2009/06/16
TELUS: Excellent Value for a Canadian Telecom Company
Brief History:
TELUS is a national telecommunication conglomerate in Canada. The company has expanded itself from a local wireline phone company in Alberta, Canada to a national company that offers services in digital broadband/TV, wireline/wireless communication, and healthcare data services.
TELUS was established in 1990, following the reorganization of Alberta Government Phone Commission that established in 1958. In 1998, TELUS become a prominent telecommunication company in Western Canada when it merged with BC TELECOM, a legacy telecommunication company based in British Columbia, Canada.
Why TELUS is a BUY:
• When compared to its 2001-2008 share data, TELUS currently has the highest dividend yield at 6.1% and lowest P/E ratio at 9. TELUS share enjoyed strong dividend growth in the past five years with a current payout ratio of 66%
• If we think TELUS’s equity as a bond, it has a 10% floor return, which 4% is from annualized growth of book value per share in the past five years and 6% from current dividend yield.
• As the number of smartphone users increases, TELUS will be able to collect fees on wireless data usage like a toll bridge. Currently, data plan consist only 7% of total wireless revenue for TELUS
• TELUS, with BELL Canada as its partner, is ready to launch a nationwide GSM network in early 2010 to compete with Rogers communication and capture the advantage of being on a network that has over 80% of the global wireless phone users
• TELUS has a strong presence in Western Canada, a region that is expected to have higher economic activities compare to other parts of Canada.
• TELUS operates in a highly regulated business with high barriers to entry and few industry players. The long-term outlook for this business remains viable with new demand drivers for broadband/wireless communication
Company Analysis:
TELUS (TU), BELL Canada (BCE), and Rogers Communication (RCI) are the main players in Canadian wireless telecommunication industry. Each company controls roughly 30% of total wireless subscribers. Rogers Communication is the only national GSM network provider and has enjoyed substantial growth over the past couple years as most popular smartphones were available only on the GSM network. All companies have other complementary business segments such as cable TV, broadband, and wireline phones. Wireless communication makes up bulk of the revenue (close to or over 50%) for these companies and will be a key revenue growth for these companies going forward.
Couple new entrants, namely Shaw communications and Globalive, made substantial bids and acquired wireless licenses from government of Canada in 2008 and emerged as potential competitors. However, due to global economy turmoil and financing issues, Shaw, a cable based company in Western Canada, has abandoned its plan to build a wireless phone network in the near future. Globalive will likely roll out its wireless network later this year or early 2010, but its ability to be profitable is unclear. Globalive will need to spend $1.8B between the next ten years to establish its wireless business. The competitive landscape is likely to remain the same as the big threes throwing punches at each another.
As of fiscal 2008, Rogers enjoyed the highest average revenue per user (“ARPU”) at $75 dollar per month thanks to its exclusivity of GSM network and a number of smartphones. TELUS and BELL Canada, operators of CDMA network, have “ARPU” at about $63 and $54. When compared to the US counterparts, using AT&T as an example, AT&T has an “ARPU” of $55 (using a rate of $1.10 CAD/USD). If we make the assumption that future competitive pricing will trend towards AT&T’s “ARPU”, the revenue impact as a result of pricing competition will be minimal for TELUS because organic growth of wireless users can potentially offset the lower “ARPU”. As of fiscal 2008, Canadian wireless market only exhibit a 70% market penetration rate, whereas US has a much higher rate of above 80%.
Comparing some basic metrics on the attractiveness of TELUS share against BCE and RCI, TELUS currently has a comparable dividend yield against BCE at 6.1% with a much lower payout ratio of 66% to BCE’s 88%. Rogers has similar payout ratio but only a 3.4% dividend yield. When looking at P/B, P/E and P/S ratios, TELUS has the lowest ratio between the three companies, and TELUS, looking on a standalone basis, is attractively priced at a P/B of 1.3, P/E of 8.18, and P/S of 0.98, with ROE of 15% and EV/EBITDA of 4.2 times.
Another positive is TELUS’s stable senior management team. Darren Entwistle, CEO, and Robert McFarlane, CFO, have both worked in TELUS since 2000 and successfully implement TELUS’s goal to become a national telecommunication company. Book value per share, after share buyback and dividend payout, grew roughly 4% for the past five years. If we expect that 4% is the future book value growth, adding the current dividend yield of 6% will yield a floor return of 10%. This assumption is highly probable given the near-term competitive landscape, the company's stable senior management team, and the users’ demand for wireless services.
Other positives for TELUS include better projected economic prospect in Western Canada, strong brand awareness in Western Canada, overfunded pension plan, and high barriers to enter the wireless market. Also, it could be argued that TELUS may benefit from currency translation gain as Canadian dollar strengthen against US dollar in the long run. Some short-term speculative sparks includes Vancouver’s 2010 Winter Olympic game, GSM network deployment, and foreign investors’ appetite for investing in Canadian businesses.
There are key negative issues to consider. First, TELUS has poor cash position with only $58M cash on hand. TELUS does have a $2B credit facility with about $1B available at prime rate, an attractive 2.25% cost of borrowing. However, prime rate is a variable rate set between the Canadian banks, and an interest rate hike put TELUS at a significant disadvantage. In addition, Capital expenditure going forward should be considered as well. Capex intensity, which is capital expenditure by a percentage of total sales, has been rising from 17% in 2004 to 28% in 2008. The 28% figure includes the cost to obtain wireless licenses from government of Canada in 2008 and is non-recurring. Without the one time cost, the Capex intensity is about 19%, which is still higher when compared to BCE’s 17% and RCI’s 16%. Finally, continuous monitoring on the economic environment where TELUS operates and potential entrants such as Shaw and Globalive is required. It is unlikely for Shaw to give up without a fight, especially when Shaw spent $190M to acquire a significant percentage of wireless licenses in Western Canada from the 2008 auction.
Overall, TELUS has a solid business plan going forward, and its share is priced at a reasonable rate of risks. TELUS is unlikely to achieve admirable share appreciation like what some of the smartphone companies did in the last couple years. But no matter which smartphone company comes out on top in the future, TELUS will be there to collect its fees from customers. Warren Buffett often said “A bird in the hand is worth two in the bush” and the 10% floor return being offered by Mr. Market today is worth some serious consideration.
(All figures and sources are either from company’s SEC filings, Yahoo! Finance, or Financial Post articles)
(Disclosure: Recently long in TELUS)
TELUS is a national telecommunication conglomerate in Canada. The company has expanded itself from a local wireline phone company in Alberta, Canada to a national company that offers services in digital broadband/TV, wireline/wireless communication, and healthcare data services.
TELUS was established in 1990, following the reorganization of Alberta Government Phone Commission that established in 1958. In 1998, TELUS become a prominent telecommunication company in Western Canada when it merged with BC TELECOM, a legacy telecommunication company based in British Columbia, Canada.
Why TELUS is a BUY:
• When compared to its 2001-2008 share data, TELUS currently has the highest dividend yield at 6.1% and lowest P/E ratio at 9. TELUS share enjoyed strong dividend growth in the past five years with a current payout ratio of 66%
• If we think TELUS’s equity as a bond, it has a 10% floor return, which 4% is from annualized growth of book value per share in the past five years and 6% from current dividend yield.
• As the number of smartphone users increases, TELUS will be able to collect fees on wireless data usage like a toll bridge. Currently, data plan consist only 7% of total wireless revenue for TELUS
• TELUS, with BELL Canada as its partner, is ready to launch a nationwide GSM network in early 2010 to compete with Rogers communication and capture the advantage of being on a network that has over 80% of the global wireless phone users
• TELUS has a strong presence in Western Canada, a region that is expected to have higher economic activities compare to other parts of Canada.
• TELUS operates in a highly regulated business with high barriers to entry and few industry players. The long-term outlook for this business remains viable with new demand drivers for broadband/wireless communication
Company Analysis:
TELUS (TU), BELL Canada (BCE), and Rogers Communication (RCI) are the main players in Canadian wireless telecommunication industry. Each company controls roughly 30% of total wireless subscribers. Rogers Communication is the only national GSM network provider and has enjoyed substantial growth over the past couple years as most popular smartphones were available only on the GSM network. All companies have other complementary business segments such as cable TV, broadband, and wireline phones. Wireless communication makes up bulk of the revenue (close to or over 50%) for these companies and will be a key revenue growth for these companies going forward.
Couple new entrants, namely Shaw communications and Globalive, made substantial bids and acquired wireless licenses from government of Canada in 2008 and emerged as potential competitors. However, due to global economy turmoil and financing issues, Shaw, a cable based company in Western Canada, has abandoned its plan to build a wireless phone network in the near future. Globalive will likely roll out its wireless network later this year or early 2010, but its ability to be profitable is unclear. Globalive will need to spend $1.8B between the next ten years to establish its wireless business. The competitive landscape is likely to remain the same as the big threes throwing punches at each another.
As of fiscal 2008, Rogers enjoyed the highest average revenue per user (“ARPU”) at $75 dollar per month thanks to its exclusivity of GSM network and a number of smartphones. TELUS and BELL Canada, operators of CDMA network, have “ARPU” at about $63 and $54. When compared to the US counterparts, using AT&T as an example, AT&T has an “ARPU” of $55 (using a rate of $1.10 CAD/USD). If we make the assumption that future competitive pricing will trend towards AT&T’s “ARPU”, the revenue impact as a result of pricing competition will be minimal for TELUS because organic growth of wireless users can potentially offset the lower “ARPU”. As of fiscal 2008, Canadian wireless market only exhibit a 70% market penetration rate, whereas US has a much higher rate of above 80%.
Comparing some basic metrics on the attractiveness of TELUS share against BCE and RCI, TELUS currently has a comparable dividend yield against BCE at 6.1% with a much lower payout ratio of 66% to BCE’s 88%. Rogers has similar payout ratio but only a 3.4% dividend yield. When looking at P/B, P/E and P/S ratios, TELUS has the lowest ratio between the three companies, and TELUS, looking on a standalone basis, is attractively priced at a P/B of 1.3, P/E of 8.18, and P/S of 0.98, with ROE of 15% and EV/EBITDA of 4.2 times.
Another positive is TELUS’s stable senior management team. Darren Entwistle, CEO, and Robert McFarlane, CFO, have both worked in TELUS since 2000 and successfully implement TELUS’s goal to become a national telecommunication company. Book value per share, after share buyback and dividend payout, grew roughly 4% for the past five years. If we expect that 4% is the future book value growth, adding the current dividend yield of 6% will yield a floor return of 10%. This assumption is highly probable given the near-term competitive landscape, the company's stable senior management team, and the users’ demand for wireless services.
Other positives for TELUS include better projected economic prospect in Western Canada, strong brand awareness in Western Canada, overfunded pension plan, and high barriers to enter the wireless market. Also, it could be argued that TELUS may benefit from currency translation gain as Canadian dollar strengthen against US dollar in the long run. Some short-term speculative sparks includes Vancouver’s 2010 Winter Olympic game, GSM network deployment, and foreign investors’ appetite for investing in Canadian businesses.
There are key negative issues to consider. First, TELUS has poor cash position with only $58M cash on hand. TELUS does have a $2B credit facility with about $1B available at prime rate, an attractive 2.25% cost of borrowing. However, prime rate is a variable rate set between the Canadian banks, and an interest rate hike put TELUS at a significant disadvantage. In addition, Capital expenditure going forward should be considered as well. Capex intensity, which is capital expenditure by a percentage of total sales, has been rising from 17% in 2004 to 28% in 2008. The 28% figure includes the cost to obtain wireless licenses from government of Canada in 2008 and is non-recurring. Without the one time cost, the Capex intensity is about 19%, which is still higher when compared to BCE’s 17% and RCI’s 16%. Finally, continuous monitoring on the economic environment where TELUS operates and potential entrants such as Shaw and Globalive is required. It is unlikely for Shaw to give up without a fight, especially when Shaw spent $190M to acquire a significant percentage of wireless licenses in Western Canada from the 2008 auction.
Overall, TELUS has a solid business plan going forward, and its share is priced at a reasonable rate of risks. TELUS is unlikely to achieve admirable share appreciation like what some of the smartphone companies did in the last couple years. But no matter which smartphone company comes out on top in the future, TELUS will be there to collect its fees from customers. Warren Buffett often said “A bird in the hand is worth two in the bush” and the 10% floor return being offered by Mr. Market today is worth some serious consideration.
(All figures and sources are either from company’s SEC filings, Yahoo! Finance, or Financial Post articles)
(Disclosure: Recently long in TELUS)
2009/06/11
Harbin Electric (HRBN) Company Update
It was disappointing to see HRBN made little progress with their Shanghai auto micro-motor facility. Production may finally begin in 2Q09, after two quarters of delay from customers and another quarter or two from construction constraints.
Revenue has dipped in the last two quarters, and the $58M Hengda acquisition has not benefited HRBN’s shareholders. Since acquired in July 2008, Hengda has contributed about $1M of net income, a dismal annualized return of 2.3% from its price tag.
In addition, on a pro forma basis, if we include Hengda’s result in the 1Q08, as if business were acquired on January 1, 2008, the year-over-year quarterly revenue between 1Q09 and 1Q08 declined by 7%.
Some encouraging sights in 1Q09 were the significant reduction in accounts receivable and inventory from the previous two quarters, down from $66M to $43M. HRBN further solidified its balance sheet and has over $64M cash, which is almost enough to service its total debt.
Another encourage news is the recent filings by HRBN to sell additional shares up to $120M. HRBN can sell the shares any time at its own discretion. This has both costs and benefits for the current shareholders. On one hand, there is more share dilution, but on the other hand, more predominated institution investors will join the mix. This will increase the visibility of the company in the long-run.
The SEC filing from HRBN on June 5, 2009 outlined the long-term debt repurchase agreement between HRBN and Citadel Equity Capital. I am speculating that Citadel would want to receive equity shares as part of its early debt redemption. Details are unknown at the moment, so we don't really know if this is a good or bad news for current shareholders. From a top level perspective, this debt repurchase is indeed good news for HRBN because HRBN further establishes itself as a creditable company for willing risk takers.
Overall, HRBN is still a long-term buy given its business prospects, balance sheet strengths, and future expected appreciation of RMB. One thing to keep at the back of mind is managements tend to over-promise and under-deliver, it seems like this is the culture enticed from the CEO himself to make sure HRBN always present itself in the most favorable ways, while downplay any negative developments as much as possible.
(Disclosure: I am long on HRBN)
2009/06/08
Value Investing: A Balance Approach by Martin Whitman
Here are couple bulleted lists that I drew from Mr. Whitman's book. The book did not grab my attention as some of other value investing based book, but I think the following lists are full of wisdom.
Value Investing: A Balance Approach Martin Whitman
- Value Investing (VI) uses a balanced approach to analysis so that there is no a priori primacy given to any one factor in an appraisal.
- In VI, the essential goal is to value a business or the workout potential for credits issued by trouble companies.
- In VI, equity holdings are viewed as permanent or semipermanent commitments, subject only to a risk arbitrage exception.
- In VI, macrofactors such as the level of stock averages (e.g., the DJIA), forecasts of interest rates, or the GDP are ignored.
- In VI, as part of a balanced approach, businesses are viewed as both going concerns and as resource converters, deploying and redeploying their asset bases and liabilities into new areas including mergers and acquisitions, changes in control, massive refinancing, IPOs, and LBOs.
What has worked in investing
Tweedy, Browne Company LCC, a well established value based investment firm and worked as the broker for Warren Buffett with the acquisition of Berkshire Hathaway in the early 1960's
The firm has published a very insightful booklet for prospect investors called :
"WHAT HAS WORKED IN INVESTING - Studies of Investment Approaches and Characteristics Associated with Exceptional Returns"
There are 5 specific points:
The firm has published a very insightful booklet for prospect investors called :
"WHAT HAS WORKED IN INVESTING - Studies of Investment Approaches and Characteristics Associated with Exceptional Returns"
There are 5 specific points:
- Low Price in Relation to Asset Value
- Low Price in Relation to Earnings
- A Significant Pattern of Purchases by One or More Insiders (Officers and Directors)
- A Significant Decline in a Stock's Price
- Small Market Capitalization
Buffett Is Less Bullish on U.S. Than You Think: Alice Schroeder
Bloomberg has an interesting article by Alice Schroeder, the author of "The Snowball". Ms. Schroeder presented a different case on the "Buy America" bullish calls from Mr. Buffett.
If you have not had a chance to read "The Snowball", which is about the size of a brick, I would recommend it because it is probably one of the most intimate book about Mr. Buffett's life. The book is more about Mr. Buffett's life and his family and friends. It is not a typical "how to invest like Buffett" book, and I found the book quite entertaining yet very educational at the same time.
If you have not had a chance to read "The Snowball", which is about the size of a brick, I would recommend it because it is probably one of the most intimate book about Mr. Buffett's life. The book is more about Mr. Buffett's life and his family and friends. It is not a typical "how to invest like Buffett" book, and I found the book quite entertaining yet very educational at the same time.
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