Cogeco Communications Inc. (TSX: CCA) is a communication corporation and is engaged as a cable operator in Canada. The company provides residential and business customers with internet, video, and telephony services with broadband fibre networks. 

Key Highlights: 

• Encouraging expansion targets: The company is focusing on expanding its network presence across both U.S. and Canada. Within the U.S., the company is planning to reach to additional 70,000 consumers in FY22 and has announced the extension of its fibre network. On the other hand, CCA recently received government funding to provide high-speed Internet in unserved or underserved regions, which is expected to cater additional 75,000 homes over the next three fiscal years. Moreover, the company is investing in digital tools, which is expected to provide more personalized services to its consumer and improved operational efficiencies.

• Entry into mobile segment: The company is planning to expand its footprints in the mobile service segment across In lieu of this, it has acquired 38 spectrum licences as part of the 3500 MHz spectrum auction. Notably, the company has an immense mobile network coverage of ~91% of its broadband footprint, which is expected to cater to more than 3.6 million consumers.

• Recent acquisition will boost company’s network presence: During Q1FY22, the company acquired Ohio broadband systems, which is expected to provide additional ~689,000 homes and businesses across the Cleveland and Columbus regions. As per the management, this would serve ~196,338 Internet users, ~54,598 video and roughly 33,604 telephony consumers to CCA.

• Constant increase in dividend payment: The company has an impressive track record of dividend payment, backed by sustainable free cash flows, which is a key positive. Notably, for FY22, the company expected to distribute an annualized dividend of CAD 2.82 per share, which is 10.2% higher over FY21. Additionally, the stock of CCA has an annualized dividend yield of ~2.857%, which looks decent considering the persisting interest rate scenario.

Source: Company Presentation

• Inauguration of Breezeline Stream TV: CCA is planning to launch Breezeline Stream TV, which is a cloud-based platform, where the customers would have live access and can record live programs. Notably, this would lead to enriched customer experiences and is a key positive from the operational point of view.

• Industry beating margin profile: The company commands a higher profit margin than the industry median, which indicates higher operational efficiencies, supported by sound digitization strategies implemented during FY21. Gross profit and EBITDA margin stood at 72.6% and 48.6%, respectively, in Q1FY22, as compared to the industry median of 54.7% and 27.1%, respectively. Moreover, the company reported a net margin of 16.2% in Q1FY22, as compared to the industry median of 9.7%.
  

• Higher cash flows to support liquidity: For Q1FY22, the company reported a higher cash from operations of CAD 286.945 million, as compared to CAD 241.725 million in pcp. This is expected to boost the company’s liquidity position.
  

Risks

The company’s operations are capital-intensive in nature, and any delay in the project delivery might hinder the profitability, cash flows etc. Moreover, the telecommunications industry might witness price competition due to the emergence of several players. 

Q3FY21 Financial Highlights:

• Impressive revenue growth: CCA announced its first-quarter result, wherein the company posted revenue of CAD 718.541 million, climbed 16% on y-o-y basis. The growth was supported by higher income from American broadband services (31% on y-o-y basis) and Canadian broadband services (8% on y-o-y basis) due to the recent acquisitions.

• Higher adjusted EBITDA: Operating expenses stood significantly higher at CAD 363.674 million, as compared to CAD 301.968 million in pcp, due to additional cost incurred on account of acquisitions. The company reported its Adjusted EBITDA to CAD 349.287 million, up 12.3% on y-o-y basis, supported by elevated revenue.

• Slightly higher net earnings: The company reported a rise in the integration, restructuring and acquisition costs, higher financial expense, partially offset by slightly lower Management fees. Net profit increased to CAD 116.610 million from CAD 114.896 million in pcp.

Q1FY22 Income Statement Highlights (Source: Company Report) 

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 52.99% stake, Rogers Communications Inc, Fidelity Management & Research Company LLC are the major shareholders in the company with an outstanding position of 33.88% and 5.24%, respectively.

Source: REFINITIV, Analysis by Kalkine Group. 

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

The recent acquisition of Ohio broadband would offer immense opportunities to the American Broadband segment and is likely to generate strong free cash flow in the coming years. The company has emphasized on several new customer care initiatives, like enhanced self-service options, a new online experience, and simplified, transparent pricing. For FY22, the company expects its revenue and adjusted EBITDA to grow by 15-17% and 14-16%, respectively from FY21. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Altice USA Inc, Quebecor Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CCA at the closing price of CAD 98.70 on January 14, 2022.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached 

Technical Analysis Summary

One-Year Technical Price Chart (as on January 14, 2022). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on January 17, 2022, price as well.

Disclaimer

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