Broadband Expansion And Digital Health Will Drive Future Value

Key Takeaways

• Expansion in broadband, 5G, and digital health drives higher recurring revenues, margin growth, and diversifies earnings beyond core telecom services.
  
• Steady network modernization, innovative technologies, and synergy realization underpin cash flow growth and improve operational efficiency.
  
• Competitive and regulatory pressures, high capital requirements, and execution risks in new ventures threaten TELUS's sustainable growth, profitability, and financial stability.

Catalysts

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

• Persistent growth in broadband adoption, driven by increasing demand for high-speed connectivity (due to remote work, IoT, smart home solutions, and data-heavy applications), continues to underpin strong customer additions and supports higher recurring revenues, particularly as TELUS leverages its expanding PureFibre and 5G roll-out to deliver differentiated bundled offerings; this is expected to boost service revenues and ARPU over time.
  
• TELUS Health and related digital health and virtual care businesses are demonstrating rapid revenue and EBITDA growth (16% and 29% YoY, respectively), underpinned by ongoing product innovation, global expansion, and synergies from recent acquisitions; this strategic push into high-margin, non-commoditized digital wellness segments aligns with Canada's demographic trends and will diversify and increase TELUS's long-term earnings and margin profile.
  
• Sustained investment in network modernization-with a $2B commitment to expand broadband in key markets and asset monetization through the Terrion tower partnership-should drive high incremental returns, operational efficiencies, and deleveraging, resulting in improving free cash flow and net margin expansion as capital intensity moderates.
  
• Deployment and commercialization of next-generation technologies-including AI-powered customer experience platforms, data center assets for "sovereign AI" infrastructure, and private 5G-position TELUS to create new revenue streams, lower cost-to-serve, and enhance its competitive moat, translating into higher future earnings and margin improvements.
  
• Ongoing realization of cost synergies, digital transformation, and cross-selling across Health and core telecom services is expected to further strengthen margin expansion and drive resilient net income growth, as evidenced by the trajectory of increased free cash flow, declining leverage, and positive operational leverage as service mix shifts towards higher-value offerings.

TELUS Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming TELUS's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 7.0% in 3 years time.
• Analysts expect earnings to reach CA$1.5 billion (and earnings per share of CA$0.93) by about May 2029, up from CA$1.1 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CA$1.8 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 27.5x on those 2029 earnings, up from 24.6x today. This future PE is greater than the current PE for the CA Telecom industry at 8.5x.
• Analysts expect the number of shares outstanding to grow by 2.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.06%, as per the Simply Wall St company report.

Risks

• Ongoing ARPU (average revenue per user) decline in the wireless segment, driven by intense competitive pressures, lower overage and roaming revenues, and aggressive pricing, poses a risk to TELUS's ability to sustainably grow revenues and EBITDA per subscriber.
  
• TELUS is heavily reliant on high capital investments in fiber, 5G, and digital infrastructure, and despite some deleveraging initiatives, its elevated debt load and ongoing capex requirements increase financial risk, potentially pressuring net margins and interest coverage for years to come.
  
• Secular headwinds like the potential for slower population growth and changing demographics in Canada could limit new customer acquisition, dampening long-term revenue growth, especially as market penetration approaches saturation.
  
• Regulatory headwinds, including pro-competition rulings and mandated wholesale access, could erode TELUS's pricing power and profit margins by increasing market openness to new entrants and reducing competitive barriers, directly impacting net income and long-term profitability.
  
• Execution risk remains pronounced in TELUS's emerging growth areas, particularly TELUS Health and international ventures, where recent noncash impairment adjustments and elevated goodwill signal challenges in achieving scale or profitability, which may result in future earnings volatility or write-downs.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$20.65 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$30.0, and the most bearish reporting a price target of just CA$17.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be CA$22.0 billion, earnings will come to CA$1.5 billion, and it would be trading on a PE ratio of 27.5x, assuming you use a discount rate of 7.1%.
• Given the current share price of CA$17.55, the analyst price target of CA$20.65 is 15.0% 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.