BCE, Telus draw praise for debt reduction potential

RBC Dominion Securities Inc. recommended yesterday that its clients buy shares of Canada's two largest phone companies, saying capital spending at BCE Inc. and Telus Corp. could fall below expectations, boosting free cash flow and the potential for debt reduction.

"We reiterate our positive outlook for BCE and would add to positions," analyst Richard Talbot said in one report. In another, he said: "We believe Telus shares are timely and warrant investor attention."

Stock of BCE -- which owns Bell Canada -- slipped 0.6 per cent to $30.48 on the Toronto Stock Exchange a day after reaching a 14-month high. Telus shares climbed 5.5 per cent to $23.01, a 16-month high.

Shares of the two companies have been on fire of late, both rising more than 8 per cent in the past two weeks.

Telus shares, in fact, have almost quadrupled since a low of $5.76 last July. Mr. Talbot now rates Telus shares as a "top pick," up from "outperform," and has raised his one-year stock price estimate to $28 from $26.

According to data provider Bloomberg LP, Mr. Talbot cut Telus stock to "sector perform" from "outperform" just as Telus bottomed last July. He raised his opinion to "outperform" in November when the stock had recovered to around $15.

In particular, he recommended Telus's class A non-voting shares, which closed at $20.96 yesterday. These shares are $2.05 cheaper than the common stock but receive the same 15-cent quarterly dividend.

However, holders of the class A shares cannot vote on "routine" matters at annual meetings, Mr. Talbot noted.

He predicted Telus will spend $1.21-billion on capital expenditures, a fifth less than the Vancouver company's stated guidance of about $1.5-billion.

Mr. Talbot thus predicted free cash flow could reach $799-million, three-quarters more than the midpoint of Telus's estimated range for 2003.

The analyst also raised his share profit estimate for 2003 to 83 cents from 78 cents and for 2004 to $1.31 from $1.11, citing a lower tax rate and lower depreciation and interest charges.

Telus aims to hit a share profit of about 60 cents this year. Analysts in general predict Telus will make 63 cents this year and $1.05 next year, according to data collector Multex.com Inc.

Mr. Talbot left his "outperform" rating in place for Montreal-based BCE. He raised his one-year stock price estimate to $34 from $32, citing both higher-than-expected free cash flow and 2004 share profit. He raised his 2004 share profit estimate to $2.22 from $2.14, citing a lower tax rate.

Mr. Talbot's 2003 estimate remains $1.97. BCE's stated guidance this year is for a share profit of about $1.90.

According to Multex, the 2003 consensus is $1.95 and the 2004 consensus is $2.12. He also said the "regulatory environment" remains positive for both Telus and Bell Canada.

"We challenge the view held by some observers that the regulatory environment is likely to change significantly," Mr. Talbot said. He said Bell and Telus sell quality services at low prices.

"This view was supported by recent discussions with regulatory and public policy officials."

Regulatory decisions from the Canadian Radio-television and Telecommunications Commission in the past six months have favoured smaller telephone companies over the former monopolies, Bell and Telus.

Some analysts on Bay Street believe this trend will continue. Merrill Lynch Canada Inc. in a May 27 report warned clients that Bell and Telus could lose market share in the local telephone market, which they currently dominate.

"We expect further regulatory changes to facilitate all forms of local competition," Merrill said.

The Toronto investment dealer rates BCE stock as "neutral," with a one-year price estimate of $30. It rates Telus as a "buy" and has a price estimate of $25.