Mark Goldberg

Investing in the communications sector

When Quebecor reported its results on March 12, Scotiabank observed that it beat analyst estimates for EBITDA, its Free Cash Flow estimates for 2020 and 2021 were raised substantially, its dividend was increased 78%. Still, the company’s stock price fell 11% that day.

These are difficult days in the investment markets. Scotiabank said “With both Canadian and global markets in turmoil, we believe the telecommunications space is a good place to hide” (March 10). In a follow-up late last week, Scotia said, “Communication services are critical during the current COVID-19 crisis. Our financial estimates are not immune to reductions, and the impact could come in waves, but we believe our telecom and cable financial estimates will be more resilient than media and many other sectors.”

Similarly, when TD Securities issued its report “Lowering Estimates for COVID 19”, it said “we want to make it clear that the point of this analysis is to identify opportunities as opposed to highlighting risk. Most of the names we cover are high-quality companies with defensive business models, sustainable dividends, and strong balance sheets.” TD is estimating that net additions for Canada’s wireless industry will decline 10% for the year, due to its estimate of a 30% reduction in net additions in the first 2 quarters of the year. Be sure to note this is a reduction in net additions, not a reduction in total subscribers. Offsetting the reduction in net additions, TD believes churn will be reduced by 0.3 percentage points. “The fact that many of these stocks have sold off as much as the overall market is illogical, in our view, … and we believe it has created some incredible buying opportunities on a risk-reward basis.”

Scotiabank noted “An area we are monitoring closely is network capacity.” So far, the networks for the major carriers are performing well. Still, it was fascinating to see a warning from Open Media, asking its followers to “Be considerate in your internet use”, and suggesting that people “try to keep downloads to sleeping hours when people are less likely to be accessing essential services and information on the web.” It is good advice, but I found it interesting to note that this message didn’t come from service providers.

So far, the networks have performed remarkably well under the stress of increased loads, and service providers have tried to provide some relief for their customers facing significant changes to how they use communications services as a result of quarantines and “social distancing” that has closed schools and sent most people home from work.

As Scotiabank observed,

Telcos and cablecos have stepped up their efforts during the COVID-19 crisis. We started this note by highlighting just how important communication services are during this current time of crisis, as more people are working remotely. We were pleased to see that all of the companies have taken important steps to ensure that services not only remain uninterrupted regardless of their customers’ circumstances but also, in many cases, are enhanced to address more work and entertainment at home.

An opinion piece by Rita Trichur in the Globe and Mail last week said the current pandemic is providing all of us with a better appreciation of how dependent we are on their smartphones. “Data use is surging on wireless networks as more people work remotely, banks encourage customers to use mobile apps instead of visiting branches and Canadians of all ages turn to social media to stay connected and informed.”

The telecom industry has stepped up to the challenge of handling the disruptions on our lives imposed by the COVID-19 pandemic. As Canada’s policy chiefs begin to examine how to respond to a new state of normalcy, the Prime Minister’s Office needs to re-examine the mandates handed to members of Cabinet. Targets that may have seemed appropriate last fall no longer fit within an environment that has yet to settle on a new equilibrium.

The Globe opinion piece concludes, “Wireless is a high-growth industry and one of Canada’s last industrial bright spots. The government’s target of a 25-per-cent price reduction always seemed arbitrary, but in light of the current crisis, it’s downright tone deaf. Ottawa should scrap it.”

There isn’t a need to focus at this time on the pricing objective; my views on such matters were detailed in posts on March 5 [“Moving the goalposts” and “Declare victory. Consumers are winning“]. But there should be a recognition by Ottawa of the value of Canada’s telecom sector as an “industrial bright spot” . Governments should be looking at ways to encourage increased employment created by further investment by the sector. Policy leaders need to explore how government can clear the path for increased capital spending, expanding capacity and extending the reach of networks.

Scotiabank’s review last week commented on the “initiatives that telcos and cablecos have undertaken to help their customers and society cope during the crisis.” How can we clear roadblocks that inhibit or discourage investment? What steps can be taken to enable, and indeed encourage, telecommunications carriers to reinforce Canada’s digital infrastructure to continue to deliver world leading service quality to Canadians throughout this crisis and beyond?

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