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TELUS International to hit US$50.00, says National Bank

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Solid quarterly results are just what the doctor ordered, says National Bank Financial analyst Richard Tse on global IT company TELUS International (TELUS International Stock Quote, Charts, News, Analysts, Financials NYSE:TIXT). Tse reviewed TELUS’ fourth quarter 2021 financials in a report to clients on Thursday where he reasserted his “Outperform” rating on the stock.

TELUS International, which offers digital customer experience solutions and services, reported its Q4 earnings on Thursday, showing revenue up 36 per cent year-over-year to $600 million and adjusted EBITDA up 12 per cent to $143 million. Adjusted diluted EPS was $0.28 per share. For the full year, TI hit $2,194 million in revenue, up 39 per cent, and adjusted EBITDA of $540 million, up 38 per cent. (All figures in US dollars.)

It was TELUS’s first year as a publicly traded company on both the TSX and NYSE, where the stock bounced around a bunch before ending up even for the year. So far in 2022, TIXT is down 14 per cent.

In his comments on the quarter and year, President and CEO Jeff Puritt pointed to new, high-quality clients won and the company’s global leadership in the growing AI services space as well as being named a ‘Leader’ in the IDC MarketScape: Worldwide Digital Customer Care Services 2021-2022.

“For the eighth consecutive year, we maintained our leading top-quartile global team engagement score, all the while continually adapting aspects of our business to consistently meet and exceed our teams’ and clients’ needs through the prolonged pandemic,” said Puritt in a press release. 

“Moreover, in the fourth quarter, we expanded many of our client and partner relationships and sustained our momentum of new client wins, securing multi-year engagements with one of the top wireless carriers in the U.S., a rapidly growing Australian software firm, a large manufacturer in the global PC gaming market and pioneer in modern computer graphics and a leading American software developer for marketing, sales, and customer service,” he said.

Looking ahead, TELUS International gave its outlook for 2022, calling for revenue in the range of $2,550 to $2,600 million and adjusted EBITDA margin of 24 per cent and adjusted diluted EPS in the range of $1.18 to $1.23 per share.

Tse called the Q4 results and 2022 guidance solid, saying the $600 million in Q4 revenue compared to his $597 million estimate and the consensus $596 million while adjusted EBITDA of $143 million was also in line with his $142 million estimate and the Street’s $140 million.

Tse said TI’s Technology and eCommerce verticals remained the strongest at year-over-year growth of 62 per cent and 49 per cent, respectively, while the company’s adding of about 3,600 employees over the fourth quarter (adding 6.2 per cent to its workforce) signals robust growth entering 2022. 

“As for wage inflation, there’s no getting around that, not for any companies in this sector; yet, what’s more important is whether TI is improving its position in the market, and based on what we heard, it is,” Tse said. 

“To hit this point home, while TI booked a number of new marquee wins in the hundreds of millions, it’s already been able to replenish its pipeline back up to $2 billion. In our view, that tells us the business momentum is building for a Company that’s maintaining best-in-class (industry) margins, despite wage inflation,” he wrote.

Tse said outsized organic growth in IT Services is a key takeaway from the quarterly results, noting that TELUS International is positioned within the higher relative growth segments of the IT Services spectrum with services such as content moderation, digital customer experience and data annotation along with its growing monetization of advanced technologies like AI.

“We believe TI is overlaying such unique technology to their services that offers the potential to expand margins by augmenting labour. Bottom line, TI has positioned itself within the crosshairs of growth that’s not fully reflected in its valuation,” he said.

On the M&A front, Tse said he fully expects more acquisitions in 2022, noting that the Q4 featured strong cash from operations of $64 million, allowing the company to continue de-levering its balance sheet after the acquisition of Lionbridge AI a year ago.

“TI has been able to lower its leverage ratio (Net Debt/Adj EBITDA) to 2.1x at the end of Q4 F21, down from 4.1x in Q4 F20 (immediately after closing the [Lionbridge] acquisition). If you’ve been following our research, you’ll recall our view that TI is a disciplined service provider having showed the ability to de-lever quickly after meaningful transactions. We believe a leverage ratio towards the lower end of its target range (2-3x), $831 million in available liquidity combined with a history of ~1 large acquisition a year, suggests we should see another move in F22,” Tse wrote.

With his reiterated “Outperform” rating, Tse also maintained his $50.00 target price for an estimated total return at press time of 76.5 per cent.

About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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