T stock is long-term winner, Desjardins says

2024 will be a year that is characterized by more visibility for Canadian telecom stocks, and it should be a decent one for Telus (Telus Stock Quote, Chart, News, Analysts, Financials TSX:T), particularly in the second half of the year.

That’s the opinion of Desjardins analyst Jerome Dubreuil, who in a comprehensive research report issued, December 19, provided an outlook for Canadian telecom stocks in which he named Rogers as his top pick in the space and Telus as his third favourite.

“It has been an eventful 2H23 for Canadian telecoms with CRTC decisions on MVNO rates and temporary FTTH access, as well as a dynamic Black Friday, the analyst wrote. “While the full impact of these events may not yet be in companies’ results or retail telecom market dynamics, at least we now have a much better idea of what the telecom sector is working with. We also expect EBITDA growth to be supported by continual cost consciousness in the sector.

Dubreuil, who has a “Buy” rating and price target of $27.00 on the stock, describes Telus as a “longer term play” and says he likes its prospects better in the second half of the year than the first.

“Our Buy recommendation on T is largely based on longer-term growth opportunities as we believe 2024 consensus is high and TIXT (Telus International) might turn the corner only in 2H24,” he wrote. “TIXT could work better in 2H24. Even after excluding issues with TIXT’s second largest client, we estimate that recent organic growth at TIXT was roughly flat. Management has indicated its sales funnel is strong, but the company is not immune to global IT trends of prolonged sales cycles and extended decision-making processes. We believe T’s stock could gain momentum once TIXT’s growth reaccelerates, although we are not out of the woods yet. Indeed, management expects low single digit growth in 2024, but consensus is at 4.5%. TIXT has been focusing on cost control recently and will lap easier comps in 2H24, which we believe is a better setup for the company. We also highlight that TIXT was excluded from the S&P/TSX Composite Index on December 1, which has probably impacted the stock’s recent performance.”

While Dubreuil thinks the street is a bit too optimistic about T right now, he does see some numbers improving.

“We forecast a big jump in FCF in 2024, but the Street’s forecast is more optimistic. We project a considerable increase in 2024 FCF to C$2.3b, increasing from the anticipated C$1.5b in 2023. It is worth noting that our 2024 FCF expectations are currently 4% below consensus of C$2.4b. The company’s restructuring plan is expected to yield significant cost savings, fostering decent EBITDA growth. However, our view is that 2024 consensus EBITDA appears optimistic; we currently forecast C$7.45b, which is 3% below consensus. Investors should be mindful of the company’s reduced pace of M&A.”