DBRS Confirms TELUS Corporation at BBB (high) and R-2 (high), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Notes rating of TELUS Corporation (TELUS or the Company) at BBB (high) as well as its Commercial Paper rating at R-2 (high). DBRS has also confirmed the Senior Debentures rating of TELUS Communications Inc. at BBB (high). The trends on all ratings remain Stable. The ratings continue to be supported by TELUS’s well-entrenched market position and proven track record of profitable growth. The ratings also reflect intensifying competition, risks associated with regulatory and technological change as well as the industry’s capital-intensive nature.

TELUS’s consolidated revenues grew to $12.7 billion in the last 12 months (LTM) ended Q3 2016 compared with $12.5 billion in 2015, supported by subscriber growth and rising data usage, although top-line growth has slowed relative to prior years. EBITDA margins improved to 36.4% in the nine months ended September 30, 2016 (9M 2016), driven primarily driven by cost-control measures, which caused EBITDA to rise to $4.4 billion in the LTM ended Q3 2016 from $4.2 billion in 2015. Because of higher capital spending and growing cash dividend payments, free cash flow before changes in working capital turned negative in 2015; however, TELUS’s credit metrics stabilized through 9M 2016 following a series of debt finance strategic investments and stock buybacks in recent years. For the LTM ended Q3 F2016, debt-to-EBITDA, EBITDA interest coverage and cash flow as a percentage of debt were 2.83 times (x), 8.33x and 27.4%, respectively, compared with 2.85x, 8.47x and 27.4%, respectively, at YE2015.

Going forward, DBRS expects TELUS’s earnings profile to remain well placed within the current rating category, supported by continued, albeit slower, wireless revenue growth, and continued wireline momentum, supported by the ongoing fibre deployment. DBRS has tempered its growth outlook for TELUS, owing to competitive pressures in both wireless and wireline segments as well as economic softness in western Canada, particularly in Alberta. DBRS expects consolidated revenues to grow in the low-single digits through 2017, rising to between $13.0 billion and $13.1 billion. EBITDA margins are forecast to climb to the high-36% range by 2017, supported by data revenue growth and efficiency improvement initiatives. As such, EBITDA should grow to between $4.8 billion and $4.9 billion by 2017.

TELUS’s financial profile is expected to come under some pressure over the near to medium term as free cash flow is expected to remain negative until at least 2018, in part due to elevated capital investments and ongoing but moderating shareholder return priorities. Cash flow from operations is likely to rise to between $3.7 billion and $3.9 billion by 2017. Capex will remain elevated and is assumed to be roughly $2.85 billion annually over the medium term. Management is now targeting annual dividend per-share increases of 7% to 10% through 2019, leading to overall cash dividends outlays of over $1.1 billion in 2017. As such, free cash flow before changes in working capital is forecast to remain negative in 2017. DBRS notes that the Company has a publicly stated target range of 2.0x to 2.5x for net debt-to-EBITDA. TELUS’s financial leverage is currently above that range and DBRS believes that this target will be challenging to achieve without meaningful growth in operating income over the medium term. That said, DBRS does not require the Company to achieve this for the current ratings; a gross debt-to-EBITDA ratio between 2.5x and 3.0x would be sufficient to maintain the current ratings. However, in light of heightened risks in the operating environment, weaker-than-expected operating performance or more-aggressive-than-expected financial management that results in gross debt-to-EBITDA rising toward 3.0x in a sustained manner could put some pressure on the ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.