Cogeco Communications Inc. (TSX: CCA) is a telecommunication services provider company, which functions as a cable operator in Canada. The company provides residential and business customers with internet, video, and telephony services with broadband fibre 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 fibre network. Moreover, CCA recently received government funding to provide high-speed Internet in unserved or underserved regions, which is expected to attract 75,000 retail and corporate users over the next three fiscal years. Additionally, the company is investing in digital tools, which is expected to provide more personalized services to its users along with improved operational efficiencies.

• New Product Launch: Recently, the company launched a powerful WiFi solution targeting small- and medium-sized businesses. Apart from the Wifi connectivity, this product also provides enhanced security and cyber threat protection to the user. The product is also designed to offer personalized business usage data metrics along with employee usage management to the end users. Hence, the client easily customized its bandwidth connectivity as per their requirements. Due to its feature loaded offering, we expect that this would attract several mid and small-size businesses in the coming days and would help the company to improve its market share.

• Strong FY22 Guidance: The company is focusing to expand across the adjacent footprint which has stable growth profile and attractive demographic. For FY22, the company expects its revenue to grow within 15% to 17% over FY21, while Adjusted EBITDA is likely to increase by 14% to 16% over previous year. The company is also planning for acquisition strategy and allocated a capital of CAD 815 million to CAD 845 million for FY21.

Source: Company Presentation 

• Entering into Content viewing 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 2022 and would increase its presence across other potential markets in 2022. Considering the growing popularity of mobile usage along with increase in content viewers, we believe this service would offer ample prospect to the company in the coming days.
  

• Strong momentum from the 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. The growth was driven by the acquisition of Ohio broadband systems in September 2021. Moreover, CCA also reported growth within the Internet service customers, and also reported higher value product mix, driven by an increase demand for high-speed offerings since the beginning of the COVID-19 pandemic and an implementation of higher annual rate for specific services.

• Robust margin profile: The company commands a higher profit margin than the industry median, which indicates better 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 53.9% and 26%, respectively. Additionally, the company reported a net margin of 16.2% in Q1FY22, as compared to the industry median of 8.6%.
  

• Result Announcement: The company would disclose its second quarter FY22 result on April 14, 2022.

Risks associated with the Investment:

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.

Q1FY22 Financial Highlights:

   Q1FY22 Income Statement Highlights (Source: Company Report)

• Surge in top-line: CCA announced its first-quarter result, wherein the company posted revenue of CAD 718.5 million, grew from CAD 618.9 million in pcp. The surge was driven by an increase income from American broadband services (31% on y-o-y basis) and Canadian broadband services (8.2% on y-o-y basis) due to the recent acquisitions.

• Increase in Operating Expense: Operating expenses stood higher at CAD 363.6 million, as compared to CAD 301.9 million in pcp, due to additional cost incurred on account of acquisitions.
  

• Reported slightly higher net earnings: The company reported a rise in the integration, restructuring and acquisition costs, surge in financial expense, partially offset by slightly lower management fees. Net profit stood at CAD 116.6 million, as compared to CAD 114.8 million in pcp.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 55.25% stake, Rogers Communications Inc, Mackenzie Financial Corporation are the major shareholders in the company with an outstanding position of 34.69% and 7.00%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

 Valuation Methodology (Illustrative): EV to Sales 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:

With the recent acquisition of Ohio broadband systems during first quarter of FY22, the corporation is likely to add meaningful scale to the company’s operations, as the group would leverage the growing demand for Internet services across the Ohio region in the coming years. Notably, the company has launched a major fiber expansion initiative and is expected to cater to more than 70,000 additional users and businesses in the New Hampshire and West Virginia through its ultra-fast Fiber-to-the-Home (FTTH) technology. This is further expected to add robust free cash flows to the company’s operations, which is a key positive. 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 BCE Inc, Corus Entertainment Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CCA at the last closing price of CAD 103.61 on April 01,2022.

One-Year Technical Price Chart (as on April 01, 2022). Analysis by Kalkine Group

*Recommendation is valid on April 04, 2022, price as well. 

  Technical Analysis Summary

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.