Financial analysts say telecoms ‘resilient’ to impact of COVID-19

Canada’s telecommunications sector is a “constructive place to hide” for financial investors as markets continue to feel the impact of COVID-19, RBC Capital Markets analyst Drew McReynolds says. In a briefing note to investors on Wednesday, McReynolds said he believed telecom stocks currently ranked well on “relative earnings resilience and valuation.” “In addition to the sector’s reasonable leverage and defensive dividend-paying characteristics in an exceptionally low interest rate environment, we see relatively manageable direct COVID-19 impacts,” McReynolds said. He revised the predicted financial performance of companies below the low-end of RBC’s 2020 forecasts because of COVID-19, factoring in a short-lived recession in Canada for the rest of 2020 where economic growth returns in 2021, consistent with wider forecasts by RBC Economics. However, McReynolds noted there was “no question” that the direct and indirect impacts of COVID-19 would remain “a highly uncertain and fluid situation for weeks to come.” COVID-19’s impacts on the telecom sector could include supply chain constraints, lower wireless roaming and internet/wireless overage revenue, lower wireless and wireline subscriber additions and network investment required due to increased data consumption, McReynolds said in his note. Telecommunications companies have already implemented a range of measures in response to the virus, suspending data overage fees on home internet services, closing retail stores and getting their employees to work from home as much as possible. Other impacts listed by McReynolds also include costs of precautionary COVID-19 measures for employees, lower advertising revenues across traditional media assets, a potential growth in customers upgrading their wireless, internet or cable and streaming plans due to the huge increase in Canadians working from home, as well as temporary concessions to customers made because of the virus’ financial impact on households, including the waiving of fees and charges, and deferred bill payments. But those impacts are “relatively manageable” due to how essential telecom services are to Canadians and the “sheer magnitude of disruptive near-term impacts” that COVID-19 will have on major parts of the Canadian economy, McReynolds predicts. In a separate briefing note issued on Tuesday evening, Scotiabank analyst Jeff Fan said he believed his financial estimates for Canada’s telecom and cable sectors would be “more resilient than media and many other sectors,” but noted his estimates were not immune to reductions. Focusing on companies’ revenue for wireless overage and roaming, wireline business customers, media advertising and sports and entertainment — areas identified as potentially affected by COVID-19 — Fan predicted BCE Inc.’s revenue is most at risk due to the impact of COVID-19, with 31 per cent coming from those areas. They’re followed by Quebecor Inc. at 22 per cent and Rogers Communications Inc. at 16 per cent. Fan identified lower operating costs and capital expenditure as “significant mitigating factors that will offset lower revenues during the crisis”, while McReynolds agreed telecoms had the ability to “further squeeze the towel.” Looking at companies’ non-traditional core assets, McReynolds said he could not “even begin to comprehend the impact from postponed sports leagues and sporting events” on Maple Leaf Sports and Entertainment, which Bell owns a 28.5 per cent equity interest in, while Rogers has a 37.5 per cent equity interest. Most major sporting leagues in North America have suspended their operations, including the NHL and NBA. Those cancellations would also have a similar impact on the Rogers-owned Toronto Blue Jays, but McReynolds said the stake was a relatively low share of Rogers’ net asset value, and the value of MLSE and the Blue Jays were unlikely to suffer “permanent impairment” as a result of COVID-19 and he did not believe that Rogers’ share price would be overly sensitive to transitional earnings impacts. Quebecor chief financial officer Hugues Simard told Desjardins’ Industrials, TMT, Diversified and Consumer Conference on Wednesday that the company was monitoring the situation around COVID-19 “very closely”, but did not expand on the company’s comments during its quarterly earnings call on March 12 when it said the virus was not expected to have a “material financial impact.” Cogeco Inc. chief financial officer Patrice Ouimet told the conference on Tuesday that he also didn’t think the virus would have a “very large” impact on the company’s financials. Rogers and Corus Entertainment Inc. were scheduled to also give presentations at the two-day conference on Wednesday, but followed Bell and Telus Corp. in cancelling their appearances due to the virus. — With reporting by Adam Langenberg at alangenberg@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

Financial analysts say telecoms ‘resilient’ to impact of COVID-19

News | March 18, 2020

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Financial analysts say telecoms ‘resilient’ to impact of COVID-19

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