It’s getting harder for Canadian telecommunications companies to stand out from each other, but analysts predict the entire industry will continue to enjoy a boost from factors outside its control.
Macro conditions, particularly low oil prices and low government bond yields, have contributed to strong results for all major telecom shares this year, and the trend is expected to continue into the third quarter, analysts from Citi Research and RBC Dominion Securities said in research notes Tuesday.
Rogers was first out of the gates early with solid quarterly results – and a surprise leadership change – on Monday, but its competitors are expected to deliver similarly steady results when they report in two weeks, Citi’s Michael Rollins wrote.
“We expect… more of the same for Canadian telecom, with the back-to-school promotional period appearing largely rational,” Rollins wrote. During the last reporting period, the big three companies easily beat analysts expectations in large part due to strong wireless performance despite continuing problems with cord cutting.
Telecom shares tend to move in the opposite direction as oil prices, especially over the medium and long-term, so Rollins is watching for signs to see if recent oil price increases continue. In the short term, rising oil prices could help stabilize Alberta’s economy, he noted, a positive for telecoms with large market shares in the province.
Meantime, telecom stocks have outperformed the S&P/TSX Composite Index with a total return of 17 per cent since the beginning of the year, RBC’s Drew McReynolds wrote.
“Breaking out of the pack is becoming more difficult” for telecoms given the lack of identifiable new growth opportunity or a major competitive advantage, McReynolds noted.
He also pointed to similar valuation ratios between major players as competition between players takes a backseat to the larger environment. He believes this reflects “still tremendous” investor demand for capital preservation given market conditions.
“While more recently we have a seen a modest pullback, the likelihood of a persistent low interest rate environment… and lingering uncertainty as to the timing/magnitude of a recovery in the commodity sectors should continue to provide a ‘constructive enough’ backdrop for Canadian telecom stocks,” he wrote.
But there are some regulatory changes that could come into play, Rollins added. The Canadian Radio-television and Telecommunications Commission is pushing harder for more broadband competition, he wrote, noting its decisions to force providers to sell wholesale access to their fibre-to-the-home connections and to lower wholesale access rates on DSL and cable lines. Still, wholesale represents less than 10 per cent of the market according to the CRTC’s most recent statistics.
The other factor that could shake the market up is Shaw Communications Inc.’s acquisition of Wind Mobile. This could hurt the long-term growth for the Big Three wireless incumbents, McReynolds noted, but he doesn’t expect much change in the next year.
Shaw, BCE Inc. and Telus Corp. are all expected to report financial results the first week of November. Analysts expect strong wireless volumes, relatively flat margins and a better outlook in Alberta.
Source: Financial Post