We reaffirm our Hold recommendation on Bell Canada (BCE) based on the tepid operating results. The company reported limited revenue improvement and lower wireless net subscriber additions. Additionally, business momentum for video and broadband Internet segments was more than offset by sustained declines in traditional voice wireline business.
BCE is increasingly exposed to price competition as evident by the persistent decline in wireless revenue per customer. Moving forward, BCE faces a greater degree of risk as it is exposed to an intensely competitive environment due to the entry of additional wireless carriers. We also anticipate that operating performance through 2009 will be negatively affected by a weak Canadian economy.
The company lost nearly 40% of its market valuation since the setback associated with cancellation of the company’s privatization initiative. Recent efforts to maximize shareholder returns in the form of dividend and share repurchases could partially offset negative market sentiment resulting from the collapse of the proposed buyout.
Furthermore, complete control of Virgin Mobile Canada may provide opportunity to more counter price competition and drive wireless subscriber growth. We reiterate our Hold rating with a valuation target of $21.50 based on 4.3x 2009 EV/EBITDA or 11.7x 2009 estimated earnings and consideration for potential weakness in the Canadian currency against the U.S. Dollar.
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