CFA Institute Research Challenge hosted by CFA Society Team C

Integrated Telecommunications Service sector Team C Stock Exchange This report is published for educational purposes only by students competing in the CFA Institute Research. Challenge.

th Date: January 20 , 2017 Closing Price: $43.84 Recommendation: HOLD Ticker: T CN CAD 1.00 = USD 0.75 Target Price: $44.63

Market Profile Closing Price $43.84 Highlights 52-Week High/Low $44.40/$37.38 We initiate coverage on with a HOLD recommendation and target price of Avg. Volume (3M) 994,011 $44.63 one year going forward. This implies a 1.79% upside based on the company’s Shares Outstanding 591.40 million closing price as of January 20th, 2017. Given our expected dividend payment of $1.98 Market Cap $25.99 billion per share in 2017, we derive a total return of 6.31%, which is less than TELUS’s costs of equity and, thus, justifies our HOLD recommendation. Beta 0.90 EV/EBITDA 8.59x  Business Model – TELUS generates most of its revenue through its telecommunication infrastructure which requires ongoing capital expenditures to P/E 18.61x maintain revenue growth. Dividend Yield 4.37%  Competitive Positioning – TELUS is characterized through the highest ARPU as Key Financial Data well as the lowest churn rates among its peers. However, ongoing competition 2013 2014 2015 could drive down ARPU and lower revenue growth. Rev. Growth 4.4% 5.2% 4.2%  Industry Trends – Rapid technological advancements and structural changes EBITDA Ma. 35.2% 35.1% 34.1% intensify pressure on telecommunication companies. High penetration rates and Profit Ma. 11.3% 11.9% 11.1% slowing revenue growth indicate a mature stage of the industry. EPS 2.08 2.31 2.29  Financial Analysis – Solid financial performance through stable EBITDA Div./share 1.36 1.52 1.68 margins and revenue growth. High infrastructure investments decrease cash-flow generation and increase debt levels. Div. Yield 3.7% 3.6% 4.4% ROE 16.5% 18.4% 18.3%  Valuation – TELUS’s shares provide limited upside potential for capital Valuation Summary appreciation. High dividend growth rates are expected to slow down and cash flow to equity is anticipated to decrease through higher capital expenditures. Method Price Weighting Consequently, we expect yearly total return for investors to decrease until the FCFF $43.06 25% price has adjusted to its fair value. FCFE $34.29 20%  Risk – Regulatory uncertainty and increasing competition influence the outlook DDM $41.52 25% on TELUS’ share price. Higher churn rates and decreasing ARPU are considered major risk factors and could alter our investment decision. EV/EBITDA $45.88 10% P/E $50.63 10% Recent News P/Book $52.07 10%  January 18th, 2017 – TELUS announced presentation of fourth quarter results to $42.94 100% be webcasted on Thursday, February 9th, 2017. Cost of equity – th 3.93%  January 17 , 2017 – TELUS invests $250 million in its fibre optic network. Div. Yield TELUS plans to connect more than 90% of homes and businesses in Surrey, B.C. 12 month target $44.63 directly to its fibre optic network. Surrey is the second largest municipality in the Expect. Div. 2017 $1.98 province and provides further growth potential for new customers.

Total return 6.31%

Last-Twelve-Month Performance Monte Carlo Simulation - 1 year forward 125% 120% 9.8% 73.3% 16.9% 14 9.8% 73.3% 115% 12 110% 10

Thousands 8 105% 6 100% 4 2 95% 0 90% 01/2016 04/2016 07/2016 09/2016 12/2016 T CN SPTSX 1

Business Description Figure 1. TELUS Structure TELUS Corporation is a Canadian telecommunication company headquartered in Vancouver, TELUS . It is the incumbent communication service provider in British Columbia and Corporation with a strong market share in both of its primary segments, Wireless and Wireline (Figure 1). TELUS mostly generates revenue through its telecom infrastructure. It provides a wide range of related products and services such as data, internet, voice and television as well Wireless Wireline as cloud based to businesses and households. (See AppendixA1 for detailed corporate structure) Wireless Data Voice The wireless segment, which makes up 55% of overall revenue (Figure 2), is TELUS’ fastest growing business unit, generating most of its revenue through voice and data services. In 2008, Advanced Internet Solutions IPTV TELUS and Bell agreed on a network sharing contract to compete directly with Rogers Communication. TELUS is operating under two brands, and Koodo both of which focus on separate market segments. While Koodo is offering lower priced products, Small TELUS mobility addresses higher-end segments. Healthcare Business Solutions Wireline According to Figure 2, the Wireline segment makes up 45% of TELUS’ revenue, providing voice and data services such as IPTV, internet, hosting services, local and long distance landline Figure 2. Total Revenue share connections. According to Figure 3 data services account for 69% of wireline revenue. Apart from this, TELUS also offers several products for small and medium businesses such as cloud based PBX, network and cloud solutions which aim to provide affordable process optimizations. Driven by continuous product diversification, TELUS recently launched its healthcare segment and became the largest EMR provider in Canada by offering various 45% healthcare solutions such as claim management and health monitoring. 55% One of the most recent trends is TELUS’s IPTV and Satellite TV service known as Optik TV which allows subscribers to access more than 630 digital channels. Future expansions TELUS continues to invest in wireless capacity and network growth as well as in broadband infrastructure expansion and upgrades. One of its strategic objectives is to increasingly connect Wireless Wireline businesses and residential units with fibre-optic cable, by expanding rural broadband Source: TELUS Annual Reports. connections. These investments increase internet speeds and the capacity to support TV, Internet and data service growth. It also enhances the reach of its healthcare solutions, and Figure 3. Wireline Revenue share provides backhaul capability to expand wireless services. TELUS mainly focuses on the telecom business; however, successfully adapts to industry changes and is resilient enough to 4% overcome economic downturns. Management and Governance 27% The average tenure of TELUS executives has exceeded the respective tenure of peer companies by around 25% which indicates higher loyalty and lower turnover. (Appendix B1a) Fourteen years as the company’s CEO, guided TELUS through a period of rapid 69% growth. He returned to his old position on August 2015 after a leave for fourteen months. Investors’ confidence grew after a 4.2% revenue growth the following month of Darren Entwistle’s reappointment and his $10 million investment in TELUS shares. The oversight of the board is realized through four committees Audit, Corporate Governance, HR & Compensation and Pension (Appendix B1b). Each committee is composed of board Data Voice Service Other directors with the objective to ensure the alignment of policies and strategy. In order to maintain Source: TELUS Annual Reports. a neutral standpoint in discussions and decisions, TELUS’ executive team is not involved in any of the sub-committees of the Board. Additionally, TELUS launched the National Sustainability Council in 2015 which is expected to solidify TELUS award-winning disclosure in corporate Figure 4. TELUS National Coverage governance.

Embracing Culture

Increasing diversity and inclusiveness have been reflected throughout all levels of the organization. A clear policy is supervised by the Corporate Governance Committee which enable TELUS to be recognized by Mediacorp Canada as one of the best employers with respect to diversity. Shareholders’ Rights To ensure shareholders’ rights, a Corporate Secretary has been designated by the Board as its agent to receive and review communications and meeting requests. A new policy has been adopted in 2015 to improve the previous say-on-pay and shareholder engagement policy in order to encourage timely, honest and ongoing dialogue.

Code of Ethics Source: CRTC Data Collection The TELUS Code of Ethics and Conduct is used to assist TELUS team members in maintaining the highest standards of ethical conduct in the corporate and professional dealings. Ethicsline, as part of the annually renewed code allows team members to anonymously raise complaints. 2

ESG Figure 5. Revenues and Percentage Environmental, social and governance concerns could negatively influence the business going of Wireless Sector. forward which would alter our investment decision. Among its peers, TELUS has the most 50 52% percentage of independent director and meeting attendance percentage, indicating an organized

management structure. In terms of ranking, TELUS scored the best in the RobecoSAM Rank, 40 51% 50% Sustainalytics Rank, ISS Quality Score and CDP Climate Score compared to peers Bell and 30 50% Rogers (See appendix B2). Our analysis of TELUS’s ESG factors show that there is a low 49% 48% 20 49% probability that ESG factors will have a negative impact on the valuation.

47% 46% 10 Industry Overview and Competitive Positioning

0 44% Industry Overview 2011 2012 2013 2014 2015 Over the past 5 years, the telecommunication industry saw an average annual revenue growth of wireline wireless 2.8% (Appendix C1a) with approximately 94% of revenue generated through services that are Wireless% no longer price-regulated. In general, the EBITDA margin for telecom companies is 39.8% with Source: CRTC data. a 7.6% growth 2014 to 2015 (Appendix C2a). The average ROE for the telecommunications sector is 15.5% and the average debt to equity ratio is 1.688 (Appendix C2b). The fastest growing segments are internet and wireless which capture around 70% of the Figure 6. GDP Growth of Canada. industry’s revenue. During 2011 to 2015, wireless data services alone grew by an average 3.50% annual rate of 18.8% and gained a market share to 51% (Figure 5). The greatest decline in

3.00% revenue was experienced by access line services, which have been gradually decreasing by 4.8% annually over the last 5 years. Additionally, revenues generated from television services 2.50% have experienced an average annual decrease of 0.4% (Appendix C3a) due to high substitution 2.00% by online streaming. Technological advancements led to a shift from voice services towards an 1.50% increasing need for data volume and navigates potential infrastructure investments going 1.00% forward. The five largest telecommunication providers, including TELUS, account for 84% of total 0.50% market revenue. Smaller resellers are responsible for nearly 68% of the services offered but 0.00% only account for 4% of revenues (Appendix C4a). This indicates a highly-concentrated market which increases the risk of further regulations. Short life cycles of technological advancements continue to fuel growing need for greater infrastructure investments. Historical Forecast Source: Statcan, IBIS Demand Drivers Moderate GDP growth leads to increasing corporate activity and lower unemployment rate Since 2010, Canadian GDP growth has been fluctuating with a downward sloping trend, from Figure 7. Per Capita Disposable 3.1% annual change in 2010 to 1.3% in 2016 (Figure 6). However, after a resource driven Income Growth decline in recent years, Canada’s economy was able to recover which led to a positive economic 4.00% outlook, especially for Alberta. Canadian GDP is anticipated to pick up speed by with an

3.00% estimated 1.8% growth rate in 2017, passing through the fear of a real estate bubble as well as constrained export activity caused by a stagnant Eurozone economy. These trends will likely 2.00% result in an increasing demand for data consumption and other telecommunication services. 1.00% Growing Per Capita Disposable Income 0.00% Over the past five years, per capita disposable income has increased at an annualized rate of -1.00% 2.1% (Figure 7). However, this trend might be weakened by increasing level of household indebtedness over the most recent years. Rising consumer debt in Canada could intensify the existing concerns about a possible recession. Further pressure can be expected from housing Historical Forecast prices as they continue to increase. Nonetheless, we expect disposable income to develop positively as the Canadian economy is Source: Statcan, IBIS. anticipated to recover and GDP to grow. Thus, we assume an annual growth rate of 2.5% over the next 5 years forward which will support the trend towards higher smart phone penetration.

Demographics: Population, Immigrants and Age Groups Table 1. Historical Population by Age The number of Canadian residences has been growing steadily at around 1% annually for the Groups (Thousands) past ten years. At the same time, Canada is characterized by an aging population with a mean of 48 years. (Table 1) The workforce gap is expected to be filled by a growing number of < 20 20 - 64 > 64 2010 immigrants at younger age, higher education and larger purchasing power. High immigration 7874 21335 4796 rates provide potential for further revenue growth within the telecommunication industry. 2011 7867 21526 4950 According to Statistics Canada, adults in the age of 40 to 54 years spend the most on 2012 7854 21729 5167 telecommunication services, which leads to higher profitability going forward (Appendix C5). 2013 7849 21923 5384 Technology Innovation 2014 7849 22106 5589 Given the continuing trend of Internet of Things (IoT), mobile payments, video streaming and 2015 7851 22211 5787 fast evolving electronic devices, telecommunication companies are facing both challenges and 2016 7898 22398 5991 opportunities. The increasing demand for data services challenges network capacity and is Growth 0.05% 0.81% 3.78% anticipated to be accompanied by decreasing prices. Disruptive technology such as OTT (over CAGR 0.93% 0.17% 3.46% the top) offerings and increasingly available free Wi-Fi networks has the potential to affect Source: Statistics Canada TSPs by competing for entertainment viewership and wireless data services (Appendix C6). However, telecommunication service providers also have the chance to acquire new growth 3 opportunities though technology innovations. A vertical cross-sector collaboration involving Figure 8. Five Forces Analysis. software platforms and embedded systems boost the chance for revenue growth as well as Entry of cooperation with other operator partners. new Competitive positioning barriers 5 The communication industry is continuously exposed to characteristic changes. High demand Rivalry 4 for voice service in recent decades has been replaced by data services being the new revenue aong 3 Level of 2 driver. VOIP, Skype and Facetime limit the demand for phone connections. Free internet in existing Subsitute public places and Shaw’s free Wi-Fi hot spots can cause lower demand for data plans. competit 1 s ors 0 However, we perceive a shift within the same industry rather than a substitution through new products. Thus, the risk of substitution of the telecommunication industry is low. Since TELUS Bargainn Bargainn is highly diversified within the industry, we think it can adapt to current trends and maintain ing ing stable revenue growth. power of power of The bargaining power of suppliers is mainly influenced by the government through the buyers suppliers distribution of spectrum licenses and regulations. However, recent attempts to increase competition has failed due to low economies of scales for smaller companies. Thus, we do not Figure 9. Monthly postpaid Churn expect any extensive regulatory pressure in the near future. Rate. The Canadian telecom industry is considered an oligopoly leading to low rivalry among 1.50% existing competitors. Over the past years, we perceived low changes in market share of the big three service provider (4% since 2009). We calculated the Herfindahl-Hirschman index (HHI) 1.30% of the telecom industry which results in a score of over 2700 (for detailed description, please refer to Appendix D1d). According to the US Department of Justice, an industry with HHI of 1.10% over 2500 is considered highly concentrated. Due to limited threats from new entrants and substitution, the telecom industry has relatively high pricing power and maintains high profit 0.90% margins. However, going forward we expect competition among existing competitors to increase (Appendix D1b). 0.70% Churn Rate 2012 2013 2014 2015 According to the Federal Commissioner for Complaints for Telecommunications Services Telus Rogers Bell (CCTS) report, the number of complaints TELUS received was half the number of Rogers, and Source: TELUS Annual Reports. one fifth of the number of Bell (Appendix D1e). Consequently, TELUS maintains the lowest postpaid customer churn rates (0.94%) which indicates the loss of clients per month as a Figure 10. Commercial Mobile percentage of the existing customer base (Figure 9). Thus, we expect TELUS to maintain a Spectrum License sustainable growth going forward. However, 1% per month is still ~12% per year, which Holdings by Percentage. requires high marketing spending and promotional offer to attract new customers. 50% Spectrum 40% Mobile Spectrum license is vital for the telecommunications industry since they enable larger data volumes. The key players currently own more than three quarters of the national mobile 30% spectrum licenses. TELUS increased the market share of its spectrum license holdings from 15% in 2010 to 25% in 2016, thereby becoming the second largest spectrum holder in Canada 20% (Figure 10). As TELUS continues to significantly invest in spectrum licenses, it is expected to maintain high quality services. 10% Infrastructure Investment 0% Since the telecommunication industry is a technology intensive industry, investment in network infrastructure is a key success factor. Since Bell and TELUS started network sharing in 2009, Roger’s competitive advantages have decreased and the company keeps losing market share (Figure 11). While TELUS and Bell have announced plans to upgrade their network to increase 2010 2016 wireless speed, Rogers is yet to announce any such plans to maintain its market position Source: Innovation, Service and (Appendix D1f). Economic Development Canada. ARPU ARPU, average revenue per user, is a measure used in the telecommunication industry to Figure 11. Market Share of describe the quality of product and services. Higher ARPU proves customers’ willingness to Telecom Industry. pay more for premium services (add-ons, high priced plans, see Appendix D2a,D2b). It is also 40.00% an indicator of loyalty because customers who stay with the company’s plans are losing the advantage of initial promotional discounts and usually pay more for their contracts. According 30.00% to Figure 12, since TELUS has a high ARPU, we can assume that it maintains a loyal customer 20.00% base. From our survey, most TELUS/Koodo users are satisfied in terms of signal strength, internet speed, data charges, customer service, and 65.22% TELUS users would recommend 10.00% TELUS to others. However, as our survey revealed, many customers leave TELUS due to high data charges. Consequently, we think that TELUS’s high ARPU could lead to higher churn 0.00% rates going forward (For detailed survey results please see Appendix D3). Small Competitors Despite the fact that the Canadian government has been encouraging competition within the 2010 2016 industry, the telecom giants have eliminated competition from smaller telecom companies primarily through acquisition. TELUS acquired in 2013 while Rogers acquired Source: CWTA. in 2015 and Bell is currently undergoing the approval process to acquire MTS. Other small competitors such as PC Mobile are resellers rely on large operators to package and deliver 4 their mobile services. The revenue and subscribers generated through reseller arrangements are Figure 12. Blended ARPU. lower than 1% of the whole Canadian market and therefore resellers have very limited 65 competition (For the detailed small competitor analysis please refer to Appendix D4).

60 Investment Summary

55 We issue a HOLD recommendation on TELUS with a 1-year target price of $44.63 using the weighted average of the following valuation methods: Discounted Cash Flow to Firm, 50 Discounted Cash Flow to Equity, Dividend Discount method, and Trading Multiples. By including the expected dividend payment in 2017 of $1.98, our return would be 6.31% in one 45 th 2011 2012 2013 2014 2015 year based on the company’s closing price as of January, 20 2017. Merits Telus Rogers Bell Incumbent service provider in Western Canada with strong nationwide presence Source: TELUS Annual Reports. TELUS continuously invests in spectrum licenses and infrastructure to enhance its service

quality and increase its customer base. The company maintains a great market share in both its Figure 13. Historical Performance. wireless and wireline segment and currently serves 14.2 million customers. Recent growth 47 drivers are TELUS’s TV and internet services, which grow faster than its competitors. Additionally, TELUS’ ARPU is the highest in the industry given its strong presence in Western 45 Canada. Higher penetration rates as well as lower levels of unemployment and 43 Potential upside higher household incomes support higher-priced phone plans in British Columbia and Alberta. Given its strong market position, TELUS can maintain revenue growth going forward. 41 Solid profitability and strong cash flow base support capital expenditures 39 TELUS is one of the few telecommunication companies that achieve consistent revenue and subscriber growth. The company continues to increase product diversification with segments 37 such as TELUS Health and TELUS International, which will strengthen their position in the 35 telecommunication market. Strong wireless metrics and customer satisfaction combined with 2014 2015 2016 2017 the lowest churn rate in the industry foster TELUS ability to compete with other service providers. Stable EBITDA margins show TELUS’ ability to maintain its profitability and Source: Bloomberg. financial performance. A sustained positive operating cash flow supports high investments in infrastructure, further enhancing TELUS’ growth objective. High dividend yields benefit investors and increase the attractiveness of TELUS shares going forward. Figure 14. P/E multiple. 24.x TELUS is trading at a lower P/E multiple with respect to its peers An analysis of the current trade multiples show that TELUS trades at a discount compared with 22.x the industry average despite a competitive dividend yield (Figure 14). We also perceive a rather 20.x stable valuation multiple, which indicates little price fluctuations in 2016. These findings are in line with our valuation outcome and indicate stable returns over the course of last year. Going 18.x forward we think that TELUS has limited upside potential characterized by a rather stable performance. Despite a low P/E ratio we do not think that TELUS is currently undervalued and, 16.x thus, we do not issue a BUY decision. These findings are in line with our HOLD recommendation. 14.x 01/2016 04/2016 07/2016 09/2016 12/2016 Concerns TELUS BELL High valued Canadian telecommunication industry due to slow economic growth ROGERS SHAW The telecommunication industry delivers stable returns through high dividend yields and decent Source: Bloomberg. growth. In an economic downturn or uncertain market environment, investors seek for stable

investment opportunities. While Canadian corporate and government bond rates were

continuously declining over the past years, TELUS’s dividend yield steadily grew and provided Table 2. 10-year Bond Yield greater return opportunities. A 10-year corporate bond issued by TELUS currently trades at a Comparison yield of 3.42% compared to the current dividend yield of 4.37% (Table 2). Thus, many investors might swap corporate bonds with telecommunication stocks to receive higher returns. Return 2012 2013 2014 2015 2016 A cross country comparison reveals that Canadian telecommunication companies are currently Stock overvalued with respect to its US peers, which are traded at a discount (Figure 15). An Total 18.4 19.2 (5.9 18.6 optimistic outlook on the US economy and a likely increase in interest rates trigger a lower 16.7 return % % %) % demand for telecommunication stocks. Investors seek for higher risk rewarded returns and Dividend 3.9% 3.9% 3.8% 4.6% 4.4% avoid industries with low growth potential. Going forward we expect higher economic growth in Canada resulting in an increase in interest Bond rate and lower demand for TELUS stocks. Yield Gov. 1.98 3.19 2.27 1.88 1.93 Ongoing competition and fast pace technology advancements bond % % % % % TELUS is exposed to high competition in both its wireline and wireless businesses. Due to a 3.26 4.32 3.55 3.62 3.42 TELUS high market penetration and limited growth opportunities, telecommunication service providers % % % % % must attract clients from their competitors to increase market share. Expansion in other provinces is difficult due to the expensive construction of infrastructure and limited economies Source: Bloomberg. of scale. Therefore, TELUS must continue to significantly invest in its existing telecommunication infrastructure (especially fibre technology), web hosting and spectrum licenses while simultaneously deploying technological advancements. Consequently, TELUS maintained elevated capital expenditures and reached the highest capital intensity ratio among

5 its peers. However, high pay-offs and returns on these investments remain uncertain and Figure 15. EV/EBITDA - Canada negatively impact our outlook on TELUS. Decreasing liquidity puts pressure on debt levels and dividend growth going forward

9.01x Avg. TELUS continues to heavily invest in infrastructure and spectrum licenses mainly financed 8.83x 8.57x through the issuance of long term debt. At the same time TELUS maintains dividend growth rates of above 10%. Higher debt levels increase interest expenses which puts pressure on profitability over the next years. Thus, we consider TELUS’s dividend growth unsustainable 8.28x 8.15x and predict a decrease in growth in following years. Structural change in the industry leads to declining revenue from voice services High substitution of voice services and a maturing wireline market leads to a decline in the high TELUS BELL ROGERS SHAW profitable voice and long-distance revenue. A recent Canadian Radio-television and Telecommunications Commission (CRTC) report showed a trend towards the usage of mobile- EV/EBITDA - US only services among Canadians households (currently 24%). Consequently, TELUS must focus on higher revenues and cash flows from TV and internet services in order to maintain its 7.04x 6.93x profitability in the wireline sector. High investments in its fibre technology are necessary which Avg. increases the pressure on liquidity. 6.72x Financial Analysis 6.20x TELUS stock provided great returns over the last 5 years Over the last 5 years, TELUS stock provided superior returns and high dividend yields. The AT&T SPRINT annualized total return, which assumes dividends to be reinvested, was on average 13.5%, combined with 9.0% capital appreciation each year (Figure 16). If we compare both dividend Source: Bloomberg. yield as well as total return with the respective 10 year bond rates, we can conclude that TELUS provided an attractive return over the last 5 years due to a well performing stock price.

Changes in capital structure influence return on equity Figure 16. Return Analysis. TELUS has an attractive 2015 ROE of ~18.1%. However, compared to its Canadian peers ROE 55 is below the industry average of ~21.1%. With respect to its peers, TELUS has lower profit 50 margins as well as lower leverage (Table 3). High ARPU rates, however, lead to a superior asset turnover which positively influences ROE. Going forward, we project ROE to continue its 45 upward sloping trend, mainly driven by increases in debt and a change in capital structure. The 40 increase in TELUS’s EBITDA margin is offset by elevated interest payments, which leads to a stable profit margin. Asset turnover is expected to slightly decrease due to decrease revenue 35 growth and high investments in infrastructure, leading to an increase in assets. Overall we 30 project a stable ROE going forward.

25 Declining growth rates and ongoing industry maturation 2012 2013 2014 2015 2016 2017 TELUS achieved reasonable top-line revenue growth rates over the last 5 years with a CAGR of 4.7%. Driven by increases in the subscriber base as well as broadband internet data usage, Total return TELUS’ last twelve-month revenue ended in Q3 2016 grew to $12.7 billion compared with Capital appreciation $12.5 billion in 2015 and $12 billion in 2014. However, increasing competition and industry Source: Bloomberg. maturation led to a recent slowdown in growth rates. In 2016 wireless penetration is expected to stagnate despite stable churn rates, indicating a decline in new customers. Additionally, TV subscriber growth is expected to slow down, which has been the major growth driver over the Table 3. Du Pont Analysis. last 5 years (Table 4). Going forward we expect a decreasing growth potential, leading to a decline in revenue growth 2012 2013 2014 2015 and customer base expansion. Profit 11.0 11.4 11.9 11.1 Margin % % % % Stable EBITDA margin with expected growth going forward Peer avg. 13.8 12.6 12.9 12.3 Higher restructuring costs in addition to a depreciated Canadian dollar and higher roaming costs % % % % led to a decrease in the EBITDA margin to 34.1% in 2015 (Figure 17). However, headcount Asset reductions of approximately 1,500 full-time employees initiated at the end of 2015 improved Turnover 0.54 0.54 0.54 0.50 the EBITDA margin to up to 34.9% over the last twelve month ended in Q3 2016. Labor costs Peer avg. 0.52 0.49 0.46 0.42 per employee grew on average 3% per year which was less than revenue growth and, therefore, Leverage 2.6x 2.7x 2.9x 3.3x support a strong EBITDA margin. However, with decreasing revenue levels TELUS has to Peer avg. 4.3x 4.2x 4.0x 3.9x maintain low operation costs in order to sustain profitability and therefore a high ROE. Going 15.8 16.4 18.6 18.1 forward we expect TELUS to increase its EBITDA margin through further reductions in ROE % % % % operating expenses. Peer avg. 30.4 25.9 22.6 21.1 Table 5: Liquidity Analysis % % % % 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Source: Bloomberg Debt/Equity 86.6x 98.5x 126.2x 158.2x

Interest coverage 5.3x 5.0x 5.2x 5.3x 4.8x 4.4x 4.2x 4.3x 4.4x Gross debt/ EBITDA 1.7x 2.0x 2.2x 2.9x 3.1x 3.2x 3.2x 3.2x 3.1x (Div. + share 68% -6% 15% 13% 22% 57% 66% 90% 95% buyback) / FCFE

6

Increasing debt levels due to high capital expenditures Table 4. Subscriber Base. In 2016 TELUS heavily invests in its telecommunication infrastructure as well as spectrum licenses and 2012 2013 2014 2015 thousand E has released its intention to invest $10.0 billion across British Columbia, Alberta and Wireless 7,670 7,807 8,100 8,457 8,507 until 2019, and $2 billion cumulated in until 2020 (Figure 18). Strategic considerations Growth 4.5% 1.8% 3.8% 4.4% 0.6% include the acceleration of fibre penetration, especially in and Vancouver, the Access 3,009 upgrade of TELUS’ network infrastructure as well as the acquisition of additional spectrum line 3,406 3,254 3,169 3,053 licenses. Elevated capital expenditures led to a decrease of free cash flow and an increase of Growth. -5.2% -4.5% -2.6% -3.7% -1.4% leverage, mainly through the issuance of long-term debt. Therefore, DBRS downgraded Internet 1,359 1,420 1,475 1,566 1,631 TELUS’s corporate bonds from A to BBB in 2015 (Table 7). Increasing financing costs reduce Growth 5.7% 4.5% 3.9% 6.2% 4.2% the profitability of TELUS going forward. Given TELUS high liquidity needs over the next TV 678 815 914 1,002 1,058 years, we perceive a high probability that leverage will increase rather than decrease. A further Growth 33.2 20.2 12.1 9.6% 5.6% increasing debt level is difficult to maintain and has the potential to negatively impact TELUS’ % % % credit rating which would increase the cost of financing and put pressure on profitability. 13,11 13,29 13,65 14,07 14,20 Overall 3 6 8 8 5 Table 6: Dividend Analysis Growth 3.0% 1.4% 2.7% 3.1% 0.9% 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Dividend/share $1.22 $1.36 $1.52 $1.68 $1.85 $1.98 $2.10 $2.18 $2.26 Source: Annual Report Growth rate 22.0% 11.5% 11.8% 10.5% 10.0% 7.3% 5.9% 4.1% 3.3%

Payout ratio 66.0% 67.3% 65.6% 73.2% 68.6% 74.0% 77.0% 77.0% 76.2% Figure 17. Financial Performance. Dividend Yield 3.9% 3.9% 3.8% 4.6% 4.4% $12.7 $12.0 $12.5 Peer avg. 4.5% 4.2% 4.2% 4.5% $10.9 $11.4 Unsustainable dividend growth TELUS has continuously increased its dividend payments with growth rates exceeding 10% over the last 4 years which led to a payout ratio of over 70% in 2015. Simultaneously, an increasing dividend yield to 4.6% in 2015 enhanced the attractiveness of TELUS stocks with respect to the fixed income market. Many investors might have shifted their investment from corporate bonds to TELUS shares to achieve higher returns. However, going forward we do not think that TELUS can maintain a payout ratio of over 80%, therefore, leading to a decline in 2012 2013 2014 2015 LTM dividend growth. The underlying calculation assumes 푔 = (1 − 푑푖푣푖푑푒푛푑 푝푎푦표푢푡) × 푅푂퐸 which would result in a dividend growth of 푔 = (1 − 0.73) × 18.1 = 4.88%. Revenue EBITDA Source: Annual Report. Valuation

Figure 18. . Infrastructure We derive a fair value of $42.94 based on our combined valuation methods which allocates the Investments (Million) weights 25% to FCFF and a fair value of $43.1, 20% to FCFE and a fair value of $34.3 as well as 25% to DDM and a fair price of $41.5. The remaining 30% are allocated to our comparable analysis. The following chart represents a summation of the entire valuation section. We multiply the fair price by cost of equity adjusted for the current dividend yield in order to derive our price target of $44.63 one year going forward.

$42.94 Figure 19. Valuation Summary 1 P/Book Exit Multiple P/E Exit Multiple 0.8 EV/EBITDA Exit Multiple 2012 2013 2014 2015 2016 Comparable Metrics: 0.6 Spectrum - 67 1,171 2,048 1,000 DDM FCFE Wireline 0.4 1,270 1,398 1,527 1,684 1,750 FCFF CapEx Valuation Metrics: Wireless 0.2 711 712 832 893 950 Analyst target prices CapEx 52-week trading rage 0

$0.00 $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 Source: Annual Report. DCF (FCFF & FCFE) Table 7. Credit Rating – DBRS. Given the nature of the telecommunication industry and TELUS’ stable financial performance, a discounted cash flow method was used to calculate the intrinsic value of the share price. Our 2012 2013 2014 2015 analysis is based on 3 case scenarios, a base case, a bull case as well as a bear case. We TELUS included trends from the historical performance, the industry outlook as well as an assessment Corp. of TELUS competitive positioning. Issuer rating A A A BBB Free cash flow to the firm is expected to decrease over the next 2 years followed by a larger (low) (low) (low) increase from 2018 onwards. This is due to high capital expenditures related to fibre optic TELUS cables, 5G technology, and growth in TELUS Health. During this period we assume that Comm. TELUS will take on more debt to pay for the investments. Free cash flow to equity holders is Issuer rating A A A BBB forecasted to follow the opposite trend as FCFF because the high amount of debt being used to (low) (low) (low) fund capital expenditures. The sections below will provide additional color. (Detailed financial forecasts can be found in Appendix E) Source: DBRS Report Revenue Growth Revenue growth is primarily driven by the overall industry outlook as well as the assessment of TELUS competitive positioning. The main input variables are the net add of subscribers in each 7 Table 8. FCFF Sensitivity Analysis. ($) service line, encompassing wireless, access lines, internet and TV. The resulting subscriber base is then compared with ARPU of each segment in order to derive an overall outlook on revenue WACC (%) growth. In the period between 2016 and 2020 we expect access line net adds to be negative with $47. decreasing ARPU which partly offset the revenue growth generated through TV and internet 47 5.40 5.64 5.89 6.14 6.39 services which will be the key growth driver going forward. Future growth will be driven by the 1.25 44.1 40.1 36.6 33.4 30.5 acquisition of new customers through the expansions of the existing infrastructure and enhanced service quality. However, we expect revenue growth to slow down due to a maturing industry. 1.50 48.1 43.6 39.6 36.1 32.9 Capital Expenditures / Debt 1.75 52.5 47.5 43.1 39.1 35.6 TELUS will continue to invest in advanced technology and infrastructure upgrades. High 2.00 57.7 51.9 46.9 42.5 38.6 investments in fibre cable infrastructure for households and businesses is expected to continue

Terminalgrowth (%) until the end of 2018. Thus, capital expenditures remain elevated and debt levels continue to 2.25 63.6 57.0 51.3 46.4 42.0 increase.

Share Repurchases TELUS has recently engaged in a large amount of share repurchases, returning upwards of $500 million to shareholders over the past year. We have forecasted TELUS to fully utilize their Table 9. FCFF normal course issuer bid for 2016 leaving the year end share count at 588 million. By 2020 we Free Cash Flow to the firm ($) are forecasting share repurchases on a much smaller scale leaving the 2020 share count at 578 million. 2017E 2018E 2019E 2020E EBIT WACC (1-t) 2,036 2,077 2,143 2,211 TELUS’ weighted average cost of capital is broken down into four parts: Dep. 1,646 1,789 1,903 1,992 The cost of equity was determined using the Capital Asset Pricing Model, where we inputted a 10 year risk free rate of 1.75%, a cash adjusted levered beta of 0.90 and a market risk premium (CapEx) 2,600 2,548 2,497 2,447 of 7.25%; resulting in a 8.30% cost of equity. The cost of debt was taken by looking at the yield (WC) (72) (364) 9 (25) to maturity on a 10Yr. TELUS corporate bond, where we then accounted for taxes by using the effective tax rate of 27.5%. The after tax cost of debt is 2.63%. The weights of equity and debt FCFF 1,155 1,683 1,540 1,781 were computed using 2016E data, wherein we determined that the weight of equity is 62.10% TV of and the weight of debt is 37.90%. The WACC of TELUS is 5.89%. FCFF 35,320 Beta Beta for CAPM was calculated using research performed by Aswath Damodaran, he has calculated the unlevered beta adjusted for cash for Wireless and Wired Telecom providers in North America. We analyzed his data and revenue weighted the two betas to depict the business Table 10. FCFE Sensitivity Analysis.($) model of TELUS. The beta was then levered up with the according debt to equity ratio, giving us a 0.90 cash adjusted levered beta. Cost of Equity (%) $37. Terminal Growth Rate

34 7.80 8.00 8.30 8.50 8.80 We used a terminal growth rate of 1.75% as the perpetual growth of TELUS’ future cash flows. Over the past 50 years, the average real Canadian GDP growth rate has trended just above 2%, 1.25 34.8 33.6 32.5 31.5 30.5 we chose a growth rate just below that to be conservative and reflect the correlation between the 1.50 35.8 34.5 33.4 32.3 31.3 growth in the Canadian economy and TELUS. 1.75 36.9 35.5 34.3 33.1 32.1 FCFF 38.1 36.6 35.3 34.0 32.9 We took the present value of each cash flow and discounted it by the weighted average cost of Terminal growth(%) Terminal 2.00 capital to find the present enterprise value of the firm (Table 9). To find the terminal value we 2.25 39.4 37.8 36.4 35.0 33.8 utilized the Gordon Growth method by taking 2020 FCFF and dividing it by the difference between WACC and the terminal growth rate, then discounting it back to the present. After which, debt was deducted and cash was added back to find the equity value, outputting a fair value share price of $43.06. We utilized a sensitivity analysis to see the impact of changes in the weighted average cost of capital and terminal value on the share price (Table 8). Both of these inputs can greatly impact valuation giving us ~$16 range, when WACC changes from between 5.64% and 6.14% and Table 11. FCFE terminal value changes between 2.00% and 1.50%. Free Cash Flow to Equity FCFE 2017E 2018E 2019E 2020E e Net Income 1,575 1,587 1,646 1,712 Free cash flow to equity holders has similar inputs as free cash flow to the firm. In the case of TELUS, the difference is found with increasing debt levels. As mentioned earlier, we forecast Dep. 1,646 1,789 1,903 1,992 TELUS’ capital expenditures to be funded through additional debt giving us much lower cash (CapEx) (2,600) (2,548) (2,497) (2,447) flows to equity holders in later years. The FCFE method returned a fair value share price of (WC) (72) (364) 9 (25) $34.29 (Table 10). (Debt (5,750) (6,250) (6,500) (6,500) As the table 11 shows, FCFE for 2016/2017 trends closely to net debt additions, after which RePMT)) capital expenditures slow and depreciation increases. The terminal value of FCFE was New 7,250 7,250 6,750 6,550 Debt calculated in a similar manner to FCFF, except the cost of equity was used to discount cash FCFE 2,049 1,463 1,311 1,282 flows. The additional of the present value of cash flows plus the terminal value returned an TV of FCFE 14,840 equity value of $22Bn, which was divided by 588 million shares to return the fair value share price.

Dividend discount model (DDM) For 2017 onwards we have forecasted slightly smaller dividend growth, with dividend per share of $2.26 in 2020. 8 Using the cost of equity of 8.30% as the discount rate we found the present value of the forecasted dividends (Table 13). To find the terminal value of dividend the Gordon Growth method we used a conservative growth estimate which gave a terminal value of $34.24. The Table 12. Dividend Sensitivity. ($) present value of dividend was added to the terminal value to give a share price of $41.52 per Cost of Equity (%) share (Table 12). $43. For 2016, TELUS will pay over $1 billion back to shareholders in dividends which is not 10 7.80 8.00 8.30 8.50 8.80 included in our DDM calculation. However, we have forecasted this number to increase to $1.3 billion in 2020 which is extremely conservative considering the cash that is currently being 3.10 44.4 42.2 40.2 38.4 36.8 expended on repurchases. As discussed above, we have forecasted minimal share repurchases 3.20 45.2 42.9 40.9 39.0 37.3 over the next 5 years. There is a higher forecasted dividend growth rate to offset the reduction in share repurchases 3.30 46.0 43.6 41.5 39.6 37.8 and concept that as the business continues to mature and de-lever they will deliver more back to shareholders as a steady dividend. 3.40 46.9 44.4 42.2 40.2 38.4 Relative Valuation 3.50 47.8 45.2 42.9 40.9 39.0 A multiples analysis was done in addition to the DCF and DDM models for additional color on

Dividends Rate (%) Growth the direction of the company share price. During the relative valuation looked at three multiples: EV/EBITDA, Price/Earnings and Price/Book. These multiples were chosen for their simplicity and clear ability to reflect per share value. There were three comparable companies analyzed during the relative valuation: BCE, Rogers, and Shaw. We also compared TELUS to Table 13. Dividend Discount Model American companies but found that US competitors often trade at lower multiples which unfairly impacted TELUS’ valuation. Detailed Forecast Results Enterprise Value/EBITDA 2017 2018 2019 2020 We took the median of the Canadian competitors for last twelve months, 8.83x’s and multiplied E E E E it by 2016 EBITDA of $4.63Bn to find an Enterprise Value of $40.88Bn. After taking out debt Shares 588 582 580 578 Outstanding and adding back cash we found a fair value share price of $45.88. Price/Earnings 1.98 2.10 2.18 2.26 Div. ($) A P/E multiple of 18.8x’s was put on a projected earnings per share of $2.69 to give a share Growth 7.3% 5.9% 4.1% 3.3% price of $50.63. We understand that TELUS has historically traded at a lower P/E multiple, Rate PV of more in line with BCE Inc. but believe that TELUS’ P/E will not increase enough to justify a 1.91 1.87 1.79 1.71 Div.($) HOLD recommendation. TV of Price/Book 34.24 Div.($) A similar process was followed for Price to Book, where a multiple of 4.07x was applied to a $12.77 BVPS, yielding a share price of $52.07. Enterprise Value/Subscribers During our multiples analysis we also looked at enterprise value to subscribers, but found that TELUS trades at a very different multiple to the peer group. TELUS has a larger percentage of Table 14. Monte Carlo Simulation wireless subscribers compared to Bel which skews this multiple, if we used the same methodology as the above comparables we would derive a fair value share price of $28.53. Statistical Results Monte Carlo Simulation Simulation paths 100,000 We utilized a Monte Carlo Simulation to analyze the expected share price range one year going Minimum $38.80 forward. This simulation reflects the base case of our valuation and derives similar results using historical standard deviation and returns. We ran 100,000 simulation paths 1 year into the future Maximum $50.75 with daily price changes assuming that we are exposed to 253 trading days per year. The results Mean $44.72 illustrate the impact of deviations in underlying assumptions which enables us to analyze the sensitivity of our HOLD recommendation. With a mean of $44.72, our calculation proves to be Skewness 0.08 very accurate with respect to our valuation method. 73.3% of all simulated share prices support Kurtosis 0.04 our HOLD recommendation, while 9.8% indicate a SELL scenario and 16.9% would lead to a BUY scenario. 74.4% of the scenarios lead to a share price above the current market value. Median $44.70 Investment recommendation 5% confidence level $42.54 Our system for issuing an investment recommendation depends on TELUS’s underlying cost of 95% confidence level $46.95 equity. As described earlier we assume cost of equity to be 8.3%. If we receive an expected return above that threshold we issue a BUY recommendation. With the current dividend yield of 4.27%, an additional 4.03% return through capital appreciation is required to issue a BUY recommendation. The underlying assumption for our HOLD recommendation is to receive an overall return that exceed the risk-free rate of 1.75%. Given the current dividend yield we would tolerate a capital depreciation of (2.62%). Expected returns below the risk-free rate are given a SELL recommendation. Given our price target of $42.94 and the expected dividend payment of $1.98 in 2017, our return would be 6.31% in one year based on the company’s closing price as of January 20th, 2017. Consequently, we issue a HOLD recommendation. Investment Risks

[AR] Deceasing ARPU due to price wars and regulations

Canadian telecommunication companies are characterized through high profit margins and elevated price levels. Consequently, the Canadian government tries to encourage smaller competitors to enter the market in order to increase competition and lower costs for consumers. 9 Figure 20: Risk Matrix Smaller service provider can lease spectrum licenses at lower costs which could lead to destructive price wars and an overall decrease in ARPU. Furthermore, other telecommunication Impact High companies could initiate aggressive promotional strategies which would harm TELUS’s growth

perspective and put pressure on TELUS elevated ARPU going forward. Further risk factors include the expansion of regulatory pressure such as the skinny basic (effective March 1, 2016) which gives Canadians residences access to an affordable basic TV package that costs no more US than $25 per month. Higher demand for these packages could lead to a decrease in TELUS’s

AR High Likelihood customer base and, therefore, slow down revenue growth substantially. MR [CR] Impact on churn rate CR TELUS was able to maintain low churn rates over the past years. However, an increase in churn CE rates going forward could lead to a decrease in the number of customers and, therefore, to an unexpected decrease in revenue. Key factors in the forecasts of churn rates are TELUS’s

Likelihood Low LC TE reputation as well as service quality and price. Main driver of TELUS service quality is its infrastructure which is exposed to high risks such as damages and an overload of traffic. TELUS must be able to maintain its services, which requires proactive actions. Failure in maintaining service quality could decrease confidence, causing peaking churn rates and a decrease in the number of customers. Impact Low Another potential risk for Telus comes from its partnership with Bell. Telus and Bell have been sharing their network for wireless service since 2009. Both network infrastructures affect the other company’s reputation and service quality. Consequently, the relationship is built on trust Table 15. Risk Mitigation. which could lead to complications going forward. Company specific disruptions could affect Risk Mitigation the other company’s customers. TELUS actively [CE] Unexpected capital expenditures participates in CRTC Decreasing ARPU The wildfires in Fort McMurray in the summer of 2016 proved that TELUS is exposed to the review and consultation processes risk of natural disasters. In the event of wild fires or earthquakes, TELUS’ network infrastructure could be substantially damaged which increases capital expenditures and causes Ongoing investments in service quality to decrease. TELUS would have to raise debt borrowing to pay for these Churn Rate increase service quality and network reliability unexpected expenditures due to its low cash reserves. This would decrease TELUS’ profitability and thus, has a negative impact on its stock price. Even if part of the infrastructure Enterprise-wide business is covered by an insurance, it may take a relatively long time for TELUS to repair its continuity program, ongoing optimization of infrastructures and recover its normal service quality. Unexpected CapEx disaster recovery capability for network [TE] Technology impacts assets Over the years, as technology in the telecom industry advances, Canadian residences are Ongoing infrastructure demanding faster and more reliable internet connections as well as greater data volume. Technology impacts investments Consequently, TELUS has to continuously invest in infrastructure to keep up with latest Long-term bonds issued technological trends. Elevated capital expenditures could remain high and not decrease going Market Risk with fixed interest forward. Thus, return on investments would be lower, which decreases profitability in the obligation future. Additionally, new technological advancements increase the risk of substitution. For High initial infrastructure example, Netflix and free online streaming services have been attracting TV subscribers (Figure US entrants investments and low 21). Also, landline phone users have declined due to the rise of VOIP services such as Skype, economies of scale Facetime and other instant messaging applications in the past 10 years. If TELUS continues to TELUS continuously lose its wireline subscribers, it might negatively affect TELUS’ share price. monitors recently Heath risk published studies and [MR] Market risk regulations TELUS share performance is exposed to changes in interest rates going forward. One of the main characteristics of telecommunication companies is a high leverage due to extensive capital expenditures. TELUS has announced several investment plans for the next couple of years mainly financed by the issuance of new debt. However, its revenue may not be able to offset the Figure 21. TV Subscriber vs Netflix higher debt costs especially if interest rates are going to rise. A resulting decrease in profit Subscriber in Canada margins could have a tremendous effect on TELUS’s share price. Moreover, higher interest rates may induce investors to invest in fixed income securities rather than equities. As a 12000 consequence, demand for TELUS shares may decrease, which may lead to price depreciations. 10000 [US] US telecommunication companies enter the Canadian market 8000 In Canada the CRTC, Department of Innovation, Science and Economic Development (ISED) and the Competition Bureau are in charge of regulating the communication industry with the 6000 purpose to increase competition among market players. Thus, TELUS is exposed to regulatory 4000 decisions which could impact overall profitability and market position. One of the major risks is the approval of US companies entering the Canadian market which would increase the 2000 competitive pressure and, therefore, lower profitability going forward. 0 2011 2012 2013 2014 2015 2016 [LC] Legal claims due to potential health risks Increasing data usage and expansion of TELUS’s wireless infrastructure expose Canadian TV subscribers(in thousands) residence to potential health risk due to radiofrequency signals. Tighter regulations on Source: Statcan. radiofrequency emissions could lead to higher investments in safety standards and, therefore, exposes TELUS to increasing legal costs. Proven impact on health issues of residences could further lead to legal claims against TELUS and negatively impact reputation and customer trust. 10 Section A: Business Description Appendix A1: Corporate Structure.

TELUS Corporation

National telecommunication company that provides a wide range of telecommunications products Wireless Wireline

Fastest growing segment; Make up 45% of the revenue; Voice and data services provide the Provides various data services. most revenue; Joint network sharing agreement with .

Telus Home Phone TELUS Mobility Offers wired connections for fixed monthly rates. Attracts elder clients; Providers unlimited calling and up to 9 calling Requires fixed term contract. features.

Koodo Telus Internet Targets younger aged customers; Fixed term contract is not Offers DSL and dial up services to businesses; required Currently upgrading pure fibre internet; More flexibility. Second most satisfactory ISP in Canada for 2016.

Business Connect

Cloud based PBX which supports VOIP calling; Targets small businesses.

TELUS TV Cloud based PBX which supports VOIP calling; Targets small businesses.

Advanced Solutions Cloud based PBX which supports VOIP calling; Targets small businesses.

11 Section B: Management and Governance Appendix B1: Executive Team Members and Board of Directors Appendix B1a: Executive Team. Executive Position Career History with TELUS Background Shares Darren President and Joined TELUS in 2000 Bachelor of Economics (Honours) degree from 626,382 Entwistle CEO served as President and CEO for Concordia University fourteen years MBA in Finance from McGill University In May 2014, Darren became the Diploma in Network Engineering from the University Executive Chair of the Company of Toronto August 2015 resumed position as Serves on the boards for the Business Council of CEO Canada, the Gairdner Foundation and the Canadian Board Diversity Council. Josh EVP, TELUS Oversees TELUS Health, University of Victoria’s Bachelors of Electrical 265325 Blair Health, Payment Solutions and TELUS Engineering program. President, International Graduate of the Executive Program at Queen’s School Business Has oversight of TELUS sourcing of Business. Solutions West Solutions. Serves on the Board of Governors and Executive Chair, TELUS Serves as TELUS’ Chief Committee for the Business Council of British International Corporate Officer Columbia and the Governor’s Council of Canada. David EVP Joined TELUS in 2004, CMO Professional engineer who holds a Master’s degree in 93,374 Fuller President Oversees all aspects of consumer Business Administration from York University TELUS marketing, the development and Bachelor of Applied Science in Engineering from Consumer and management of TELUS’ full Queen’s University Small Business range of products and services for David was the country Managing Director for Solutions consumer and small business BearingPoint. He has also held management positions customers. with KPMG Consulting and Canadian Pacific. Doug EVP Doug held progressively senior Eight years working experience in Ernst and Young as French CFO roles, including Controller for the senior manager in auditing and accounting practice. largest business divisions, He supported numerous clients IPO efforts including Consumer Solutions, Business Clearnet. He holds a Bachelor of Arts (Honours), Solutions and Technology Commerce and Economics from the University of Strategy, as well as leading Toronto. He is also a Chartered Professional Corporate Accounting, Financial Accountant, a member of the Canadian and Ontario Reporting and Bid Governance. Institutes, and is based in Toronto. Monique EVP Monique is now a trusted advisor Worked at BCE and Bell Canada International before 72,354 Mercier Corporate to the TELUS executive joining Emergis in 1999 as Executive Vice President Affairs Chief leadership team and Board of of Law & Human Resources Legal and Directors. Graduated from the University of Montreal Law Governance School and holds a master's degree in politics from Officer Oxford University. Eros EVP Joined TELUS in 2000, Eros Before joining Clearnet in 1995, Eros held senior 164,847 management positions in engineering and marketing at Spadotto Technology served as the executive vice Strategy president and CTO of TELUS . Mobility. Responsible for leading Eros holds a Bachelor of Applied Science in Electrical TELUS’ integrated network Engineering from the University of Windsor. Master technology strategy, guided of Business Administration, from the Richard Ivey TELUS through the acquisition of School of Business at Western University in Clearnet Communications. Canada. He is a member of the Ontario Board of Directors for The Duke of Edinburgh's Award. Francois EVP President of Quebec and Atlantic Mr. Gratton holds an MBA from Harvard Business 61,478 Gratton President, Canada since 2012 before named School and a Bachelor of Law from the Université de Business as EVP for business solutions for Montréal. He sits on the boards of Foundation Solutions East Eastern Canada. Guided TELUS Montréal Inc., La Presse, Gesca and Square Victoria and TELUS through acquisition of Emergis. Communications Group in addition to being a member Québec of Le Cercle des présidents du Québec and the Harvard Business School Advisory Board.

12 Sandy EVP Sandy joined TELUS in 2007 and Serves as Vice-chair of the TELUS Toronto 37,352 Community Board and Honorary Chair of the Princess McIntosh president, has been championing the growth People & and development of the TELUS Margaret Hospital OneWalk to Conquer Cancer. Culture and team ever since, transcending Sandy holds both an Executive MBA and a Master’s Chief Human traditional HR accountabilities in Industrial Relations from Queen’s University, and Resources and challenging the status quo. graduated with honours from Carleton University in Officer Public Administration.

Tony EVP Leads TELUS’ Broadband Tony is a graduate of the Cranfield School of 64,162 Geheran President Networks team – responsible for Management with a Diploma in Professional Broadband the design, implementation, Marketing from the Figureered Institute of Marketing. Networks marketing and deployment of the He holds a Professional Certificate in Business most advanced Fibre-to-the- Administration from Open University and received his Premise (FTTP) program in the Professional Qualifications in Mechanical and world. Electrical Engineering while serving in the Royal Navy. Phil Executive Vice- Phil Bates coordinates 3000 team Phil has more than 30 years of experience in the 56,668 president, Bates members responsible for telecom industry in Canada and the United States and Operations and application development, release includes experience in operations, customer service, Application management, network and system network engineering, information technology, Development operations, change management regulatory and general management. and support activities. Jeferrery TELUS Jeferrey Puritt (Jeff) is in charge Jeff obtained his Bachelor of Arts in Political Science Puritt Executive Vice- of global business process, from York University and has a Bachelor of Laws President and contact center and IT outsourcing degree from Osgoode Hall Law School. Before TELUS clients joining Telus, Jeff has worked in Finance and International Administration, IP applications & Business President & Development, New Product and Service Development, CEO Ventures, and Mergers and Acquisitions. Source: TELUS.com.

Appendix B1b: Board or Directors. Audit Committee HR and Compensation Corporate Governance Pension Committee Committee Committee R.H.Auchinleck1

Micheline Bouchard

Raymond T. Chan

Stockwell Day *

Darren Entwistle2

Mary Jo Haddad

John S. Lacey *

William Mackinnon * * Sarabjit Marwah

David Mowat

Notes: *Indicates Chair of the Committee 1)Chair of the Board of Directors of TELUS Corporation 2)President and CEO of TELUS Corporation Source: TELUS.com

13 Appendix B2: Environmental, Social and Corporate Governance.

Appendix B2a: ESG scores for TELUS, BCE Inc. and . TELUS BCE Inc. Rogers Communications Environmental GHG/Revenue 30.8 16.5 12.7 Social Women Employee % 41.7 34.2 39.2 Lost Time Incident Rate 0.7 1.07 0.4 Governance Independent Directors 92.9 92.3 53.3 Women Directors % 21.4 23.1 33.3 Source: Bloomberg.

Appendix B2b: ESG metrics for TELUS, BCE Inc. and Rogers Communications. Metrics TELUS BCE Inc. Rogers Communications RobecoSAM Rank 95/100 60/100 42/100 Sustainalytics Rank 90.9/100 89.4/100 71.2 Bloomberg ESG Disclosure 53.5/100 56/100 50.6 ISS Quality Score (1 – low risk, 10 – high risk) 1/10 1/10 10/10 CDP Climate Score 4/5 4/5 3/5 Source: Bloomberg.

Environment Factors, Social Issues and Governance Concerns are important factors establishing a company’s long term sustainability. The use of clean technology, adherence to regulation and commitment to social issues help companies sustain their business in the long run. While Bell Canada concentrates their efforts in recovering residual materials from their operations and Rogers mostly focuses on reducing their electricity consumption, TELUS serves communities by expanding networks in remote communities thereby increasing accessibility and communication. They also have an ISO certified Environment Management System to reduce absolute energy consumption and GHG emissions as they continue to expand their networks. TELUS is also known to invest significantly in green buildings and infrastructures such as the which received the Leadership in Energy and Environmental Design (LEED) Platinum certification, he highest rating a building can receive.

14 Section C: Industry Analysis

Appendix C1: Communications Service Industry Revenues.

Appendix C1a: Communications Service Industry Revenue ($ billions) Sector Category 2011 2012 2013 2014 2015 CAGR (%) Retail 20.6 20.6 20.9 21.2 21.4 0.90% Wholesale 3 2.9 2.8 2.7 2.8 -1.80% Wireline Wireline Total 23.6 23.5 23.7 24 24.2 -0.50% Retail 18.4 19.5 20.2 20.9 22.5 5.20% Wholesale 0.7 0.8 1 1 1.1 11.80% Wireless Wireless Total 19.1 20.4 21.2 22 23.6 5.40% Retail 39 40.2 41.1 42.2 43.9 3% Wholesale 3.7 3.7 3.7 3.8 3.9 1.30% Total Total 42.8 43.9 44.8 45.9 47.8 2.80% Source: CRTC data collection.

Revenues from telecommunications services are derived from sales to residential and business consumers (retail revenues) and to other carriers (wholesale revenues). Table 2.1 displays retail and wholesale revenues for wireline and wireless services for the years 2011 to 2015.

Appendix C1b: Telecommunication Revenues (Wireline and Wireless) ($ billions) 25 23.6 23.5 23.7 24 24.2 24 23.6 23 22 22 21.2 21 20.4 20 19.1 19 18 17 16 15 2011 2012 2013 2014 2015

Wireline Total Wireless Total Source: CRTC data collection.

According to CRTC data, telecommunication Industry outgrew GDP growth and inflation from 2013 to 2015, indicating favorable messages and greater room for growth. Internet and wireless service show the highest growth rate during this time while TV and data private line displayed the biggest decrease. Within the TV sector, almost all sub-categories are in downward trend except for category B which remain stable with slight increase in 2015.

The customer base in Canada consist of over 14 million households and over a million businesses using both landline and wireless facilities. By dividing services into broadcasting and telecom, we understand that telecommunication services capture nearly half of the total revenues and continue to grow rapidly in recent years. As noted above, more and more Canadians subscribe exclusively to mobile wireless services than to wireline telephone services, indicating financial data trends that demonstrate relatively consistent mobile service revenue growth.

15 Appendix C2: Telecommunication EBITDA margins.

Appendix C2a: Margins for wireline, wireless and total telecom industry.

46 44.6 44 43.3 42 40.6 39.8 40 37.7 38 37 36 35 34 32.9 33.7 32 30 2013 2014 2015 Wireline Wireless Total

Source: CRTC data.

Within telecommunication industry, wireless sector maintains the highest EBITDA ratio and in general the overall EBITDA margins have increased for both wireline and wireless by 1.3% and 4%.

Appendix C2b: Return on Equity and Debt/Equity ratio for telecom industry.

21 1.8 19.5 19.4 1.688 19 1.513 1.6 17 15.8 15 1.511 15.9 15.5 1.4 13 1.377 11 1.2 9 1 7 1.033 5 0.8 2010 2011 2012 2013 2014 ROE Debt/Equity Source: Statcan.

According to the data from Statcan, the average Return on Equity for telecommunication industry had a peak at 2011 and gradually decreased ever since. Debt to Equity ratio on the other hand has been steadily increasing and the accumulated growth rate from 2010 to 2014 was 63.4%

16 Appendix C3: Conventional Television Sector.

Appendix C3a: Aggregate PBIT margins for private conventional TV and discretionary services. 40% 35% 30% Specialty: Category A Specialty: Category B 25% 20% 15% Specialty: Category C 10% 5% 0% Pay,PPV and VOD -5% Conventional TV -10% -15% 2011 2012 2013 2014 2015 Source: CRTC data collection.

Discretionary service reported an average PBIT margin of 20.8% in 2015, down 3% from 2014. Specialty services, especially category A earned 32.4% PBIT margin. Pay services, on-demand services reported a significant drop in profitability in 2015.

Appendix C3b: Revenue Generation Channels for Conventional Television Sector.

Syndicated Production, 1% Other, 6% Informercials, 1% Network Payments, 6% Local Time Sales, 19%

National Time Sales, 67%

Source: CRTC data collection.

17 Appendix C4: Percentage of Market Revenue and Services.

Appendix C4a: Telecommunication Revenue Distribution, by types of TSP (%) 68 Resellers 4 19 facilities-based TSPs 3 8 Cable-based carriers 31 4 Small incumbent TSPs 1 1 Large incumbent TSPs 61

0 20 40 60 80 Service providers Revenue Source: CRTC data.

The graph displays the distribution of total revenues and total services by types of providers for telecommunications services where we can clearly see that large portion of revenues is received by Large Incumbents while the most of the services are provided by resellers. According to CRTC, the top five telecom groups are Bell, , Rogers, Shaw and TELUS which combined takes up 84% of the total market revenues. The next five accounted for 9% and the remaining groups captured 7%.

Appendix C4b: Cross-Country Incumbents and new entrants Landscape.

The map shows the cross-country availability of HSPA+ technology by incumbent and new-entrant facilities-based WSPs.

According to the maps, TELUS main operating provinces British Columbia, Alberta, Ontario and Quebec show relatively higher new entrants threat, especially Ontario and Quebec. BC and Alberta as bigger markets for TELUS among the four display smaller market room for new entrants and relatively stable market condition.

18 Appendix C5: Demographics and Household Expenditures.

Appendix C5a: Monthly household expenditures by service and by age groups. 300 250.41 250 217.84 219.5 207.17 34.83 22.5 167 200 11.17 47.92 40.33 43.83 47.67 150 42.67 60.83 43.67 37.75 50.25 100 61.75 30.83 59 50 114.42 97.42 106.83 74.75 33.5 0 < 30 y 30 to 39 40 to 54 55 to 64 > 65 y Mobile wireless Cable and DTH Internet Wireline telephone 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).

Appendix C5b: Household spending on communication services, by Income Quintile. Household income quintiles First Second Third Fourth Fifth

Characteristics < $30,519 $30,520 to $53,274 $53,275 to $81,294 $81,295 to $124,838 > $124,839

Average annual income $19,664 $42,122 $67,083 $101,177 $201,752

Members per household 1.5 2.05 2.51 2.91 3.4 Expenditures / annual income 6.60% 4.10% 3.10% 2.40% 1.50% Source: Statistics Canada.

Appendix C5c: Canadian wireline and mobile wireless service subscribers per 100 households, by income quintile.

Five Quintile 88.30 95.00 99.8 4.8 11.5

Fourth Quintile 80.20 93.20 99.5 6.3 19.3

Third Quintile 74.30 89.40 99.2 9.8 24.9

Second Quintile 69.10 83.20 99.4 16.2 30.3

First Quintile 65.30 67.40 97.8 30.4 32.5

0.00 50.00 100.00 150.00 200.00 250.00 300.00 wireline Mobile Wireless Wireline a/o Wireless Wireline only Wireless only Source: Statistics Canada.

Financial situation appear to play a significant role in household decision on telecommunication services. Fewer households in fifth quintile choose to purchase either one of the wireline and wireless service alone.

19 Appendix C6: Access and service availability for Canadians.

Appendix C6a: Total residential connections distribution by service type (%) and percentage for hotspot locations. 100 19 18.7 18.7 18.4 17.7 80 For Pay 941 60 43.8 44.6 45.4 45.8 46.9

40 17.3 17.6 17.9 18.4 19 20 Free 19.9 19.1 17.9 17.3 16.4 0 21,017 2011 2012 2013 2014 2015 Wireline telephone Internet Wireless BDU 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.

In addition to advanced wireless networks such as LTE which provide broadband internet access, wireless service providers have significantly increased the number of available hotspot locations to the public. Free Wi-Fi spots takes up around 95.7% of the entire hotspot locations across the country with a stunning growth rate of 50% since 2014.

Appendix C6b: Expansion of LTE coverage since 2013.

Source: CRTC data. This map shows the LTE coverage in Canada over the past three years, where we can see clear and rapid expanding of the LTE coverage. Up to 2015, LTE coverage reaches over 97% of the population, while HSPA+ is available to over 99% of the population.

20 Section D: Competitive Positioning Appendix D1: Telecommunication market competitive landscape shown by service providers. Appendix D1a: Wireless Service Coverage by number of providers.

Source: CRTC data. 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.

Appendix D1b: Porter’s Five Forces Analysis Entry Barrier: high. The telecommunication industry is characterized by high entry barriers since new entrants require significant initial capital investments in infrastructure to establish competition. Although the Canadian government has been encouraging competition, it is unsuccessful in its attempts to promote a fourth big carrier in the telecom industry. Existing service provider claim to reach 95% of the Canadian population which makes it very difficult for new entrants to generate a significant market share. Consequently, we perceive the telecommunications industry to have high entry barriers and, therefore, there is limited threat from new entrants. When a new competitor, like Wind Mobile, entered the market, it stole market share by pricing, and the Big Three responded by launching similar price promotions for a short period of time. Level of substitutes: Low. Within recent years we have seen a large shift in industry characteristics. Voice service as one of the major revenue streams in previous decades have been diminished by data services being the new revenue driver. Consequently, we perceived a high level of substitution within the industry. VOIP services such as Skype and Facetime are substitutes for phone connections. Open Wi-Fi in public places and Shaw’s free Wi-Fi hot spots can cause many to opt for a cheaper data plan if they intend to use public Wi-Fi copiously. Thus, we see a shift within the same industry rather than a substitution with new products. Overall the risk of substitution of the telecommunication industry is low. Since TELUS is highly diversified within the industry, we think it can resist current trends and maintain a stable revenue. Bargaining power of suppliers: high. There are quite a few infrastructure manufacturers for telecommunication industry to choose from. However, the supply of spectrum licenses is controlled by the government and therefore, subject to a high regulation risk. Additionally, the extension of the wired infrastructure could become regulated if the government decides to implement new competitors. In this case, telecommunication companies would have limited abilities to respond and, therefore, are reliant on government behavior. By assuming that the government serves as supplier for the telecommunication industry, we perceive the bargaining power of suppliers to be high. However, recent attempts by the government to increase competition has failed due to low economies of scales for smaller companies. Bargaining power of buyers: low. Similarly, the bargain power of buyers is low. Since the telecom industry is high concentrated, buyers have limited products and services to choose from. Since 2007, the HHI of the telecom industry is over 2700, and according to the US Department of Justice, an industry with HHI of over 2500 is considered highly concentrated industry. Because of this oligopoly and low customer pricing power, Canadians have to pay the highest cellphone bills globally. Rivalry among existing competitors: low to moderate. The rivalry among existing competitors is assumed limited, for over the years, the changes in market shares of the incumbent operators is quite low, within 4% from 2009 to now. Although, price wars are fairly common in the telecom industry and telecom carriers tend to release similar promotional offers, those offers are only temporary. However, besides the incumbent operators, we cannot ignore the competition from the small players. For example, TELUS has regional competitors such as MTS in Manitoba and SaskTel in Saskatchewan in wireless segment and they face competition from in the wireline segment. 21 Appendix D1c: Market Share in Subscribers (in Thousands) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

BCE 6216 6497 6833 7242 7427 7681 7778 8119 8246 8381 Rogers 7339 7942 8494 8977 9335 9437 9503 9450 9877 10143 TELUS 5568 6129 6524 6971 7340 7670 7807 8100 8457 8507 MTS 394 435 458 484 496 497 476 481 483 490 SaskTel 403 511 541 569 594 608 616 618 618 614 Wind(Freedom) 0 0 0 233 403 590 676 800 940 1043 Videotron 0 0 0 93 288 403 503 633 769 867 Public Mobile 0 0 0 0 0 0 222 212 0 0 Total 19920 21514 22851 24568 25884 26886 27582 28413 29390 30046 Source: CWTA

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.

Appendix D1d: Market Share in Percentage and HHI Calculation. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 BCE 31.21% 30.20% 29.90% 29.48% 28.70% 28.57% 28.20% 28.57% 28.06% 27.89% Rogers 36.84% 36.92% 37.17% 36.54% 36.07% 35.10% 34.45% 33.26% 33.61% 33.76% TELUS 27.95% 28.49% 28.55% 28.37% 28.36% 28.53% 28.31% 28.51% 28.78% 28.31% MTS 1.98% 2.02% 2.01% 1.97% 1.92% 1.85% 1.73% 1.69% 1.64% 1.63% SaskTel 2.02% 2.37% 2.37% 2.32% 2.30% 2.26% 2.23% 2.18% 2.10% 2.04% Wind(Freedom) 0.95% 1.56% 2.20% 2.45% 2.82% 3.20% 3.47% Videotron 0.38% 1.11% 1.50% 1.82% 2.23% 2.62% 2.89% Public Mobile 0.80% 0.75% HHI 3120.35 3096.14 3100.71 3019.45 2940.87 2877.61 2801.51 2756.47 2768.86 2746.57 Source: CWTA

Appendix D1e: Percentage of All Accepted Complaints 2013-2014 2014-2015 2015-2016 Bell 32.20% 36% 35.90% Rogers 20.98% 18.20% 10.50% WIND 4.50% 7% 6.10% TELUS 5.76% 4.70% 7.00% Virgin 7.19% 6.10% 6.10% Source: CCTS

Appendix D1f: Infrastructure Investment TELUS announced to invest $4.5 billion in Alberta, $4.5 billion in British Columbia and $ billion in Ontario through 2019 to extend advanced communications infrastructure. The investments will be used to extend fibre optic infrastructure directly to thousands of homes and businesses in rural and urban communities, further strengthen wireless service, and support key services including healthcare and education with new technologies. At the same time, Bell announced plans to invest $20 billion in network infrastructure by the end of 2020. Source: Company website

22 Appendix D2: Price Comparison between TSPs and Provinces. Appendix D2a: Field research on Prices and Packages for major competitors. TELUS Bell Rogers $10-$15 Calls 50min 20c/min 30c/min Messages 50 Unlimited Unlimited Data - - - $20-$25 Calls 50min 50min 50min Messages Unlimited Unlimited Unlimited Data - - - $30-$40 Calls 150min 150min 150min Messages Unlimited Unlimited Unlimited Data 250MB 200M - $41-$50 Calls 300min 100min 500min Messages Unlimited Unlimited Unlimited Data 500M 500M - $51-$60 Calls Unlimited Unlimited Unlimited Messages Unlimited Unlimited Unlimited Data - - -

Appendix D2b: Data add-on prices. Data Add-ons (monthly) TELUS Bell Rogers $10 100M 100M 100M $15 - - 250M $20 - - 500M $25 500M 500M - $30 1GB 1GB 1GB $50 - - 2GB

Appendix D2c: Price Indices for Telephone Services, BDU services and Internet Services Compared to CPI. 170 160 150 140 130 120 110 100 90 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

CPI Telephone Services BDU Services Internet Access Services Source: Statistics Canada. 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.

23 Appendix D3: Price Comparison Survey.

Q1. Age Range of Respondents. Q2. Years Lived in Canada. 1.82% 1.82% 1.82%

18.18% 40.00% 43.64%

76.36% 16.36%

Less than a year Less than 5 years More than 5 years 15 to 20 21 to 25 26 to 30 31 to 35 46 to 50

Q3. Annual Household Income Annual Household Income

over $108000 14.55%

$90001 to $108000 7.27%

$78001 to $90000 5.45%

$39001 to $78000 18.18%

$0 to $39000 54.55%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%

Q4. Factors that consumers think are most important in their phone plan (score out of 100) Min Max Mean Std Deviation Variance

Price of package 20 100 80.13 20.2 408.11

Number of local texting, picture and video messaging 0 100 45.96 30.76 946.12

Number of local minutes for voice calls 0 100 45.14 22.94 526.08

The number of devices you can add to your line 0 100 30.95 25.58 654.38

Number of data volume available 4 100 77.77 26.6 707.37

Savings on long distance calls 0 100 37.02 25.79 664.93

Attractiveness of smartphone available with plan 0 100 46.42 33.29 1108.42

Q5. Carriers used by Respondents. 70.00% 60.00% 60.00% 50.00% 40.00% 30.00% 20.00% 20.00% 9.09% 7.27% 10.00% 3.64% 0.00% (Fido) Rogers (Virgin Mobile) (Koodo) Telus (Wind Mobile) Other (please Communications Bell Canada Communications Shaw mention below) Canada Inc. Inc. Communications

24 Q6, Satisfaction with TELUS/Koodo. Question Very Dissatisfied Dissatisfied Neutral Satisfied Very Satisfied

Signal Strength 0.00% 0.00% 33.33% 50.00% 16.67%

Call & SMS charges 0.00% 8.33% 16.67% 58.33% 16.67%

Voice Quality 0.00% 0.00% 33.33% 50.00% 16.67%

Internet Speed 0.00% 0.00% 15.38% 76.92% 7.69%

Data charge 8.33% 16.67% 8.33% 50.00% 16.67%

Quality of Customer Service 8.33% 25.00% 16.67% 50.00% 0.00%

Promotional Offers 16.67% 25.00% 33.33% 8.33% 16.67%

Q7. Reasons for choosing TELUS. Lower Prices

33.33% Convenience of Stores Recommended By Family/Friends 25.00% 8.33% 8.33% 25.00% Better Minute Level Plan Plan Features 50.00% Promotional Offers

Series1

Q8. Reasons for leaving TELUS. Q9. Would responders recommend TELUS to others?

25.00%

62.50% 12.50% 34.78% 50.00% 65.22%

High Call & SMS charges Poor Internet Speed Yes No High Data charge Poor Promotional Offers

Q10. Reasons for responders who are not using TELUS.

Poor Promotional Offers 44.83% Poor Quality of Customer Service 10.34% High Data charge 44.83% Poor Internet Speed 6.90% Poor Voice Quality 0.00% High Call & SMS charges 6.90% Poor Signal Strength 20.69%

25 Appendix D4: Small Competitor Analysis: MTS: The province of Manitoba has a local telecom company called Manitoba Telecom Services (MTS) commanding the largest market share in the provincial market. However the company will soon be acquired by Bell who has announced its purchase at $3.9 billion. Bell intends to sell a third of MTS’ customer and stores to TELUS as part of the acquisition. The acquisition has been approved by shareholders on June 23rd and had proceeded to Manitoba Court of Queen’s Bench on June 29th where it received its second approval. It received its third approval from Canada Radio-Television and Telecommunications Commission (CRTC) on December 20th and awaits the final approval from the Federal Minister for Innovation and Economic Development and the Competition Bureau. This step has further structured the telecom industry into an oligopoly in the hands of a few key players. SaskTel: Saskatchewan also has a local telecom company called SaskTel which holds the majority share of subscribers in the province. After the acquisition of MTS, SaskTel is facing pressure from its neighboring province in terms of future profitability. Recently, SaskTel has been actively improving its network facilities within Saskatchewan but has no plans to expand to other provinces. For this reason, SaskTel does not pose a significant threat to the key players in the telecom industry. Shaw Communications: Shaw Communications Inc. has become a significant competitor after it acquired Wind Mobile (now known as ) in December 2015. Prior to the acquisition, Shaw Communications Inc. focused on wired services such as television, internet, and home phone lines. Shaw Communications Inc.’s expansion to the wireless sector has proved successful as can be judged from Freedom Mobile’s market share which leapt from 0.95% to 3.47% between 2010 and 2016. Since Freedom Mobile has an added advantage of capital and technical expertise from its parent company, the carrier can be deemed a potential threat to the big three telecom giants. Glentel: In Burnaby, BC, Glentel was a retailer of wireless communication services which delivered multi carrier network and mobile services to both individuals and businesses. Glentel had retail locations inside Canada, United States, Philippines and Australia. In 2014, its expansion project in Canada is considered a failure and leads to a net income of $20 million despite $1.6 billion in sales. It was subsequently acquired by Bell Canada in May 2015. Bell divested 50% of its ownership interest to Rogers Communication Inc. Today, Glentel is jointly owned by BCE and Rogers Communications Inc. Videotron: Videotron is a predominant telecommunication services provide in Quebec. The company is owned by Quebecor, which is an integrated communication company based in Montreal, Quebec. Videotron has had a steady increase in market share from 0.38% in 2010 to 2.89% in 2016 (measured by subscriber base), which may be due to the optimal combination of plans and their newly launched and expanded LTE network which covers about 90% of Québec’s population.

26

Section E: Valuation & Financial Analysis Appendix E1: Sensitivity Analysis for Trading Multiple Valuation EV / EBITDA Multiple – Appendix

$45.88 8.33x 8.58x 8.83x 9.08x 9.33x $ 4,132 $34.86 $36.62 $38.38 $40.13 $41.89 $ 4,382 $38.40 $40.27 $42.13 $43.99 $45.86 $ 4,632 $41.94 $43.91 $45.88 $47.85 $49.82 $ 4,882 $45.48 $47.56 $49.63 $51.71 $53.79

Projected EBITDA $ 5,132 $49.02 $51.21 $53.39 $55.57 $57.75

P / E Multiple – Appendix $50.63 18.3x 18.55x 18.8x 19.05x 19.3x

$ 2.19 $40.07 $40.61 $41.16 $41.71 $42.26 $ 2.44 $44.64 $45.25 $45.86 $46.47 $47.08 $ 2.69 $49.22 $49.89 $50.63 $51.23 $51.91

Projected EPS $ 2.94 $53.79 $54.52 $55.26 $55.99 $56.73 $ 3.19 $58.36 $59.16 $59.96 $60.76 $61.55

P / Book Multiple – Appendix $0.00 3.5764x 3.8264x 4.076x 4.326x 4.576x

$ 12.27 $43.90 $46.97 $50.04 $53.11 $56.17 $ 12.52 $44.79 $47.92 $51.06 $54.19 $57.32 $ 12.77 $45.69 $48.88 $52.07 $55.27 $58.46 $ 13.02 $46.58 $49.84 $53.09 $56.35 $59.61

Projected BVPS $ 13.27 $47.48 $50.79 $54.11 $57.43 $60.75

27 Appendix E2: Base Case historical and project balance sheet

Balance sheet ($ in millions) Actual Estimated Assets 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Current assets Cash and equivalents (inc. investment securities) $ 46.00 $ 107.00 $ 336.00 $ 60.00 $ 223.00 $ 275.46 $ 309.84 $ 307.56 $ 435.53 $ 784.73 Accounts receivable $ 1,428.00 $ 1,541.00 $ 1,461.00 $ 1,483.00 $ 1,428.00 $ 1,451.08 $ 1,474.53 $ 1,498.36 $ 1,522.57 $ 1,547.18 Deferred income taxes $ 66.00 $ 25.00 $ 32.00 $ 97.00 $ 1.00 $ 50.00 $ 50.00 $ 50.00 $ 50.00 $ 50.00 Inventories $ 353.00 $ 350.00 $ 326.00 $ 320.00 $ 360.00 $ 377.75 $ 396.38 $ 415.92 $ 436.43 $ 457.95 Prepaid expenses $ 144.00 $ 178.00 $ 168.00 $ 199.00 $ 213.00 $ 241.79 $ 274.47 $ 311.57 $ 353.69 $ 401.50 Derivative assets $ 14.00 $ 9.00 $ 6.00 $ 27.00 $ 106.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 2,051.00 $ 2,210.00 $ 2,329.00 $ 2,186.00 $ 2,331.00 $ 2,496.08 $ 2,605.22 $ 2,683.41 $ 2,898.22 $ 3,341.36 Non-current assets PP&E $ 7,964.00 $ 8,165.00 $ 8,428.00 $ 9,123.00 $ 9,736.00 $ 10,975.60 $ 11,929.26 $ 12,687.87 $ 13,281.73 $ 13,736.57 Intangibles $ 6,153.00 $ 6,181.00 $ 6,531.00 $ 7,797.00 $ 9,985.00 $ 11,035.68 $ 12,039.07 $ 12,497.31 $ 12,434.93 $ 12,125.36 Goodwill $ 3,661.00 $ 3,702.00 $ 3,737.00 $ 3,757.00 $ 3,761.00 $ 3,750.00 $ 3,750.00 $ 3,750.00 $ 3,750.00 $ 3,750.00 Other non-current assets $ 102.00 $ 187.00 $ 541.00 $ 354.00 $ 593.00 $ 305.0 $ 330.0 $ 330.0 $ 330.0 $ 330.0 $ 17,880.00 $ 18,235.00 $ 19,237.00 $ 21,031.00 $ 24,075.00 $ 26,066.28 $ 28,048.33 $ 29,265.18 $ 29,796.66 $ 29,941.93 Total Assets $ 19,931.00 $ 20,445.00 $ 21,566.00 $ 23,217.00 $ 26,406.00 $ 28,562.36 $ 30,653.55 $ 31,948.60 $ 32,694.88 $ 33,283.29

Liabilities and Owner's Equity Current Liabilities Short term borrowing $ 404.00 $ 402.00 $ 400.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 Accounts payable and accrued expenses $ 1,419.00 $ 1,511.00 $ 1,735.00 $ 2,019.00 $ 1,990.00 $ 2,112.26 $ 2,242.03 $ 2,379.78 $ 2,525.99 $ 2,681.18 Income and other taxes payable $ 25.00 $ 102.00 $ 102.00 $ 2.00 $ 108.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 Dividend payable $ 188.00 $ 208.00 $ 222.00 $ 244.00 $ 263.00 $ 289.30 $ 318.23 $ 350.05 $ 385.06 $ 423.56 Advance billings and customer deposits $ 655.00 $ 703.00 $ 729.00 $ 753.00 $ 760.00 $ 782.22 $ 805.10 $ 828.64 $ 852.87 $ 877.81 Provisions $ 88.00 $ 49.00 $ 110.00 $ 126.00 $ 197.00 $ 115.00 $ 115.00 $ 115.00 $ 115.00 $ 115.00 Current maturities of long-term debt $ 1,066.00 $ 545.00 $ - $ 255.00 $ 856.00 $ 1,500.00 $ 1,500.00 $ 1,750.00 $ 1,750.00 $ 2,000.00 Other current liabilities (non-debt) $ - $ - $ 1.00 $ - $ 2.00 $ - $ - $ - $ - $ - $ 3,845.00 $ 3,520.00 $ 3,299.00 $ 3,499.00 $ 4,276.00 $ 4,998.79 $ 5,180.36 $ 5,623.47 $ 5,828.92 $ 6,297.55 Non-current Liabilities Provisions $ 122.00 $ 222.00 $ 219.00 $ 342.00 $ 433.00 $ 400.0 $ 400.0 $ 400.0 $ 400.0 $ 400.0 Long term debt $ 5,508.00 $ 5,711.00 $ 7,493.00 $ 9,055.00 $ 11,182.00 $ 12,682.00 $ 14,182.00 $ 14,932.00 $ 15,182.00 $ 14,982.00 Other non-current liabilities $ 1,343.00 $ 1,682.00 $ 649.00 $ 931.00 $ 688.00 $ 970.00 $ 970.00 $ 970.00 $ 970.00 $ 970.00 Deferred income taxes $ 1,600.00 $ 1,624.00 $ 1,891.00 $ 1,936.00 $ 2,155.00 $ 2,000.0 $ 2,000.0 $ 2,000.0 $ 2,000.0 $ 2,000.0 $ 8,573.00 $ 9,239.00 $ 10,252.00 $ 12,264.00 $ 14,458.00 $ 16,052.00 $ 17,552.00 $ 18,302.00 $ 18,552.00 $ 18,352.00 Liabilities $ 12,418.00 $ 12,759.00 $ 13,551.00 $ 15,763.00 $ 18,734.00 $ 21,050.79 $ 22,732.36 $ 23,925.47 $ 24,380.92 $ 24,649.55 Shareholders' Equity Common Shares $ 2,219.00 $ 2,219.00 $ 5,296.00 $ 5,175.00 $ 5,050.00 $ 4,924.38 $ 4,924.38 $ 4,874.13 $ 4,857.38 $ 4,840.63 Non Voting shares $ 3,337.00 $ 3,360.00 $ - $ - $ - $ - $ - $ - $ - $ - Contributed surplus $ 166.00 $ 163.00 $ 149.00 $ 141.00 $ 135.00 $ 135.00 $ 135.00 $ 135.00 $ 135.00 $ 135.00 Accumulated other comprehensive income $ 11.00 $ 40.00 $ 31.00 $ 38.00 $ 59.00 $ 59.00 $ 59.00 $ 59.00 $ 59.00 $ 59.00 Retained earnings $ 1,780.00 $ 1,904.00 $ 2,539.00 $ 2,100.00 $ 2,428.00 $ 2,393.20 $ 2,802.81 $ 2,955.00 $ 3,262.59 $ 3,599.11 Minority interest $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 7,513.00 $ 7,686.00 $ 8,015.00 $ 7,454.00 $ 7,672.00 $ 7,511.57 $ 7,921.19 $ 8,023.12 $ 8,313.96 $ 8,633.74 Total Liabilities and Owner's Equity $ 19,931.00 $ 20,445.00 $ 21,566.00 $ 23,217.00 $ 26,406.00 $ 28,562.36 $ 30,653.55 $ 31,948.60 $ 32,694.88 $ 33,283.29 * Note: 2016 Numbers are estimates to forecast 2017 onwards. However, we did not use 2016 numbers for our valuation.

28 Appendix E3: Base Case historical and project income statement

Income Statement ($ in millions) Actual Estimated 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Total operating revenue $ 10,397.00 $ 10,921.00 $ 11,404.00 $ 12,002.00 $ 12,502.00 $ 13,033.62 $ 13,488.88 $ 13,932.41 $ 14,353.10 $ 14,720.54 % Growth 6.2% 5.0% 4.4% 5.2% 4.2% 4.3% 3.5% 3.3% 3.0% 2.6% Operating expenses $ 6,697.00 $ 7,014.00 $ 7,288.00 $ 7,711.00 $ 8,014.00 $ 8,311.79 $ 8,485.21 $ 8,684.98 $ 8,881.16 $ 9,070.21 Restructuring $ 35.00 $ 48.00 $ 98.00 $ 75.00 $ 226.00 $ 90.0 $ 90.0 $ 90.0 $ 90.0 $ 90.0 EBITDA $ 3,665.00 $ 3,859.00 $ 4,018.00 $ 4,216.00 $ 4,262.00 $ 4,631.83 $ 4,913.67 $ 5,157.42 $ 5,381.94 $ 5,560.34 EBITDA margin 35.3% 35.3% 35.2% 35.1% 34.1% 35.5% 36.4% 37.0% 37.5% 37.8% Depreciation $ 1,331.00 $ 1,422.00 $ 1,380.00 $ 1,423.00 $ 1,475.00 $ 1,460.40 $ 1,646.34 $ 1,789.39 $ 1,903.18 $ 1,992.26 Amortization of intangible assets $ 479.00 $ 443.00 $ 423.00 $ 411.00 $ 434.00 $ 449.33 $ 496.61 $ 541.76 $ 562.38 $ 559.57 EBIT $ 1,855.00 $ 1,994.00 $ 2,215.00 $ 2,382.00 $ 2,353.00 $ 2,722.11 $ 2,770.72 $ 2,826.28 $ 2,916.38 $ 3,008.50 EBIT margin 17.8% 18.3% 19.4% 19.8% 18.8% 20.9% 20.5% 20.3% 20.3% 20.4% Financing costs $ 377.00 $ 374.00 $ 447.00 $ 456.00 $ 447.00 $ 567.28 $ 627.28 $ 667.28 $ 677.28 $ 679.28 EBT $ 1,478.00 $ 1,620.00 $ 1,768.00 $ 1,926.00 $ 1,906.00 $ 2,154.83 $ 2,143.44 $ 2,159.00 $ 2,239.10 $ 2,329.22 EBT margin 14.2% 14.8% 15.5% 16.0% 15.2% 16.5% 15.9% 15.5% 15.6% 15.8% Income Taxes $ 376.00 $ 416.00 $ 474.00 $ 501.00 $ 524.00 $ 571.03 $ 568.01 $ 572.13 $ 593.36 $ 617.24 Tax Rate 25.44% 25.68% 26.81% 26.01% 27.49% 26.50% 26.50% 26.50% 26.50% 26.50% Net income $ 1,102.00 $ 1,204.00 $ 1,294.00 $ 1,425.00 $ 1,382.00 $ 1,583.80 $ 1,575.43 $ 1,586.86 $ 1,645.74 $ 1,711.98 Net income margin 10.6% 11.0% 11.3% 11.9% 11.1% 12.2% 11.7% 11.4% 11.5% 11.6%

Common Shares Outstanding - Accounting for splits 648.0 652.0 623.0 616.0 603.0 588.0 586.0 582.0 580.0 578.0 Face Value $ 8.57 $ 8.56 $ 8.50 $ 8.40 $ 8.37 $ 8.37 $ 8.37 $ 8.37 $ 8.37 $ 8.37 Earnings Per Share $ 1.70 $ 1.85 $ 2.08 $ 2.31 $ 2.29 $ 2.69 $ 2.69 $ 2.73 $ 2.84 $ 2.96 Dividend Per Share $ 1.00 $ 1.22 $ 1.36 $ 1.52 $ 1.68 $ 1.85 $ 1.99 $ 2.10 $ 2.18 $ 2.26 * Note: 2016 Numbers are estimates to forecast 2017 onwards. However, we did not use 2016 numbers for our valuation.

Appendix E4: Base Case historical and project cash flow statement

Cashflow statement ($ in millions) Actual Estimated 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Cash From Operating Activities Net Income - CF $ 1,215.00 $ 1,204.00 $ 1,294.00 $ 1,425.00 $ 1,382.00 $ 1,583.80 $ 1,575.43 $ 1,586.86 $ 1,645.74 $ 1,711.98 Adjustments to reconcile net income to cash provided by operating activities Depreciation And Amortization $ 1,810.00 $ 1,865.00 $ 1,803.00 $ 1,834.00 $ 1,909.00 $ 1,909.73 $ 2,142.95 $ 2,331.15 $ 2,465.56 $ 2,551.83 Net Change In Working Capital $ (255.00) $ 52.00 $ 187.00 $ (64.00) $ 214.00 $ (48.13) $ 77.89 $ 80.81 $ 83.60 $ 86.20 Other $ (220.00) $ 98.00 $ (38.00) $ 212.00 $ 37.00 $ (198.00) $ - $ - $ - $ - Total Cash Flows From Operations $ 2,550.00 $ 3,219.00 $ 3,246.00 $ 3,407.00 $ 3,542.00 $ 3,247.39 $ 3,796.26 $ 3,998.82 $ 4,194.90 $ 4,350.01

Cash From Investing Activities Cash payments for capital assets, excluding spectrum licences$ (1,847.00) $ (1,950.00) $ (2,035.00) $ (2,373.00) $ (2,522.00) $ (2,689.00) $ (2,600.00) $ (2,548.00) $ (2,497.04) $ (2,447.10) Cash payments for spectrum licences $ - $ - $ (67.00) $ (1,171.00) $ (2,048.00) $ (1,500.00) $ (1,500.00) $ (1,000.00) $ (500.00) $ (250.00) Other $ (121.00) $ (108.00) $ (287.00) $ (124.00) $ 93.00 $ 288.00 $ (25.00) $ - $ - $ - Total Cash Flows From Investing $ (1,968.00) $ (2,058.00) $ (2,389.00) $ (3,668.00) $ (4,477.00) $ (3,901.00) $ (4,125.00) $ (3,548.00) $ (2,997.04) $ (2,697.10)

Cash from Financing Activities Dividends Paid $ (642.00) $ (774.00) $ (852.00) $ (913.00) $ (992.00) $ (1,060.32) $ (1,136.89) $ (1,190.06) $ (1,232.21) $ (1,266.02) Issuance/Repurchase of Common Stock $ 24.00 $ 1.00 $ (1,000.00) $ (612.00) $ (628.00) $ (657.60) $ (87.68) $ (175.36) $ (87.68) $ (87.68) Issuance and repayment of short-term borrowings $ 4.00 $ (2.00) $ (2.00) $ (300.00) $ - $ (2.00) $ - $ - $ - $ - Long-term debt issued $ 4,068.00 $ 5,988.00 $ 4,630.00 $ 7,273.00 $ 9,219.00 $ 7,500.00 $ 7,250.00 $ 7,250.00 $ 6,750.00 $ 6,550.00 Redemptions and repayment of long-term debt $ (3,946.00) $ (6,309.00) $ (3,375.00) $ (5,450.00) $ (6,486.00) $ (5,356.00) $ (5,750.00) $ (6,250.00) $ (6,500.00) $ (6,500.00) Other Financing Activities $ (61.00) $ (4.00) $ (29.00) $ (13.00) $ (15.00) $ 282.00 $ - $ - $ - $ - Total Cash Flows From Financing $ (553.00) $ (1,100.00) $ (628.00) $ (15.00) $ 1,098.00 $ 706.08 $ 275.43 $ (365.42) $ (1,069.89) $ (1,303.70)

Cash Position Increase (decrease) in cash and temporary investments, net$ 29.00 $ 61.00 $ 229.00 $ (276.00) $ 163.00 $ 52.46 $ (53.31) $ 85.40 $ 127.97 $ 349.21 Cash and Cash Equivalents (Beg of Period) $ 17.00 $ 46.00 $ 107.00 $ 336.00 $ 60.00 $ 223.00 $ 275.46 $ 222.16 $ 307.56 $ 435.53 Cash and Cash Equivalents (End of Period) $ 46.00 $ 107.00 $ 336.00 $ 60.00 $ 223.00 $ 275.46 $ 222.16 $ 307.56 $ 435.53 $ 784.73 * Note: 2016 Numbers are estimates to forecast 2017 onwards. However, we did not use 2016 numbers for our valuation.

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Appendix E5: Calculation of WACC

Capital Asset Pricing Model Risk Free Rate - 10Yr 1.75% Equity Risk Premium 7.25%

Unlevered Telecom Wireless Beta - Cash Adj. 0.58 Unlevered Telecom Services Beta - Cash Adj. 0.68 Wireless Weight 56.49% Services Weight 43.51% Weighted Unlevered Beta 0.624 Debt to Equity Ratio 61.02% Effective Tax Rate 26.50%

Beta 0.9032 Cost of Equity 8.30%

Cost of Debt (after tax) 2.63%

Weight of Equity 62.10% Weight of Debt 37.90%

WACC 5.89%

Terminal Growth Rate 1.75%

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Disclosures:

Ownership and material conflicts of interest

The authors, or a member of their household, of this report do not hold a financial interest in the securities of this company. The authors, or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report.

Receipt of compensation

Compensation of the authors of this report is not based on investment banking revenue.

Position as an officer or a director

The authors, or a member of their household, do not serve as an officer, director, or advisory board member of the subject company.

Market making

The authors do not act as a market maker in the subject company’s securities.

Disclaimer

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the authors to be reliable, but the authors do not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Vancouver, CFA Institute, or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge

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