CFA Research Challenge 2017 Vancouver - Team C

1. CFA Research Challenge 2017 Vancouver - Team C

2. Executive Summary Highlights Last twelve-month performance HOLD SFU Source: Bloomberg. Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

3. Business Profile Business Description Management and Governance • Average tenure of TELUS executives exceed that of peers by 25%, indicating higher loyalty and lower turnover • Current CEO Darren Entwistle guided TELUS through a period of rapid growth • Canada’s third largest telecom company • Incumbent service provider in British Columbia and Alberta • Shared network with BCE since 2008 • Provider of wireless and wireline communication services as well as cloud based business solutions and EMR Total Revenue Breakdown & Profile Future Expansions • TELUS intends to invest in network growth and to upgrade its broadband infrastructure • Plans to connect businesses and residential units with fibre-optic cable, by expanding rural broadband connections • Investments will increase data speed as well as capacity to support TV, internet and data service growth SFU Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

4. ESG Scorecard ESG scores for TELUS, BCE Inc. and Rogers Communications. • Organized management structure • Scored the best under various ranking systems • ESG leader in the industry Source: Bloomberg. ESG metrics for TELUS, BCE Inc. and Rogers Communications. SFU Source: Bloomberg. Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

5. Industry Overview Industry Revenue • Averageannual revenue growth 2.8% • Growing EBITDA margin – wireless sector faster than wireline • ROE decreased in recent years • Debt to Equity ratio continuously increases • Top five telecom companies take up 84% of the total market revenue Source: CRTC data collection. Incumbents vs New Entrants Porter’s Five Forces SFU Source: CRTC data collection. Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

6. Demand Drivers GDP Annual Growth Per Capita Disposable Income Source: Statcan, IBIS. Source: Statcan, IBIS. Population by Age Groups. SFU Source: Statcan. Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

7. Competitive Positioning Monthly postpaid ChurnRate Churn Rate • Lowest churn rate and least number of filed complaints among all telecom incumbents Spectrum Licenses • Second largest spectrum license holder with 10% increase in past six years Infrastructure Investment Source: TELUS Annual Reports • Announced $12 Billion of investments in AB, BC, ON and QC through 2019 Commercial Mobilespectrum license holdings (%) ARPU • Customers’ willingness to pay for premium services and customer loyalty Small Competitors • Competition is acquired SFU Source: Innovation, Service and Economic Development Canada Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

8. Financial Analysis Telus Return Analysis Source: Bloomberg. Summary • TELUS’s stock provided superior returns over the last 5 years • Elevated P/E ratio driven by superior growth perspective • High dividend stocks used as a substitution for bonds in an unstable economy • Low interest rate level supports demand for equity SFU 1Capital appreciation and dividend yield Source: Bloomberg. Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

9. FinancialAnalysis Financial Performance Source: Bloomberg. Summary • High restructuring expenses as well as revaluations of deferred income tax liabilities led to sharp decline in profit margin • Changes in capital structure influences return on equity • Increasing leverage puts pressure on profitability SFU Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

10. FinancialAnalysis Liquidity Assessment Source: Bloomberg. Summary • High capital expenditures put pressure on liquidity • Unsustainable dividend growth going forward SFU Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

11. Valuation Overview & Inputs Current Fair Value(1) Fair Value: $42.94 Current Price(2): $43.84 Return: -2.05% Recommendation: HOLD Beta – Unlevered / Levered Weighted Average Cost of Capital SFU 1) As of Jan 20th, 2017 2) As of Feb 27th, 2017 3) Source: AswathDamodaran Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

12. Relative Valuation & Output Relative Valuation (1) Sensitivity Analysis Methodology SFU TELUS trades in line with BCE on many multiples, undeservingly so. TELUS has more relative exposure to the wireless business and has been making large capital expenditures to create a higher return for shareholders. Thoughts: 1) Source: Bloomberg Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

13. FCF Valuation & Summary Free Cash Flow to the Firm (1) Sensitivity Analysis 1 Year Target Price (1) Target Price: $44.63 All Valuation Outputs (1) SFU 1) As of Jan 20th, 2017 Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

14. Valuation & Risk Assessment Statistical Results Input factors • Expected return – Based on our base-case target price calculation • Expected standard deviation – based on historical sigma • Underlying method – Monte Carlo Simulation 9.8% 73.3% 16.9% SFU Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

15. Risk Assessment Operational Risk • CE: Unexpected capital expenditures • Natural disaster might lead to unexpected CapEx • Time needed to repair infrastructure and recover normal service quality Canadian Cellular Towers Map Operational Risk • CR: Impact on churn rate • Lower service quality • Reputational damage • Network sharing agreement with BCE inherits risks BEC TELUS Source: ertyu.org Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

16. Risk Assessment Regulatory Risk • AR: Decrease in ARPU due to price wars • and regulations • Canadian government encourages smaller competitors • Further regulatory pressure such as spectrum license lease by smaller competitors • US: American telecommunication companies • enter the Canadian market • Approval through CRTC • LC: Legal claims due to potential health risks • Issues regarding potential health risks due to radiofrequency signals • Tighter regulations on radiofrequency emissions Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

17. Risk Assessment Market Risk • MR: Interest rate upside volatility • Increasing cost of debt • Substitution of TELUS stock through bonds Technology Risk • TE: Technology impacts • Continuing infrastructure investment needed • New technological advancements increase the risk of substitution. Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

18. Decision Executive Summary Business Profile Industry Overview Financial Analysis Risk Assessment Decision Valuation

19. THANK YOU !

20. Appendix Appendix A1. Corporate Structure. TELUS Corporation National telecommunication company that provides a wide range of telecommunications products Wireless Wireline • Fastest growing segment • Voice and data services provide the most revenue • Joint network sharing agreement with Bell Canada Make up 45% of the revenue; Provides various data services. TelusHome Phone Offers wired connections for fixed monthly rates. Providers unlimited calling and up to 9 calling features. TELUS Mobility Attracts elder clients Requires fixed term contract. Telus Internet Offers DSL and dial up services to businesses; Currently upgrading pure fibre internet; Second most satisfactory ISP in Canada for 2016. Koodo Targets younger aged customers Fixed term contract is notrequired More flexibility. Business Connect TELUS TV Advanced Solutions SFU

21. Appendix Appendix B1a. Executive Team. SFU

22. Appendix SFU

23. Appendix Appendix B1b. Board of Directors. SFU

24. Appendix Appendix C1a: Communications Service Industry Revenue ($ billions) Source: CRTC data collection. Appendix C1b: Telecommunication Revenues (Wireline and Wireless) ($ billions) SFU Source: CRTC data collection.

25. Appendix Appendix C2a: Margins for wireline, wireless and total telecom industry. Appendix C2b. Return on Equity and Debt/Equity ratio for telecom industry. SFU Source: Statcan.

26. Appendix Appendix C3a: Aggregate PBIT margins for private conventional TV and discretionary services. Source: CRTC data collection. Appendix C3b: Revenue Generation Channels for Conventional Television Sector. SFU Source: CRTC data collection.

27. Appendix Appendix C4a: Telecommunication Revenue Distribution, by types of TSP (%) Source: CRTC data collection. Appendix C4b: Cross-Country Incumbents and new entrants Landscape. SFU Source: CRTC data collection.

28. Appendix Appendix C5a: Monthly household expenditures by service and by age groups. Source: Statistics Canada. In 2014, all age groups except persons 65 years and over spent the least on wireline telephone services, while also spent the most on mobile wireless services. Persons under 30 years spent the most on mobile wireless services ($114.42 per month) and persons in the 40 to 54 age group spent the most on total communications services ($250.42 per month). The relationship between age group and the amount spent on communications services is seen between households with persons aged less than 30 years, and households with persons aged 65 years and over. An obvious generation gap is demonstrated through their monthly communications expenditures, since the youngest generation tends to spend more on communications services, specifically on mobile wireless services. However, the oldest generation spends the least in total for communications services, while the service it spends the most for is cable and DTH ($59.00 per month). SFU

29. Appendix Appendix C5b: Household spending on communication services, by income quintile. Source: Statistics Canada. Appendix C5c: Canadian wireline and mobile wireless service subscribers per 100 households, by income quintile. SFU Source: Statistics Canada.

30. Appendix Appendix C6a: Total residential connections distribution by service type (%) and percentage for hotspot locations. Source: CRTC data collection. Source: CRTC data collection. As shown in the figure, connections to mobile wireless services represent nearly half of all household connections and Internet connections continue to expand. Landline (i.e. wireline telephone service) and BDU (e.g. cable, DTH satellite, and IPTV) connections, despite their relative declines, still comprise over one third of all subscriptions. As a whole, while mobile wireless service connections are the most widespread, the growing trend is gradual but steady. SFU

31. Appendix Appendix D1a: Wireless Service Coverage by number of providers. Source: CRTC data collection. The competitive landscape in the communication system as a whole remains mostly unchanged during recent years. Large vertically and horizontally integrated entities hold dominant market positions when most provinces have at least 2 service providers. SFU

32. Appendix Appendix D1c: Market Share in Subscribers (in Thousands) The Herfindahl-Hirschman index (HHI) is a commonly used measure of market concentration. A market with HHI below 1500 is considered as a competitive market, an HHI between 1500 to 2500 as a moderately competitive market and an HHI higher than 2500 as a highly concentrated market. In Canada, all the major telecom competitors have an HHI higher than 2500 which means that the competition in telecom industry is limited. SFU

33. Appendix Appendix D1d: Market Share in Percentage and HHI Calculation. Appendix D1e: Percentage of All Accepted Complaints SFU

34. Appendix Appendix D2a: Field research on Prices and Packages for major competitors. SFU

35. Appendix Appendix D2c: Price Indices for Telephone Services, BDU services and Internet Services Compared to CPI. As measured by the CPI, average annual inflation in Canada was 1.1% in 2015. In comparison, from 2014 to 2015, the prices of key communication services increased by 2.8% (telephone), 2.5% (cable, DTH satellite and IPTV) and 5.0% (Internet). Prices for BDU services have increased each year, over the past decade. Similar to previous years, consumers spent on BDU services almost double the amount they spent on telephone services. Internet access service prices continued to rise since 2010. SFU

36. Appendix Appendix D2c: Small Competitors Analysis. SFU

37. Appendix Appendix D3: Survey. Q1. Age Range of Respondents. Q2. Years Lived in Canada. Q3. Annual Household Income SFU

38. Appendix Appendix D3: Survey. Q4. Factors that consumers think are most important in their phone plan (score out of 100) Q5. Carriers used by Respondents. SFU

39. Appendix Appendix D3: Survey. Q6, Satisfaction with TELUS/Koodo. Q7. Reasons for choosing TELUS. SFU

40. Appendix Appendix D3: Survey. SFU

41. Appendix Appendix E1: Sensitivity Analysis for Trading Multiple Valuation SFU

42. Appendix Appendix E2: Base Case historical and project balance sheet SFU

43. Appendix Appendix E3. Base case historical and project income statement. * Note: 2016 Numbers are estimates to forecast 2017 onwards. However, we did not use 2016 numbers for our valuation. SFU

44. Appendix Appendix E4. Base case historical and project cash flow statement SFU * Note: 2016 Numbers are estimates to forecast 2017 onwards. However, we did not use 2016 numbers for our valuation.

45. Appendix Appendix E5. Calculation of WACC. SFU