Strong Customer Growth And Diversification Will Drive Future Success

Key Takeaways

• Strong customer growth in mobility and fixed services, coupled with low churn, suggests positive future revenue and earnings growth.
  
• Diversification through health and agriculture sectors, alongside strategic investments and cost efficiencies, supports margin expansion and long-term profitable growth.
  
• TELUS faces pressure on revenue growth, profitability, and financial flexibility due to competitive pressures, high debt, and execution risks in deleveraging strategies.

Catalysts

Provides a range of telecommunications and information technology products and services in Canada.

• TELUS is achieving significant customer growth across its mobility and fixed services, with industry-leading telecom net additions and low postpaid mobile phone churn, suggesting a positive impact on future revenue and earnings growth.
  
• TELUS Health and TELUS Agriculture & Consumer Goods businesses are seeing strong revenue and EBITDA growth, contributing to diversified sources of future profitability and potentially improving net margins through higher-margin services.
  
• The company is focused on cost efficiency, including realizing synergies from its acquisition of LifeWorks and executing real estate and copper monetization programs, which could boost EBITDA and free cash flow.
  
• Strategic investments in broadband network expansion and advanced technology (e.g., PureFibre) support ongoing revenue growth and margin expansion, with a focus on maintaining industry-best capital intensity and driving long-term profitable growth.
  
• TELUS aims to achieve a net debt-to-EBITDA ratio of approximately 3x by 2027, allowing for financial deleveraging and accompanied by a long-term dividend growth program, enhancing shareholder returns and potentially improving EPS.

TELUS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TELUS's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 9.3% in 3 years time.
• Analysts expect earnings to reach CA$2.1 billion (and earnings per share of CA$1.36) by about April 2028, up from CA$993.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$2.3 billion in earnings, and the most bearish expecting CA$1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, down from 30.0x today. This future PE is greater than the current PE for the CA Telecom industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 2.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.82%, as per the Simply Wall St company report.

TELUS Future Earnings Per Share Growth

Risks

• TELUS experienced a decline in mobile phone ARPU (Average Revenue Per User) by 3.6%, which indicates ongoing competitive pressures that could negatively impact future revenue growth in its mobile segment.
  
• Higher financing costs due to increased long-term debt and higher interest rates were noted, potentially affecting net margins and earnings as these costs could reduce overall profitability.
  
• TELUS' leverage ratio was reported at 3.9x at the end of 2024, with a goal to reduce it to approximately 3x by 2027, indicating a high level of indebtedness that could pressure cash flow and affect investment capacity.
  
• Approval and implementation of asset divestitures or utilization of infrastructure assets for deleveraging strategies may pose an execution risk, potentially impacting financial targets if not effectively realized.
  
• Despite strong EBITDA growth, TELUS faced challenges in free cash flow, coming under target partly due to higher-than-expected cash impacts and restructuring costs, risking short-term financial flexibility.

Valuation

• The analysts have a consensus price target of CA$22.985 for TELUS 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$29.0, and the most bearish reporting a price target of just CA$20.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$22.1 billion, earnings will come to CA$2.1 billion, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 5.8%.
• Given the current share price of CA$19.68, the analyst price target of CA$22.99 is 14.4% 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.