DBRS Confirms TELUS Corporation at BBB (high) with a Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and Notes rating of TELUS Corporation (TELUS or the Company) at BBB (high), the Commercial Paper rating of TELUS at R-2 (high) and the Senior Debentures rating of TELUS Communications Inc. (TCI) at BBB (high). All trends are Stable. The confirmations acknowledge and incorporate a recovery in profitability and corresponding improvement in financial metrics year over year (YOY). The ratings continue to be supported by TELUS’s well-entrenched market position and proven track record of profitable growth, while also reflecting intensifying competition, risks associated with regulatory and technological change as well as the industry’s capital-intensive nature.

After a challenging 2015–2016, the Company’s profitability returned to a level more consistent with its historical profile, driven by solid top-line growth and positive margin leverage reflecting growth in both operating divisions, despite increasing competitive pressures. Consolidated revenues increased 3.9% to $13.3 billion in 2017, driven primarily by an increase in Wireless Network Service revenue and solid growth in Wireless Data Services and equipment revenue. EBITDA margins increased by 284 basis points to 35.9% in 2017, as both operating divisions posted higher margins YOY, leading to 12.9% YOY EBITDA growth to $4.8 billion.

TELUS’s financial profile correspondingly benefited from the solid increase in profitability, despite an increase in debt. Cash flow from operations increased to $4.1 billion in 2017 (versus $3.3 billion in 2016). However, with a YOY uptick in both capital expenditure and dividends, 2017 free cash flow (after dividends, before changes in working capital) remained negative, although very modestly and significantly improved from 2016. Credit metrics improved in 2017 as the increase in debt was more than offset by improving profit. DBRS gross debt-to-EBITDA and EBITDA coverage was 3.02 times (x) and 7.8x in 2017, respectively, compared with 3.22x and 7.24x in 2016.

Going forward, DBRS expects TELUS’s earnings profile to remain stable and supportive of the current rating, based on wireless revenue growth and continued wireline momentum, which is being driven by ongoing fibre deployment. DBRS forecasts 2018 consolidated revenues to grow in the low- to mid-single digits, to between $13.9 billion and $14.0 billion. After a large rebound in 2017, DBRS believes that EBITDA margins will continue to increase more modestly in 2018 to the 36% range and forecasts 2018 EBITDA to increase to between $4.9 billion and $5.0 billion.

TELUS’s financial profile is expected to remain stable over the near to medium term as free cash flow is expected to be essentially break-even in 2018, in part because of elevated capital investments and continued increases to the dividend. DBRS believes any improvement in credit metrics would come from growth in operating income/cash flow as opposed to debt reduction over the near to medium term. Although TELUS is at the high end of the 2.5x to 3.0x leverage range indicated to be sufficient for this rating, DBRS does not require a reduction in leverage to maintain its view on TELUS due to the strength of the Company’s business profile.

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

The principal methodology is Rating Companies in the Communications Industry, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.