2020 a ‘lost year’ for telecom growth: analyst

The telecommunications sector will have an "irrelevant" first quarter and will "write off" the second quarter, according to a preview note published Monday by RBC Capital Markets analyst Drew McReynolds. Investors will be focused on an anticipated recovery in the second half of the fiscal year and will be giving a "pass" to companies for the first two quarters' worth of results, McReynolds wrote in the note. "To be clear, the Canadian telecom sector is far from immune to direct COVID-19 impacts. However, we view these potential direct COVID-19 impacts as relatively manageable," McReynolds wrote, "particularly given the essentiality of telecom services to Canadians and given the sheer magnitude of disruptive near-term impacts that COVID-19 will have on major aspects of the Canadian economy as the country effectively shuts down in the near term (and potentially longer)." Despite his confidence that the sector is better positioned than many to weather the uncertainty of the COVID-19 pandemic, McReynolds wrote that when it comes to the metrics for growth in the industry, 2020 will essentially amount to a "lost year" in terms of growth metrics. "Our 2020 estimates are now well below the bottom end of 2020 guidance ranges, essentially treating 2020 as a ‘lost year' of growth for the sector," McReynolds wrote. If the economic contraction that follows the pandemic is on the scale of the recession of 2008-2009, McReynolds wrote, the "downside" would be as much as a 15 per cent pullback across the six companies of Rogers Communications Inc., Telus Corp., BCE Inc., Shaw Communications Inc., Cogeco Inc., and Quebecor Inc. But if the resulting economic contraction is worse than the recession of a decade ago, McReynolds has added a new "worse case scenario" of a 30 per cent pullback across the group of companies. McReynolds also forecasts increased rates of adoption in technologies related to education, healthcare, government and leisure across the sector flowing from the effects of social distancing. In the regulatory sphere, McReynolds predicts potential changes to a number of efforts, including potential delays in a decision on the presence of Huawei Technologies Co. Ltd. equipment on Canada's 5G networks, slower 5G deployment, a delayed 3500 MHz spectrum auction, and even a "swinging back of the regulatory pendulum from prioritizing lower wireless pricing and increased competition at the expense of network investment to reinforcing Canada’s longstanding facilities-based regulatory regime." According to a note published Sunday by Canaccord Genuity Analyst Aravinda Galappatthige, investors should "moderate" their exposure to the sector. "We move towards the view that more bullish investors (who expect a continued recovery in the market) should moderate their Telecom weighting, as there may well be greater value and growth elsewhere," he wrote. Though he adds, in a scenario of long term financial downturn, telecom may still be the right place to be. "Those that still feel that an elongated COVID-19 dominated slowdown (including possible 2nd and 3rd wave scenarios) should still maintain a healthy Telecom weighting," Galappatthige wrote. The sentiment in both notes echoes much of what was written in earlier March notes, where McReynolds wrote that the telecom companies have “relative earnings resilience and valuation,” making the sector a a “constructive place to hide” for financial investors. — With reporting by Michael Lee-Murphy at mleemurphy@thewirereport.ca and editing by Anja Karadeglija akarad@thewirereport.ca

2020 a ‘lost year’ for telecom growth: analyst

News | April 20, 2020

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2020 a ‘lost year’ for telecom growth: analyst

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