Telus’ Great Management Leads to Consistent Telecom Growth With Kickers From Peripheral Businesses

Equity Analyst

Matthew Dolgin

We think Telus’ wireline unit is its best business and the one most likely to drive future returns. The firm has replaced most of its legacy copper network with fiber, significantly upgrading the quality. We think this strategy has set Telus up for a sustained period of success. Telus has already taken significant market share from Shaw, its primary competitor in the western Canadian geographies where it competes. In addition to further success we expect in adding subscribers because of the better capability the fiber network offers, we believe the fiber network gives Telus more pricing power and is more efficient, leading to reduced costs.

We also see Telus with strength in its wireless segment, but we simply think it will remain one of the leaders in a very competitive market. With just less than 30% share of Canadian wireless customers, it is one of the Big Three national providers, along with Rogers and BCE, that collectively serve almost 90% of the market. It also has a network-sharing agreement with BCE that we think makes the service it provides second to none. However, we think a combination of Quebecor and Freedom Mobile will give Canada the strongest fourth competitor the country has seen in many years. Nonetheless, we expect Telus' wireless business to benefit from subscriber growth throughout the industry. We think that Telus' network strength will help it keep pace with peers but that fierce competition will weigh on pricing power throughout the industry. 

Unlike its peers, Telus has also made substantial investments in businesses that are not typically related to telecom. Although the firm generally thinks its telecom network will be an advantage for those businesses, we think they have a high degree of uncertainty and risk. These peripheral businesses--namely in the health, security, and agriculture industries, are typically small and fast-growing but not necessarily profitable. We generally see high potential upside but also the possibility for a drag on returns on invested capital. The firm also maintains a majority stake in Telus International, an IT Services outsourcing and consulting firm that Telus carved out TI via an IPO in early 2021.

Business Strategy & Outlook

Telus' narrow moat stems from efficient scale and cost advantages in its wireless business and efficient scale in wireline. Telus' adjusted returns on invested capital have been depressed over the past three years—averaging about 7% versus 10%-11% in the preceding decade—as the firm has participated in multiple big wireless spectrum auctions and accelerated its capital spending to rebuild its fixed network with fiber. However, we think 2023 is an inflection point that will mark the start of increasing ROICs each year over our five-year forecast. The firm largely completed its new fiber buildout in 2022, and we don’t expect spectrum auctions in the next couple of years to be nearly as big as those in 2019 and 2021. 

In wireless, Telus is one of the three big national competitors, and we believe these three firms have solid moats that protect them from any current or future competition. Rogers, BCE, and Telus share 90% of the total market and operate with an efficient scale. Building and maintaining a wireless network is very capital-intensive, and we think the modest economic returns that national incumbents generate typically result in prospective national competitors either unable to fund a competing network or deciding against it. Even regulatory incentives announced in 2021 coaxed only Quebecor, which already had a thriving wireless business in Quebec, to expand nationally, and we think Quebecor’s future success will depend on its acquisition of Freedom Mobile, which already operated in complementary provinces. With the scale that the incumbents have come significant cost advantages over all smaller rivals, as they can spread their marketing, overhead, and other fixed costs over comparatively massive subscriber bases.

Nearly all of Telus' wireline footprint is in British Columbia and Alberta, where in both places it is the incumbent local exchange carrier. Telus' primary competitor in those provinces is Shaw, and the two companies address virtually the entire market with similar shares. We see the two companies operating with efficient scale, as hypothetical competitors would be starting from scratch and needing to build a very expensive network to compete. Historically, Telus competed with an inferior network, as its legacy copper network couldn't’t compare to the speed and quality of the hybrid fiber-coax network of Shaw. However, Telus has now upgraded most of its footprint with fiber to the home. Apart from the speed and the higher-quality service, FTTH has several advantages for Telus, including lower operating expenses due to less maintenance and customer calls, lower churn rates, and higher average revenue per user. We expect improved margins and a diminished cost disadvantage relative to Shaw over the next few years, and we think Telus has positioned its network as an even stronger competitor.

The biggest factor keeping us from labeling Telus a wide-moat company is the ever-present threat of further regulation in the telecom industry. Management itself has stated that historically, onerous government intervention has been more problematic than competition from other companies. Telecom services are sometimes viewed as public utilities (a classification that the U.S. government used regarding broadband internet when it was defending net neutrality), and the government tends to keep a watchful eye over service offerings, competition, and network requirements. In the wireless space, the government seemingly favors more robust competition for the top three providers, as evidenced by it historically giving other competitors favored status in spectrum auctions, and it has mandated minimal levels of service offerings with a capped price for national providers. In wireline, we believe the Canadian government views broadband as a public good to some extent, which leaves a threat of things like price caps, mandatory network sharing, or other means of enhancing competition. With that in mind, we cannot assume that the environment that the firm has historically navigated will persist, and our level of confidence in long-term projections is tempered by the industry's sensitivity to government influence.

Narrow

Economic Moat

TELUS

Public Mobile is a self-serve, prepaid Canadian mobile brand which is owned by Telus.Launched on March 18, 2010, Public Mobile was one of several new Canadian cellphone providers that started in 2009–10 after a federal government initiative to encourage competition in the wireless sector.

Public Mobile

Koodo Mobile is a Canadian mobile flanker brand started by Telus in 2008 and mostly oriented toward younger customers. Koodo differs from its parent Telus by not requiring a fixed term contract. Koodo currently provides postpaid and prepaid services. Being a subsidiary of Telus, Koodo has been able to offer extensive coverage and a strong presence in mobile retailers. This allowed Koodo to gain a presence nationwide.

Koodo Mobile

TELUS Corp. is a telecommunications company, which engages in the provision of telecommunication services and products primarily for wireless and wireline voice and data. It operates through the following segments: TELUS Technology Solutions (TTech) and Digitally-led Customer Experiences–TELUS International (DLCX). The TTech segment includes network revenues and equipment sales arising from mobile technologies, data revenues, healthcare software and technology solutions, voice and other telecommunications services revenues, and equipment sales. The DLCX segment is composed of digital customer experience and digital-enablement transformation solutions, including artificial intelligence and content management solutions, provided by TELUS International. The company was founded on October 4, 1990 and is headquartered in Vancouver, Canada.

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