7 per cent.