Telus Downgraded to Hold

We have recently downgraded our recommendation for Telus Corp. (TU - Analyst Report), the second-largest telecom service provider in Canada, to Hold.

This follows our assessment of the company’s operating results for the first quarter of 2009, which were below our expectations. Top-line growth was restricted by intense wireless competition coupled with a weakening Canadian economy. Additionally, decline in fixed-line business accelerated in the most recent quarter with a reported loss of 51,000 access lines, down 31% from the year-ago quarter and 42% sequentially, reflecting continued residential-line losses.

Reduced consumer spending and usage have affected the company’s wireless business in the last quarter as evidenced by nearly 6% annualized decline in Average Revenue Per User (ARPU) and 46% year-over-year decrease in new subscriber additions. The company has cut its revenue, EBITDA and earnings guidance for full-year 2009 to reflect the impact of the domestic economic downturn, which is expected to continue till the fourth quarter. Additionally, it also trimmed wireless and wireline revenue guidance by a total of approximately C$350 million (US$280 million) for the current year.

Nevertheless, we are encouraged by Telus’ wireless business prospects, driven by expanding product/service portfolio and network upgrade initiatives. The company has collaborated with Bell Canada, a subsidiary of BCE Inc. (BCE - Analyst Report), for upgrading its existing CDMA-based wireless network to 3G high speed packet access (HSPA). This will enhance wireless voice and data service deployments, maximize network efficiency, lower operational cost and facilitate future transition to 4G Long Term Evolution (LTE). Moreover, Telus remains committed to deliver attractive returns to the shareholders in the form of healthy dividends and share buybacks.

However, Telus remains challenged by the deteriorating Canadian economy and the domestic competitive landscape, which are expected to intensify with the potential entry of new wireless players in late 2009 and early 2010. Moreover, the company has a highly leveraged balance sheet with net debt to EBITDA (excluding restructuring costs) of 1.9, which is near the upper limit of its long-term target range of 1.5-2.0. Telus’ total debt continues to increase on a sequential basis, reaching approximately C$6.6 billion (US$5.3 billion) at the end of the last quarter.