Cogeco Communications Inc. (TSX: CCA) is a telecommunication services provider company and operates as a cable operator in Canada. The company provides residential and business customers with internet, video, and telephony services with broadband fiber networks. The group operates through reportable segments, namely Canadian broadband services and American broadband services. 

Key Highlights: 

• Encouraging expansion plans: The company is 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 fiber network. Moreover, 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. Additionally, the company is investing in digital tools, which are expected to provide more personalized services to its consumers along with improved operational efficiencies.

• Higher 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.

Last five year’s Dividend distribution (Source: Company Presentation)

• Foray into a new segment: The company is planning to launch Breezeline Stream TV, a cloud-based, web-powered video experience allowing customers to access live and recorded programs on compatible devices. This streaming platform will be launched in select Breezeline markets during early 2022 and would increase its presence across other potential markets throughout 2022.

• Growth from American broadband services: In Q1FY22, the company reported a strong performance from the American broadband services and registered a revenue of CAD 363.4 million, grew from CAD 290.9 million in pcp. This was primarily driven by the acquisition of Ohio broadband systems in September 2021. Additionally, the company also reported growth within the Internet service customers coupled with a higher value product mix, driven by an increase in demand for high-speed offerings since the beginning of the COVID-19 pandemic and implementation of a higher annual rate for specific services.

• Robust profitability 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 54.1% and 24.4%, respectively. Moreover, the company reported a net margin of 16.2% in Q1FY22, as compared to the industry median of 10%.
  

• Higher cash flows to support liquidity: For Q1FY22, the company reported higher cash from operations of CAD 286.9 million, as compared to CAD 241.7 million in pcp. This is further supportive to boost the company to carry out its operations smoothly in coming periods. Additionally, cash and cash equivalent stood at CAD 408.9 million in Q1FY22, as compared to CAD 365.5 million in Q4FY21.
  

Risks associated with investment

The company’s operations are capital-intensive, 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. The company’s telephony service video service segments reported a net loss during Q1FY22, and the continuation of the above trend is likely to dampen the company’s overall performance. 

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• Impressive revenue growth: CCA announced its first-quarter result, wherein the company posted revenue of CAD 718.5 million, surged from CAD 618.9 million in pcp. The growth was aided by higher income from American broadband services (31% on y-o-y basis) and Canadian broadband services (8.2% on y-o-y basis) added by the recent acquisitions.

• Higher Operating Expense: Operating expenses stood significantly higher at CAD 363.6 million, as compared to CAD 301.9 million in pcp, due to additional cost incurred on account of acquisitions. The company reported a rise in the integration, restructuring and acquisition costs, higher financial expense, partially offset by slightly lower management fees.
  

• Marginally higher net earnings: Net profit stood at CAD 116.6 million, as compared to CAD 114.8 million in pcp, supported by significantly lower income taxes of CAD 17.4 million v/s CAD 35.5 million in pcp.
  

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 53.22% stake, Rogers Communications Inc, Mackenzie Financial Corporation are the major shareholders in the company with an outstanding position of 33.88% and 5.37%, respectively.

Source: REFINITIV, Analysis by Kalkine Group.

Valuation Methodology (Illustrative): Price to Earnings based

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation:

The acquisition of Ohio broadband systems during September 2021 is expected to add meaningful scale to the company’s operations, as the group would leverage the growing demand for Internet services from the Ohio region in the coming years. This is further expected to add robust free cash flows to the company’s operations, which will be a key positive.

We have valued the stock using the Price to Earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Quebecor Inc, Shaw Communications Inc, etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CCA at the current market price of CAD 101.00 at 09:50 AM Toronto time on February 28, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing. 

One-Year Technical Price Chart (as on February 28, 2022). Analysis by Kalkine Group

*Recommendation is valid on February 28, 2022, price as well. 

 Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

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