Sale Of Non-Core Assets Will Generate Up To $7 Billion To Strengthen Balance Sheet

Key Takeaways

• BCE's focus on fiber internet expansion and digital media shift is expected to boost subscriber revenue and long-term margin improvements.
  
• Business transformation and strategic sales aim for significant cost savings and strengthened financial health, supporting future earnings growth.
  
• Competitive pressures, regulatory challenges, and macroeconomic risks threaten BCE's revenue and financial flexibility, impacting investment, margins, and strategic execution.

Catalysts

A communications company, provides wireless, wireline, Internet, and television (TV) services to residential, business, and wholesale customers in Canada.

• BCE expects to enhance its position as a major fiber internet provider with the acquisition of Ziply Fiber, projecting approximately 12 million fiber passings in North America by year-end 2028, which should accelerate subscriber revenue and EBITDA growth.
  
• BCE’s digital media strategy is aimed at shifting from traditional broadcasting to a digital media and content powerhouse, with digital sources now comprising 42% of media revenue, expected to drive long-term revenue and margin improvements.
  
• The company's business transformation efforts, including technology, automation, and simplification initiatives, are targeting $1 billion in cost savings by 2028, which is set to have a substantial positive impact on net margins and earnings.
  
• BCE plans to grow its Business Technology Solutions leadership in the enterprise market with a goal to generate $1 billion in annual revenue by 2030, which should support future revenue growth.
  
• BCE is exploring the strategic sale of non-core assets, with up to $7 billion expected to be generated, which will be used to strengthen the balance sheet and optimize the cost of capital, potentially supporting net earnings through decreased interest expenses.

BCE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BCE's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 10.5% in 3 years time.
• Analysts expect earnings to reach CA$2.7 billion (and earnings per share of CA$2.76) by about March 2028, up from CA$163.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CA$2.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, down from 182.1x today. This future PE is greater than the current PE for the CA Telecom industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 1.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.95%, as per the Simply Wall St company report.

BCE Future Earnings Per Share Growth

Risks

• The competitive wireless environment in Canada, characterized by unprecedented pricing pressures, may continue to impact BCE's revenue and margins adversely if price competition remains intense.
  
• Regulatory challenges, particularly from the CRTC's decisions regarding fiber network resale, could inhibit network investment and growth, thereby impacting long-term revenue potential.
  
• BCE's elevated payout ratio and reliance on maintaining an investment-grade credit rating may constrain financial flexibility, potentially affecting net margins and earnings if economic conditions worsen.
  
• Delays in monetizing noncore assets or adverse outcomes from such divestitures could obstruct the company's deleveraging goals and hurt its balance sheet, impacting future capital allocation and strategy execution.
  
• The macroeconomic environment, including potential tariffs and restrained enterprise customer spending, poses risks to BCE's revenue growth, as it may lead sections of the tech services and media markets to underperform expectations.

Valuation

• The analysts have a consensus price target of CA$35.5 for BCE based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$45.0, and the most bearish reporting a price target of just CA$29.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$25.3 billion, earnings will come to CA$2.7 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 5.9%.
• Given the current share price of CA$32.2, the analyst price target of CA$35.5 is 9.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.