TELUS

We transfer coverage of the Canadian telecom providers: Rogers, BCE, Telus, Quebecor, and Cogeco. These firms account for nearly all of the wireless and wireline services provided in Canada, with all but Cogeco operating national wireless networks, and Rogers and BCE the largest wireline networks.

The bottom line: We lower our fair value estimates for Rogers to CAD 60 from CAD 70, BCE to CAD 40 from CAD 45, Telus to CAD 15 from CAD 20, and Cogeco to CAD 70 from CAD 80. We raise our fair value estimate for Quebecor to CAD 70 from CAD 55. We have lowered our Rogers, BCE, and Telus moat ratings to no-moat from narrow, and maintained our no-moat ratings for Cogeco and Quebecor. Competition in wireless remains elevated, and government-mandated wholesale wireline access has limited pricing growth, making it difficult to achieve attractive returns. We lower our capital allocation ratings for BCE and Telus to Poor from Standard. The firms' balance sheets have become strained, and returns on invested capital have deteriorated due to investments in US expansions and non-telecom businesses, respectively

Long view: Our uncertainty rating for each of our Canadian telecom companies is Medium. The earnings and cash flow generated by these five firms' telecom businesses are relatively stable and recession-proof, but M&A and non-telecom businesses have introduced some uncertainty in recent years. We don't see significant relief on the horizon for wireless competitors until restrictions on Quebecor price increases expire in 2032. We expect Quebecor will then raise prices to earn a sufficient return on its wireless investments. In wireline, we expect growth to be meager as broadband net additions and potential price increases are offset by declining television and wireline phone subscriptions.

Bears say: Slow population growth and reduced immigration have weighed on an already tough wireless industry, and market-wide net additions are unlikely to return to early-2020s peaks.

. Our fair value estimate for Telus is USD 10.50, based on the Aug. 31 exchange rate of CAD 1.39/USD 1, implying an enterprise value-to-EBITDA multiple of 7.4x for our 2026 estimate. Our forecast projects Telus’ telecom business to grow revenue 2% annually across our 10-year forecast.

We think wireless will remain challenged over the medium term, as we expect headwinds to industry growth from decreased immigration. Quebecor will likely continue putting downward pressure on pricing, limiting Telus’ ability to realize higher revenue per user. Quebecor will likely need to raise prices to earn a return on its investments in building out a national network. Additionally, Quebecor will no longer be bound by pricing limits in 2033, when we believe pricing pressure should ease significantly. Until then, we expect Telus to grow wireless subscribers 2.5% annually, while average revenue per user remains largely stagnant.

We believe broadband is where Telus has better prospects, given its upgraded fiber network. We expect Telus to gain broadband market share while average revenue per customer largely holds steady, resulting in low- to mid-single-digit broadband sales growth over our 10-year forecast. While we expect broadband performance to be positive, this will likely be counterbalanced by the rapid decline of television and landline voice services, which will drag down overall sales growth.

We project Telus’ non-telecom businesses, which comprise 25% of total revenue, to grow about 1% annually and become marginally more profitable as they increase customer numbers. While the Telus Health business was on a positive revenue growth trajectory and Telus Digital was improving its margin, consecutive poor quarters have called their prospects into question. We think these businesses are simply too unrelated to Telus’ core competencies for the company to have a competitive advantage over health or digital competitors.

We expect capital spending to continue to decline as a percentage of sales, now that the firm has mostly completed retrofitting its legacy copper network with fiber and deploying new wireless spectrum. Capex as a percentage of sales averages 12% across our forecast, in line with 2025, but significantly below the 17% between 2020 and 2024. We expect maintenance capex for the existing business to be lower than what was needed for the fiber buildout and spectrum deployment of the last five years, helping keep margins steady.

We assign Telus a no-moat rating despite recognizing elements of efficient scale and cost advantages within the company’s telecom business. Telus’ national wireless operations and regional fixed-line network benefit from barriers to entry, fixed-cost leverage, and infrastructure that would be difficult for a new competitor to replicate economically. However, these advantages are largely shared with BCE and Rogers and have not been sufficient to allow Telus to consistently earn consolidated returns materially above its cost of capital. By our measure, Telus hasn’t earned an ROIC above its cost of capital since 2018, and results have materially deteriorated since then.

Canada’s telecom market has historically supported only three to four national-scale wireless operators and several regional fixed-network owners. For a new wireless competitor to be successful, it would need to acquire spectrum, construct a national radio network, develop backhaul and IT infrastructure, and attract customers from established operators while initially spreading these costs across a small subscriber base. Similarly, a new broadband provider would need to invest heavily in rights-of-way, fiber, construction, network equipment, and customer connections before developing sufficient density to earn an acceptable return. Given the already low returns earned by incumbents and a highly mature telecom market, these economics provide Telus with aspects of an efficient-scale advantage.

Telus also benefits from cost advantages across both wireless and broadband services. Spectrum, network equipment, billing systems, customer service, marketing, engineering, and administrative expenses are largely fixed and can be spread more efficiently across a larger subscriber base. The company’s network-sharing arrangement with BCE also reduces unnecessary duplication of wireless infrastructure. At the same time, Telus’ established fiber footprint allows it to leverage existing ducts, central offices, backhaul infrastructure, and field service operations more efficiently than a new competitor could. However, periods of deflationary pricing have occurred due to increased competition among the Big Three and the emergence of Quebecor as a fourth wireless competitor.

These cost advantages primarily serve to protect Telus from excessive margin compression during competitive periods and to compete on price against other incumbents and subscale entrants, rather than to generate excess returns. Regulatory wholesale-access requirements, which have led to aggressive promotional activity and continued investment in spectrum and network capacity, can cause much of the benefit from lower unit costs to be passed through to consumers rather than retained as excess returns.

Our views on Telus Health and Digital provide additional evidence of the firm’s lack of a moat. Telus Health provides employer well-being programs, benefits administration, virtual care, pharmacy and claims management solutions, and healthcare software. Telus Digital offers customer experience, software development, content moderation, data annotation, and AI-related services. Although some offerings become integrated into customer workflows, clients can generally compare vendors, divide work among multiple providers, bring functions in-house, or rebid contracts based on price, service quality, technology, and labor availability. We therefore see insufficient switching costs or differentiation to support durable pricing power. Telus Health’s purchases of LifeWorks and Workplace Options broadened its geographic reach and product portfolio but also added substantial goodwill and intangible assets that require higher future earnings, which will be difficult to generate given the competitive landscape.

We estimate that approximately 25% of the company’s invested capital has been allocated to Telus Health and Telus Digital, neither of which benefits from any meaningful moat-protecting sources. These operations are only loosely related to owning and operating telecom infrastructure and have partly expanded through acquisitions, inflating invested capital. Consequently, a meaningful portion of Telus’ capital base is deployed in competitive, no-moat service industries, diluting any potential advantages present in the telecom business.

In summary, Telus’ telecom assets exhibit some cost-advantage and efficient-scale characteristics, but they have not generated excess returns large enough to offset the no-moat capital employed elsewhere.

Telus’ PureFibre upgrade program allows the firm to compete more effectively with Rogers in Western Canada, its most important market.

Lower capital intensity following completion of Telus’ fiber build should improve cash flow while providing a more attractive service for customers.

A turnaround in Telus Health or Digital would be highly accretive and provide additional stability, operating outside the regulatory pressure of the telecom business.

Quebecor’s national expansion continues to weigh on industrywide wireless pricing, which makes revenue growth difficult.

Regulators' focus on consumer protection is likely to cap the profits that Telus can earn from wireless and broadband services.

Telus Health and Digital have generated poor returns despite increasing revenue, and continued investment will likely destroy additional value.