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  1. 1. Vincent Lau Equity Research Associate November 11, 2014 Buy Recommendation
  2. 2. Disclaimer Brock Finance & Investment Group produces independent investment research and periodic research updates. Brock Finance & Investment Group is not registered as a securities broker-dealer or an investment adviser. Readers should review all available information on any company mentioned, which may include, but are not be limited to, the company's annual reports, quarterly reports, press releases and other regulatory filings. Our product is intended solely for informative purposes and is not solicitation or an offer to buy or sell any security. Additionally, it is not intended to be a complete description of the securities, markets, or developments referred to in the material. Brock Finance & Investment Group cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information and the suitability of any particular investment. Brock Finance & Investment Group in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in our web site. Furthermore, Brock Finance & Investment Group accepts no liability whatsoever for any direct or consequential loss arising from any use of our product, web site, or other contents. The reader bears responsibility for his/her own investment research and decisions and should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. The information presented on this site is subject to change without notice, and Brock Finance & Investment Group assumes no responsibility to update this information. Brock Finance & Investment Group members may have a long/short position in the securities mentioned and may make purchases and/or sales for their own account of those securities prior or after dissemination of relevant reports. Such conflicts, if any, will be disclosed in the relevant research reports and updates.
  3. 3. Table Of Contents Company Overview Industry Outlook Competitive Environment & Industry Five Forces Investment Thesis Internal Analysis External Analysis Valuation Recommendation Risk and Catalyst
  4. 4. Company Overview Company The largest communication company in Canada Service Covers 98% of Canadian Population Fibe TV coverage of 4.3 million households Been industry leader in charities and display strong CSR Over 55, 000 employees President & CEO George Cope Executive Vic President & CFO Slim A. Activities Bell Wireline, Bell Wireless, Bell Media, Bell Aliant Landline, Internet Service, mobile telecom, IP TV (Fibe), radio broadcasting, print, data solution, Cloud computing, IT service, network management Provides basic telecom and entertainment services to consumers Provides communication services, business network, data hosting for institutions and businesses Services in every province and territory Telecom Industry Leader in industry Oligopoly Demanding Infrastructure Threat to TV distributors/ broadcasters by internet streaming media Horizontal Integration Industry Strong Competitive Advantage, steady performance, solid income
  5. 5. Stock Price BCE TSE & NYSE Stock Price $53.51 (11/17/2014) 52 Week Range 44.75 - 53.74 Market Cap 44,927,437,297 P/E Ratio 17.7 P/B Ratio 4.161 Dividend $2.47 (4.836%) EPS 2.98 5 Year Chart 1 Week Chart 1 Day Chart
  6. 6. Stock Performance Rogers Inc. 48% TELUS Corp. 132% BCE Inc. 159%
  7. 7. Core Business Bell Mobility Virgin Mobile Canada Solo Mobile PC Mobile Provide 4G LTE Smartphone Provider Mobile Internet International Calling Television Broadcasting & Production Pay-per view, premium programming Multiple TV programs (28) Radio broadcasting (30) Internet Websites Media Advertisements Out-of- home advertisements Multiplatform media Home Phone Provider Satellite Provider Internet Provider Installation Services Atlantic IP TV provider Internet Security Services Home Security NexGen Cloud computing Data centre solution Network Security Professional IT Web hosting Business applications (automated business processing, online presence) Network (voice, data, wireless, video)
  8. 8. Industry Trends Investment in Broadband Fiber Deployment Expanding IP TV that is higher quality than cable Increase expenditure to increase internet speeds (FTTN) Wireless Substitution 21% households are wireless households BCE drop 1.2% in wireline revenue TV Everywhere Increase popularity in accessing TV on multiple screens and locations TV and internet service providers introducing substitutions TV providers demand to limit access to specific content for users Business customer adoption of IP-based services Telecommunication companies required to provide further IT services More adoption to IP-based platforms (e.g. call, data) cutting margins Database solutions are being managed by Enterprise software and computer hardware companies
  9. 9. Competitive Environment Wireline price pressure Low cost alternative products Lower creditworthiness in customers Integration of multiple tech. platforms Increase smartphone users Greater demand for after sale service Increase demand for bandwidth Upgrade and deploy networks consistently and maintain operational capability Generate higher ARPU Demand for customer services drove the company to invest in 3 more call centers It is very important to provide the latest smartphones technology for Bell Canada BCE introduced their IP Tv to respond to competitive IP TV providers
  10. 10. Telecommunications Industry
  11. 11. Market Share
  12. 12. Porters Five Forces Wireline Wireless Media 0 1 2 3 4 5 Supplier Power Threats to Entry Bargaining Power of Buyers Threats of Substitution Competitive Rivalry 0 1 2 3 4 5 Supplier Power Threats to Entry Bargaining Power of Buyers Threats of Substitution Competitive Rivalry 0 1 2 3 4 5 Supplier Power Threats to Entry Bargaining Power of Buyers Threats of Substitution Competitive Rivalry Oligopoly Other forms of voice communication (e.g VoIP) Buyers able to negotiate prices Due to high capital cost, less entry of competition Oligopoly Rivalry has set price on products Consumers have options to opt out of company CRTC allows greater freedom for consumers Government ability introduce US co. Competitors could use existing infrastructure Highly Competitive Market Threat of IP TV and free access content has reduced revenue Programs are highly expensive, thus less entry Customers have relatively week buying power for TV services Program creaters have ability to chose between companies to show content
  13. 13. Internal Analysis Media expansion to further increase exclusive content and availability to customers Interlink other services to media (e.g. Mobile TV) Offer highly demand on-demand programming (HBO) Extend partnership for media rights on exclusive sports content (e.g. Hockey Canda, CFL pre-season) Create new content for Canadian media (Amazing Race Canada #1 program in 2013) Share common interest with government bodies though creation of Canadian content Management & Dividend Payout Policies 69% dividend growth 65-75% of free cash flow for dividend Established CEO and EVP compensations and stock option plan Caps on annual bonus payouts & retirement plans Annual say on pay vote Strong oversight on cash control Excess cash for contribution on pension plan Share buyback plans $1.7 billion Strategic acquisitions, investments Wireless Acceleration Media Expansion Wireless segment increased blended ARPU 2.6% 700MHz auction secure rights for 480M Expansion in 4G LTE broadband Expand availability of Mobile TV to 70 channels Introduction of 26 new devices and tablets Develop secure mobile payment apps for RBC Postpaid net additions up 38% Service revenue growth highest at 48%
  14. 14. External Analysis Competitive Landscape Regulatory Condition Regulatory Condition Buyers have option for similar products Limited Subscriber growth (YTD 146, 274) Lower Tier small rivals capturing market share with cheaper alternatives (5%) Non-telecom providing IP technology to substitute for traditional services Other telecommunication company practice horizontal integration Competition for exclusive content coverage, events, and other mediums Fear of US telecommunication companies penetration into Canada All services are relatively at common prices, margins lower for competitive pricing BCE is able to secure exclusive mobile devices and keep prices attractive CRTC oversees the telecommunication industry Regulate prices, transfer of ownership, billing practices, business practices CRTC and competition bureau have been issues with regards to telecom mergers/ acquisition activities Altered the 3 year contract for wireless contracts Demanded for greater bandwidth on companies Allowed customers to switch with different providers without penalties Attempt to introduce US telecommunication companies into Canada Federal Government has also been strengthening competitiveness through sale of 700Mhz spectrum
  15. 15. Thesis Argument 1 Argument 2 Strong Fundamentals and Multiples showing well-valued stock to acquire. The forecast displays companys ability to continue increasing its dividends. The company is able and willing to continue to bring strong performance in the future years. The companys ability to strategically adapt to the change in the sector is seen as its strongest asset.
  16. 16. Valuation- Discounted Cash Flow Revenue Growth Conservative at 3.2% Tax Rates kept low due to revenue activities Little Increase source from wireline segment Capital Expenditure Increase from fibre optic & data/ internet equipment Argument 1: Strong Fundamentals and Multiples showing well-valued stock to acquire. Implicit Share Price $72.18 Current Share Price $53.15 Implied Upside 36% 2015 2016 2017 2018 2019 2020 Sales 21,381 21,888 22,425 22,991 23,591 24,226 Gross Profit 8,478 8,725 8,986 9,262 9,553 9,860 % margin 40% 40% 40% 40% 40% 41% EBIAT 3,571 3,700 3,835 3,977 4,128 4,287 Plus: Depreciation & Amortization 3,543 3,614 3,689 3,769 3,854 3,943 Less: Capital Expenditures (3,543) (3,632) (3,727) (3,828) (3,934) (4,046) Less: Increase in Net Working Capital 88 (79) (83) (89) (96) (104) Unlevered Free Cash Flow 3,658.89 3,602.27 3,713.52 3,829.93 3,951.73 4,079.18
  17. 17. Comparables- Mulitples Analysis Argument 1: Strong Fundamentals and Multiples showing well-valued stock to acquire. FCF Yield EV/ EBITDA EV/ Revenue P/E P/CFPS 2015 2015 2015 2015 2014 2015 TELUS 0.04 7.3 2.63 20.98 23.61 23.42 Rogers 0.08 6.5 2.37 12.36 12.21 12.98 Manitoba Telecom Services 0.05 4.7 1.64 20.39 18.86 19.42 Shaw 0.06 7.3 3.17 19.64 17.21 13.73 Cogeco 0.09 7.3 2.74 17.91 11.35 9.21 Median 0.06 7.29 2.63 19.64 17.21 13.73 Average 0.06 6.62 2.51 18.25 16.65 15.75 BCE Inc. 0.06 7.3 2.72 18.41 15.60 14.71
  18. 18. EPS of Big 3 Telecom companies Due to non-recurring expenses that reduced EPS by .44 Related to Astral, real-estate cost, workforce reduction, restructuring of workforce from Astral 1.50 1.70 1.90 2.10 2.30 2.50 2.70 2.90 3.10 3.30 3.50 2009 2010 2011 2012 2013 TELUS Rogers Average BCE Inc. Argument 1: Strong Fundamentals and Multiples showing well-valued stock to acquire.
  19. 19. Revenue Argument 2: Company has very strong potential in Revenue growth. Wireline revenue was down 1.2% from 2012. Wireless and media have seen strong revenue growth at 4.7% and 17.7% 0 2000 4000 6000 8000 10000 12000 Wireless Wireline Aliant Media inMillionsofCDN $51.7 $61.73 50 52 54 56 58 60 62 64 2009 2010 2012 2013 2014 Q1 2014 Q2 2014 Q3 Blended ARPU
  20. 20. Largest CSP by Revenue 2013 Dominant by BCE & Subsidiaries Strong Penetration by BCE & Subsidiaries Less Penetration by BCE & Subsidiaries
  21. 21. Revenue Projection 1 Standard Deviations between $24 billion & $21 billion within next 5 years Revenue growth is stable at 3.2%, at strong pace comparing with competition Transition from Wireline to Wireless revenue Slow transition as wireless will become capital intensive $19,000,000,000.0 $20,000,000,000.0 $21,000,000,000.0 $22,000,000,000.0 $23,000,000,000.0 $24,000,000,000.0 $25,000,000,000.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Revenue Projection Argument 2: Company has very strong potential in Revenue growth.
  22. 22. Recommendation Price & Time DCF Implied Price $72.18 EV/ EBITDA 2015E $50.76 P/ CFPS 2015E $64.55 Weight70% Weight15% Weight15% Target Price:$67.82 Entry price $47.50 Positive Uptrend since mid- 2013 Reaching all time highs Trading well above 200 DMA Stock should see a short period correction to $48- $47 Strong indication of upward channel for long period
  23. 23. Price Target Buy Recommendation Target Entry Price:$47.50 Implicit Price: $67.82 Return 43% 5 years Strong signs of sustainable growth of 2.3- 3% year over year. It is able to generate the high free cash flow, allowing flexibility. BCE is able to re-innovate itself and continue to increase dividend growth (11 times since 2008). Stock Performance has been amazing year over year Investors very bullish on stock after strong earnings every quarter
  24. 24. Risk and Catalyst CTRC changes in consumers purchasing freedom Consumer increase delay or reduction in purchases Other industries introducing substitutes Continuous update to technology Limited subscriber growth Shaw and Roger introduce Shomi Recent auction of 700 Mhz spectrum TV providers roll out more exclusive program content HBO and other premium contents broadcast through cable providers CRTC hostility to internet content providers Demand over how Canadians receiving and paying for TV services Attempt to start regulating video streaming service Telecom complaints drop 17% Increase wireline subscribers 119,000 Risk Catalyst
  25. 25. Appendix
  26. 26. Valuation- Discounted Cash Flow Revenue Growth Conservative at 3.2% Tax Rates kept low due to revenue activities Little Increase source from wireline segment Capital Expenditure Increase from fibre optic & data/ internet equipment Argument 1: Strong Fundamentals and Multiples showing undervalued stock 2015 2016 2017 2018 2019 2020 Sales 21,381 21,888 22,425 22,991 23,591 24,226 % growth 2% 2% 2% 3% 3% 3% COGS 12,903 13,163 13,438 13,730 14,039 14,366 Gross Profit 8,478 8,725 8,986 9,262 9,553 9,860 % margin 40% 40% 40% 40% 40% 41% SG&A 122 125 128 131 135 139 EBITDA 8,356 8,601 8,858 9,130 9,418 9,721 % margin 39% 39% 40% 40% 40% 40% Depreciation & Amortization 3,543 3,614 3,689 3,769 3,854 3,943 EBIT 4,814 4,987 5,169 5,361 5,564 5,778 % margin 23% 23% 23% 23% 24% 24% Taxes 1,243 1,287 1,334 1,384 1,436 1,491 EBIAT 3,571 3,700 3,835 3,977 4,128 4,287 Plus: Depreciation & Amortization 3,543 3,614 3,689 3,769 3,854 3,943 Less: Capital Expenditures (3,543) (3,632) (3,727) (3,828) (3,934) (4,046) Less: Increase in Net Working Capital 88 (79) (83) (89) (96) (104) Unlevered Free Cash Flow 3,658.89 3,602.27 3,713.52 3,829.93 3,951.73 4,079.18 Discount Period - 1.00 2.00 3.00 4.00 5.00 Discount Factor 1.00 0.97 0.95 0.93 0.90 0.88 Present Value of Free Cash Flow $ 3,659 $ 3,512 $ 3,529 $ 3,548 $ 3,569 $ 3,592
  27. 27. Valuation- Comparable Companies FCF Yield EV/ EBITDA EV/ Revenue P/E P/CFPS 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 TELUS 0.04 0.04 7.1 7.2 7.3 2.5 2.6 2.63 18.93 19.93 20.98 23.80 23.61 23.42 Rogers 0.09 0.08 6.9 6.7 6.5 2.7 2.5 2.37 12.91 12.63 12.36 11.47 12.21 12.98 Manitoba Telecom Services 0.05 0.05 5.7 5.2 4.7 1.9 1.8 1.64 22.98 21.64 20.39 18.31 18.86 19.42 Shaw 0.05 0.06 6.5 6.9 7.3 2.8 3.0 3.17 18.03 18.82 19.64 21.56 17.21 13.73 Cogeco 0.07 0.09 5.1 6.1 7.3 2.2 2.5 2.74 16.59 17.23 17.91 13.99 11.35 9.21 Median 0.05 0.06 6.51 6.72 7.29 2.50 2.54 2.63 18.03 18.82 19.64 18.31 17.21 13.73 Average 0.06 0.06 6.26 6.41 6.62 2.43 2.46 2.51 17.89 18.05 18.25 17.83 16.65 15.75 BCE Inc. 0.06 0.06 7.3 7.1 7.3 2.9 2.8 2.72 17.05 17.79 18.41 16.53 15.60 14.71
  28. 28. Valuation- Comparable Companies (continued) Basic EPS Current Stock Price Size (Market Cap) 2011 2012 2013 TELUS 40.89 25,012,242,162.00 1.88 2.03 2.02 Rogers 42.75 17,197,593,035.00 2.88 3.28 3.24 Manitoba Telecom Services 28.49 2,215,412,371.00 2.55 2.17 -1.24 Shaw 29.57 13,022,522,701.00 -0.31 -0.72 1.84 Cogeco 63.53 2,121,560,907.00 4.62 3.8 4.3 Average 41.046 11,913,866,235.20 2.324 2.112 2.032 BCE Inc. 50.97 42,502,276,782.00 2.88 3.39 2.55
  29. 29. Business Segment Growth 2012- 2013 Business Segment 2013 2012 Growth Wireless 5849 5586 5% Wireline 10097 10220 -1% Aliant 2759 2761 0% Media 2557 2183 17%
  30. 30. Buy Recommendation Vincent Lau Equity Research Associate November 11, 2014