TORONTO – North American wireless carriers reported strong Q2 margins, with combined wireless EBITDA service margins for Rogers, Telus, Bell, AT&T, Verizon, Sprint, LEAP and MetroPCS up 342 basis points and EBITDA growth up 14.5% over the previous year. This according to figures reported in Dvai Ghose’s Canaccord Genuity Daily Letter for September 17.
He says the improved margins were driven by reduced device subsidy pressure. Wireless equipment subsidies dropped an estimated 12% in Q2 due to a “dearth of iconic device launches.” He noted that with the Samsung Galaxy S III and the iPhone 5 recently launched “we may see much greater subsidy pressure in H2/12 and in particular Q4/12.” He adds that incumbent subscriber growth could also be a little soft in Q3/12, as consumers delay purchases until large quantities of the iPhone 5 are available.
Of the big three Canadian telcos, Ghose’s preference for best dividend growth is Telus Mobility because: it has far more exposure to wireless than Bell (he expects 62% of Telus’ 2012 EBITDA to come from wireless in 2012 versus 32% of Bell’s estimated EBITDA); and Telus Mobility is the “best managed wireless operator in Canada, as evidenced by its pioneering work with handset tabs, its industry low churn, etc.”
He also claims that Telus enjoys the best geographic exposure and estimates that approximately 44% of Telus Mobility’s base is in Western Canada and only 28% in Ontario. In contrast, he estimates that only 25% of Rogers Wireless’ base is in Western Canada and 52% in Ontario and that only 19% of Bell Mobility’s base is in Western Canada and 41% in Ontario.
“This is significant because according to the CRTC, wireless ARPU in British Columbia was up 4% in 2011 and up 8% in Alberta, presumably due to a more robust economy, exposure to resource industries that rely on wireless and a less competitive environment in terms of new entrant exposure. In contrast, CRTC figures show that wireless ARPU was down 3% in Ontario in 2011, perhaps reflecting a more sluggish economy and more a competitive wireless environment.”
Other notable trends:
- While wireless margins may be under pressure in H2/12 versus H1/12, incumbent wireless fundamentals look attractive
- The market may still be underestimating the telco IPTV threat to cable and cablecos have shown broadband, as well as TV losses to telcos. However, Quebecor and Cogeco Cable seem far better positioned than Shaw Cable and Rogers Cable
- There has been no discernible benefit from media ownership when it comes to connectivity results to date
- But Bell Media seems better positioned than peers like Shaw Media due to its sports content and the impact of TSN/RDS rate hikes
- The valuation associated with RCI, BCE and especially Shaw is demanding. While Quebecor and Cogeco Cable may face FCF pressure in the near term, we see good value potential for longer term investors.
