Interest rate volatility and challenges in the television sector are expected to put pressure on Canada’s telecom stocks in 2017, according to an annual outlook report from Desjardins Capital Markets analysts.

Since telecom stocks have a strong inverse relationship with interest rates, president-elect Donald Trump’s nod to inflationary policies could hurt telecoms that have enjoyed a low interest rate environment for years, Desjardins analyst Maher Yaghi and associate Jerome Dubreuil forecast for next year.

The U.S. Federal Reserve is forecasting three rate hikes next year, but global central banks are generally expected to keep rates low, indicating that telecoms will still attract dividend-seeking investors, they wrote. The analysts expect revenue and EBITDA growth of 2.6 per cent and 3.4 per cent respectively.

“We believe the industry’s steady and predictable growth continues to be highly prized by investors looking to hedge the more volatile parts of their portfolio,” the report stated.

Given the slightly higher risk in its calculations, Desjardins lowered the price targets for Bell ($64.50 from $67.50), Rogers ($57.50 from $61) and Telus ($49 from $50). It did, however, upgrade Bell’s rating to buy from hold given the new valuation. Ratings for Rogers and Telus remained stable at hold and buy, respectively.

But growth in the wireless and Internet segments may be subdued by increasing challenges in the TV sector, Desjardins predicted, pointing to online video streaming, the waning appeal of sports channels and changes in viewer behaviour.

Over-the-top streaming services such as Netflix have enhanced their offerings by letting consumers download shows to watch offline later and Amazon Prime Video launched in Canada this month, giving consumers another option.

“The possible launch of a live TV service delivered over the Internet by YouTube would be another headwind for TV service providers, as an increased number of channels offering access to live content at a low price could hamper both (average revenue per user) and subscriber metrics,” they wrote.

On top of that, sports channels – the desire to watch live games is generally viewed as one of the main reasons people keep their TV subscriptions – may not be as sticky as they once were.

Desjardins noted that a recent Forbes report estimated ESPN lost 4 per cent of its subscribers this year, an acceleration of the 3 per cent subscriber loss Disney reported between 2014 and 2015.

The latest CRTC reports show that major sports network subscribers declined by 1.5 per cent over the same period, though the analysts noted that telecom trends in Canada typically lag behind the U.S. by one to two years.

Regardless, the analysts are adopting a more bearish stance on TV given CRTC data that shows the number of hours of television watched has declined 3 per cent since 2009-2010. The most notable declines came from the 12-17 and 18-34 age categories, which analysts said could indicate the industry’s long-term prospects.

On the plus side, analysts expect major players will continue to grow their average revenue per user when it comes to the wireless market.

Shaw’s Freedom Mobile still doesn’t have the handsets or network quality to compete with the incumbents in B.C., Alberta or Ontario, Desjardins wrote, which should reduce the competitive pressure from a fourth player until 2018.

 

Source: Financial Post

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