Telcos focus on investment opportunities amid changing pandemic demands – The Globe and Mail

With companies and consumers depending on better mobile coverage, faster speeds and increasing digitization during the pandemic, the telecom sector is in investment mode – with the 5G rollout and new enterprise-focused applications expected to drive growth. However, analysts say companies may face a few challenges, such as rising inflation, in the short-term.

For the telecom sector, the COVID-19 pandemic represented a disruptor, with segments like retail distribution and mobile roaming revenue taking a hit in 2020, says Scott Rattee, senior vice-president of credit ratings for the consumer, communications, retail and media sectors with DBRS Morningstar in Toronto.

As data from Canadian Radio-television and Telecommunications Commission (CRTC) shows, the Canadian telecom sector saw a 1.4-per-cent decrease in total revenues year-over-year during the first year of the pandemic – mainly due to a drop in mobile revenues. Meanwhile, the sector still reported growth in retail fixed internet services, rising capital investments on 5G networks – fifth generation cellular technology that promises faster speeds and lower latency – and saw average mobile subscribers using more data than ever before.

Heavy investment

Indeed, says Mr. Rattee, all Canadian telcos, to varying degrees, have seen a recovery with revenues and profits improving. Now companies are in a period of heavy investment aimed at capturing future opportunities as the pandemic subsides.

These investments, he says, fall into three main areas – the long-term evolution of the 5G rollout, the acceleration of the fibre-optic network as the backbone that enables it, and the purchase of spectrum licenses – all of which will allow for improved network performance of telecom services and the development of new enterprise or business-focused applications.

“There is a little bit of push and pull on the [plans to] invest for future growth – just how quickly do you invest and how much growth are you able to generate in the near term,” Mr. Rattee says.

The global rollout of 5G networks has been much slower than expected, partly because of the pandemic. However Paul Harris, partner and portfolio manager with Harris Douglas Asset Management in Toronto, says 5G will be a great growth engine for Telcos.

“I think that in the second half of this year and into 2023, 5G will be proliferated around globally as well so I think it will make a difference [to profits and revenues] because that will certainly lead to more data usage.”

Mr. Harris believes that mergers and acquisitions activity may be a driver for the sector in Europe over the next year or two. But it’s a trend he doesn’t expect to see happening as much in North America because there are fewer service providers.

Closer to home, companies will get a boost over the next few months by an increase in travel, and a corresponding rise in mobile roaming charges, a potential return to the office, the continued uptake in streaming services, and the resulting need for high-speed mobile and home internet.

Telecom stocks

Stocks in the telecom sector have been on an upswing in the last year after a more volatile 2020. After falling 4.4 per cent in 2020, the TSX Capped Communication Services Index, which contains major players including BCE Inc., Cogeco Inc., Rogers Communications Inc. and Telus Corp., has returned 24.75 per cent in the last year, with several of those stocks sitting at or near new highs.

Although stocks in the index such as BCE and Telus are trading at higher multiples than the S&P/TSX Composite Index and U.S. counterparts like AT&T Inc., Mr. Harris says the premium relates to their history as good long-term investments, their healthy annual dividend yields, which are around four per cent, and their ability to steadily increase dividends.

Difficulties facing the sector include inflation-related cost pressures and rising interest rates which could put pressure on stock prices, Mr. Harris says.

Another challenge is the push companies face to bring high-speed internet to more rural areas.

A number of new players have also entered this sector, with plans to bring high-speed internet to rural areas via low-Earth orbit (LEO) satellite, including Elon Musk’s SpaceX’s Starlink satellite network and Canadian companies Telesat and Kepler Communications Inc.

Ultimately, says Mr. Harris, this is an interesting period for Canadian telecom companies, not only because of the rise of streaming, and a changing mobile landscape because of 5G, but also due to enterprise developments as companies deal with the continued decentralization of work offices, both from an infrastructure and security perspective.

“It’s a little bit of wait and see on some of that,” he says.

Enterprise growth

For enterprise demand in particular, this is a pivotal point, says Tony Olvet, group vice-president of the research analyst team at global technology research firm IDC Canada in Toronto.

Organizations of all sizes are building on the lessons learned over the last two years, including investments in digital technologies – whether cloud-based, applications or security – into their business strategies.

“Everything from how you deliver services to your employees to how you serve customers and the relevance of technology in future operations has become that much more important,” he says.

As such, many new telecom revenue streams will be geared towards meeting this demand through automation.

“The focus of the telecom sector is building a platform and a set of applications for Canadian businesses where they can extend what they’ve already invested in,” he explains. This will be aimed at functions such as smart metering, the ability to track shipments more seamlessly, or increasing the efficiency of transportation logistics management.

These types of pandemic-driven behavioural changes that focus on new applications and improved connectivity are ultimately positive for Canadian telecom companies, that maintained high standards of performance during COVID, says Mr. Rattee.

“It’s an overall tailwind. It’s not definitive whether or not that will absolutely maintain, but I think given the overall secular trend of the digitization of both individuals and businesses, I think it’s probably going in that direction and a beneficiary, broadly speaking, are the telcos.”

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