1. Vincent Lau Equity Research Associate November 11, 2014 Buy
Recommendation
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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. 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. 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. Stock Performance Rogers Inc. 48% TELUS Corp. 132% BCE Inc.
159%
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. 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. 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. Telecommunications Industry
11. Market Share
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. 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. 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. 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. 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
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. 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. Largest CSP by Revenue 2013 Dominant by BCE &
Subsidiaries Strong Penetration by BCE & Subsidiaries Less
Penetration by BCE & Subsidiaries
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. 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. 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. 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