Telus Stock Pitch

T : TelusFebruary 24, 2015

Disclaimer

The analyses and conclusions of Queen’s Capital contained herein are based on publicly available information. The analysesprovided may include certain statements, estimates and projections prepared with respect to, among other things, the historical andanticipated operating performance of the companies, access to capital markets and the values of assets and liabilities. Suchstatements, estimates, and projections reflect various assumptions by Queen’s Capital concerning anticipated results that areinherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solelyfor illustrative purposes. Actual results may vary materially from the estimates and projected results contained herein.

Queen’s Capital assumes no responsibility or liability for any error, inaccuracy, or omission contained that may be made of suchinformation by the viewer. No information herein may be replicated without prior consent by the Executive Board of Queen’sCapital.

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Executive Summary


Content Slide

Company Overview 4

Industry Outlook 5-6

Investment Thesis 7-8

Catalysts 9

Risks 10

Valuation 11-14

Company Overview

Operational Overview

• TELUS Corp. is a telecom provider that operates in Canada with two major operating segments, Wireless and Wireline

• The company provides services including wireless and wireline voice and data services, cloud based solutions/data hosting, and television.

• They also provide and operate various technology outsourcing solutions for other companies, and have some operations working in the healthcare sector

• TELUS has approximately 14 million customer connections, including 8.4 million wireless subscribers, 3.1 million wireline network access lines, 1.5 million high-speed Internet subscribers, and 980,000 TELUS TV customers.

Overview

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Industry Outlook Investment Thesis Catalysts & Risks Valuation Appendix

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2011 2012 2013 2014 2015 2016

TELUS Corporation (TSX:T) - 5 Year Share Pricing Market Data

Last Price 39.68 Market Cap (mm) 23,257.5

Day High/Low 39.85/ 39.12 Shares Out. (mm) 593.0

52 wk High/Low 45.19/ 35.51 Float % 99.8%

Volume (mm) 0.69 Dividend Yield % 4.5%

Beta 5Y 0.46 EV 35,157.5

TEV / Total Rev 2.8x TEV / EBITDA 8.7x

all numbers in CAD

• Even with the recently announced increase in prices by telecom providers there are limited options for them to increase ARPU.

• The telecom market is due for an inert year. However, TELUS is a solid company with diversified holdings in various sectors, and they have consistently provided strong dividend yields.

Macro Outlook

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Overview Industry Outlook Investment Thesis Catalysts & Risks Valuation Appendix

Industry Outlook

• Three main companies dominate the Canadian telecom market, Bell Canada Enterprises, Rogers communications, and Telus.

• These encompass over 90% of Canada’s wireless market. Mainly due to the markets high barriers to entry stemming from Canada’s large geographic size and the immense capital needed to become competitive.

• The Industry is currently under stress due to the weak CAD (increasing cost of smartphones) causing consumers to shy away from new sign-ups. In addition to low consumer spending during the end of this year

• The new entrants in the market, regulatory changes, increased prices and the sluggish nature of innovation in the telecom sector may cause decreased subscriber acquisitions.

Fourth Player

• Shaw Communications is in the process of purchasing Wind mobile for $1.6 Billion (CAD)

• In the long term Shaw will integrate this into their existing offerings in an attempt to penetrate the telecom industry and offer its customers a more complete package when added with its existing internet and television services

Rogers Wireless, 33.62%

Bell Wireless, 28.02%

Telus Mobility, 28.84%

Other, 9.52%

• This acquisition will result in a large change in the Canadian telecom industry if successfully implemented

Micro Outlook



Consumer Spending

• Canadian households spent an average of $203 per month on communications services in 2014. That’s an increase of nearly $12 a month or 6.2 per cent from 2013

• The jump in spending on wireless and internet services specifically was even higher, up by 14 and 10 per cent respectively

• The CRTC says that In many cases, they are opting for faster and larger internet packages, as well as using more data on their wireless devices

• However overall spending has recently reduced because of the weak CAD

Growing Second Hand Market

• Deloitte Global predicts that in 2016 Consumers will sell outright or trade in approximately 120 million used smartphones

• With a 50 percent year-on-year growth in units, the used smartphone market is forecast to grow four-five times faster than the overall smartphone market. Expected to represent about 7 percent of the total smartphone sales by units in 2016, up from five percent in 2015 and four percent in 2014

• Carriers in developed markets could increase their offer of refurbished premium smartphones. Carriers could offer superior trade-in rates and simple trade-in procedures to lure users from other networks, or to encourage contract extension. They should consider how best to flex contract length, or offer shorter terms

Used Smartphones Market / Total Market Size

7%

• It is predicted that 26% of smartphone users in developed markets will not make any traditional phone calls in any given week.

• This has increased from 22% in 2015 and 11% in 2012, as consumers continue to replace calls with a combination of messaging, voice and video services

• In the last decade the data capabilities of smartphones have steadily ratcheted up. Contributing to the trend of people choosing data communications instead of traditional voice calls

Rise of the Data Exclusive

Investment Thesis



• Wireless Industry Moat – beyond the introduction of Shaw into the Canadian Telecom Industry there aren’t any threats for new companies to enter this market. Due to tough market regulations

• Strong Spectrum Holdings – Telus has made large investments into its spectrum holdings, most recently they purchased the 2500 Mhz spectrum. The spectrum alone will increase in value as the data requirements for future generations increase 1

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2010 2011 2012 2013 2014 2015

Wireless Subscriber Growth since 2010

Telus Rogers Bell

21.42%

13.80%

10%

Wireless Industry Moat & Wide Spectrum Holdings

Customer Retention & Dividend

• Telus has consistently had a customer churn rate of less than 1% due to this Telus has a much higher customer retention compared to its competitors

• Telus has consistently increased it’s dividend for 12 straight years. Increasing its dividend by 60% over the last 5 years alone

• Telus is currently trading at an attractive dividend yield of 4.5%. This is near historical highs for the past 5 years

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5 Year Dividend Growth

$1.68

$1.05

Investment Thesis

Lack of Media Content

• The media sector is facing huge headwinds right now. Most media stocks or stocks with media segments are getting hammered because of the higher number of cable cutters that no longer care to subscribe to televised programs and are switching to streaming services

• Telus’s smaller presence in this segment in addition to it not owning any programming content makes its cash flows more dependable and avoids the sectors decline.

• This Strengthens the reliability of its dividend and its business model while its competitors with large media based assets struggle to maintain margins



Catalysts



Oil Rebounding

• OPEC and Russia are coming to an agreement to halt production thus reducing supply• As cheap storage capacity fills up, oil reserves will have to look for other methods of

increasing storage capacity• Oil is poised to stabilize and rebound within the middle of this year as these various factors

affect the fundamentals of the oil market• A rebound in oil prices will also increase the Canadian Dollar as we see the correlation

between the CAD exchange rate and crude prices• An increase in CAD would lead to the higher profit margins for Telus as import prices shift• An increase in Crude prices would also ease the pressure on the Energy sector in Alberta

thus mitigating Telus’ exposure

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3year CAD/USDvsCrude

CanadianDollar($CADUSD)- RateValue

CrudeOil(NYMEX:^CL) - DayClosePrice

AdjustedRsquare=88.54%

Undervalued

• Growth in past year, above industry average• EV / EBIDTA multiple trading better than industry average • Y/Y Telus has been able to increase its bottom line margin, whereas competitors are

struggling to do the same• P/E well below industry average of 18x, yet still delivering similar earnings, this

suggests that Telus is undervalued compared to its competitors.



Risks

Increased Competition

• It has been announced Shaw has spun off its media division (Shaw Media) and sold it off to Corus Entertainment Incorporated.

• This sale by Shaw indicates that Shaw is now completely focused on becoming the fourth player in the Canadian telecom industry.

• If Shaw is successfully able to generate market share Telus will face increased competition

Low Subscriber Growth Prospects

• There are additional reasons for a low subscriber growth because of stagnant technological changes in the wireless industry. The last major launch of a new network technology LTE brought along a new wave of subscribers

• However, the reasons for upgrading to faster network technologies for consumers currently do not exist because of data caps. The LTE-A launch has not seen the same fan fair that the LTE launch received, and with that being said new reasons for subscriber growth is currently not present

• As seen starting in 2014 the most popular phones have all increased their prices in Canada. This in addition to the stoppage of three year contracts has meant very high new two-year contracts.

• In turn, most Canadian consumers are either holding onto their smartphones for a longer period of time or purchasing older phones on contracts to reduce the large upfront cost.

• The consumers are also considering mid-ranged smartphones being flooded into the market by Chinese manufacturers such as Huawei and Xiaomi

Weak CAD causing an increase in smartphone prices

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USDvs.CAD

Valuation - Comps



TELUS Corporation Comparable Companies AnalysisTEV/EBITDA LTM TEV/EBIT LTM P/Diluted EPS NTM TEV/EBITDA FY1 LTM Gross Margin % LTM EBITDA Margin LTM EBIT Margin LTM Net Income Margin LTM Total Revenues, 1 Yr

Growth

Rogers (TSX:RCI.B) 8.9x 16.8x 18.6x 8.40x 37% 37% 19.9% 10.30% 4.39%

Bell (TSX:BCE) 8.8x 14.9x 19.6x 8.48x 39% 39% 23.3% 12.45% 2.24%

Shaw (TSX:SJR.B) 7.8x 12.1x 13.4x 7.24x 43% 41% 27.1% 15.33% 4.75%

Cogeco (TSX:CCA) 6.6x 13.3x 12.2x 6.23x 46% 46% 22.9% 12.56% 5.94%

TELUS (TSX:T) 8.7x 14.0x 17.3x 7.66x 35% 33% 20.3% 11.12% 4.22%

Summary Statistics TEV/EBITDA LTM TEV/EBIT LTM P/Diluted EPS NTM TEV/EBITDA FY1 LTM Gross Margin % LTM EBITDA Margin LTM EBIT Margin LTM Net Income Margin LTM Total Revenues, 1 Yr Growth

High 11.8x 29.4x 128.2x 9.21x 62% 46% 27.1% 15.33% 20.47%

Low 4.9x 10.7x 12.2x 4.42x 37% 30% 9.0% (3.30%) (12.41%)

Mean 7.8x 16.9x 32.8x 7.22x 47% 36% 17.8% 7.21% 3.28%

Median 7.9x 15.0x 18.6x 7.61x 46% 36% 17.8% 9.22% 3.32%

Valuation - DCF



InMillions ofCAD Dec10A Dec11A Dec12A Dec13A Dec14A Dec15A Dec16E Dec17E Dec18E Dec19E Dec20E Dec21ERevenue (EstimateComparable) 9,779 10,397 10,921 11,404 11,927 12,502 12,856 13,162 13,458 13,869 14,154 14,508

%YoYGrowth 6% 5% 4% 5% 5% 3% 2% 2% 3% 2% 3%EBITDA 3,724 3,785 3,897 4,089 4,272 4,471 4,592 4,753 4,889 5,038 5,142 5,270

%Margin 38% 36% 36% 36% 36% 36% 36% 36% 36% 36% 36% 36%FreeCashFlow 1,152 663 1,549 2,145 1,423 1,658 1,399 1,748 1,928 1,983 2,097 2,177

%Margin 12% 6% 14% 19% 12% 13% 11% 13% 14% 14% 15% 15%

PerpetuityGrowth

0.0% 0.5% 1.0% 1.5% 2.0%

5.3% 45.28 50.95 57.94 66.77 78.28

Discount 5.8% 39.55 44.16 49.72 56.58 65.25

Rate 6.3% 34.74 38.54 43.06 48.52 55.25

(WACC) 6.8% 30.64 33.82 37.55 41.99 47.35

7.3% 27.10 29.80 32.92 36.59 40.94

0.0% 0.5% 1.0% 1.5% 2.0%

5.3% 14% 28% 46% 68% 97%

5.8% -1% 11% 25% 42% 64%

6.3% -13% -3% 8% 22% 39%

6.8% -23% -15% -6% 6% 19%

7.3% -32% -25% -17% -8% 3%

DCFEstimatedUpside 8%

ConsensusPriceTarget 42.26DCFEstimatedValueperShare(CAD) 43.06

PerpetuityGrowthMethodCurrentPrice(CAD) 39.76

TerminalEBITDAMultiple

4.6x 6.1x 7.6x 9.1x 10.6x

5.3% 24.43 34.49 44.55 54.61 64.67

Discount 5.8% 23.54 33.37 43.19 53.02 62.84

Rate 6.3% 22.68 32.27 41.87 51.47 61.06

(WACC) 6.8% 21.84 31.21 40.58 49.96 59.33

7.3% 21.02 30.18 39.33 48.49 57.65

4.6x 6.1x 7.6x 9.1x 10.6x

5.3% -39% -13% 12% 37% 63%

5.8% -41% -16% 9% 33% 58%

6.3% -43% -19% 5% 29% 54%

6.8% -45% -22% 2% 26% 49%

7.3% -47% -24% -1% 22% 45%

DCFEstimatedUpside 5%

ConsensusPriceTarget 42.26

DCFEstimatedValueperShare(CAD) 41.87

EBITDAMultipleMethodCurrentPrice(CAD) 39.76

Valuation – DCF Rationale



6.3% 5.0% 6.0% 6.3%1.0% 0.6% 0.9% 2.5% 1.0%7.6x 7.2x 7.3x 7.7x 8.1x 7.6x

CurrentChoice

WeightedAverageCostofCapitalPerpetuityGrowthRateExitEnterpriseValue/EBITDA

Input Peers PxImplied TgtImplied Default

WACC Rationale

• 6.30% is off analyst consensus for weighted average cost of capital for Telus.

EV / EBITDA Rationale

• The 7.6x EV / EBITDA multiple is pulled off the average from the comps table listed in the previous slide.

Valuation – Football Field



42.26

41.87

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43.06

42.26

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DCF

Mul2ples

Es2mates

TELUS Corporation Football Field Analysis

Appendix



Rogers

Thank You

16

Zachary

Senior Analyst – Queen’s Capital

Calum Bruton

Analyst – Queen’s Capital

www.queenscapital.ca

Anish

Portfolio Manager – Queen’s Capital

Telus Stock Pitch

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