Quebecor Inc. (TSX: QBR.B) is a telecommunications and media company. The Company's segments include Telecommunications, Media, and Sports and Entertainment. The Telecommunications segment offers television distribution, Internet access, business solutions (including data centres), cable and mobile telephony and over-the-top video services in Canada. The operations of the Media segment in Quebec include the operation of an over-the-air television network and speciality television services; the printing, publishing and distribution of daily newspapers; the operation of Internet portals and specialized Websites; the distribution and production of music, and the operation of the out-of-home advertising business.

Investment Rationale

• An Income Play: Given the lower interest rate environment, the Company is offering a decent dividend yield of 3.6%, which is higher amid a lower interest rate environment. Moreover, the Company has a consistent track record of dividend payment over the past ten years. Moreover, the Company's dividend yield is approximately 2.85 times Canada's investment graded Government Bond Yield of 1.25%. On August 4, 2021, the Board of Directors of Quebecor declared a quarterly dividend of CAD 0.275 per share on its Class A Multiple Voting Shares ("Class A Shares") and Class B Subordinate Voting Shares ("Class B Shares"), payable on September 14, 2021, to shareholders of record as of the close of business on August 19, 2021.

Dividend History. Source: REFINITIV, Analysis by Kalkine Group

• 5G roll-out well underway: The company’s acquisition of 3500 MHz spectrum is crucial for the continued roll-out of 5th generation mobile technology in Québec and across the country. The 3500 MHz band would facilitate the introduction of premium 5G mobile broadband services by significantly reducing latency and combined with new radio access technologies. It is another step towards delivering the full 5G experience with all its benefits.

• Videotron to Expand Wireless Services Nationwide: Quebecor, the parent company of Videotron, says it is now moving forward with its plan to offer wireless services coast-to-coast in Canada. The company spent CAD 830 million (CAD 666 million) in Canada’s wireless spectrum auction. Recently Quebecor told investors about its plans to grow Videotron “as a strong 4th player in the market”, specifically in B.C., Alberta, Manitoba and Ontario. The company says it “wants to break the Bell-Rogers-Telus oligopoly once again and revitalize the 4th wireless player policy.

• Quebecor Media recorded Solid YoY Performance: In the second quarter of fiscal 2021, Quebecor Media reported solid YoY performance, with June 2021 quarter revenue stood at CAD 198.2 million as compared to CAD 132.7 million reported on the same quarter of the previous financial year, which implies a surge of 49.4% surge on a YoY basis. This was primarily driven by an 82% surge in the advertisement revenue to CAD 98.4 million, a 6% surge in the subscription revenue in the same period and an approximately 60% increase in others.

• Solid Sports and Entertainment Segment Revenue: The company reported revenues of CAD 33.5 million in the second quarter of 2021, a 29.3% increase due primarily to higher revenues from book distribution and publishing, and from hockey, partially offset by lower revenues from music, essentially because of the discontinuation of physical distribution operations. Adjusted EBITDA surged by 10.1% due primarily to the impact of the revenue increase. Cash flows from operations stood at CAD 2.5 million in the second quarter of 2021 compared with CAD 2.1 million in the same period of 2020.

• Bolstered Cash Position: At the end of the June quarter of 2021, the company’s cash and cash equivalent position stood at CAD 1,999.3 million as compared to CAD 136.7 million at the end of June 2020. The sudden surge in cash is mainly due to the issuance by Videotron of Senior Notes and recognition of the short-term receivable portion of derivative financial instruments.

• Risk Associated with Investment: The company is exposed to a variety of risks ranging from credit risk, liquidity risk and market risks relating to foreign exchange fluctuations and interest rate fluctuations. Moreover, the company is also exposed to intense competition and underperformance of investments. The company has higher debt on its balance sheet, which could be a cause of concern.

Financial Highlights: Q2FY21

Source: Company Filings

• During the quarter under consideration, the group’s reported revenue at CAD 1.13 bn, an increase of 12.7% on a YoY basis. This was primarily driven by a 6.8% surge in telecom segment revenue, 49.4% growth in Media segment revenue, 29.4% surge in sports segment revenue.
• Adjusted EBITDA increased by 5.4% to CAD 501.4 million, due to adjusted EBITDA increased in Telecommunications by CAD 17.9 million or 3.9%, Media (CAD 9.1 million), and Sports and Entertainment (CAD 0.3 million or 10.7%).
• Net income attributable to shareholders stood at CAD 123.5 million (CAD 0.50 per basic share) in the second quarter of 2021, compared with CAD 174.9 million (CAD 0.69 per basic share) in the same period of 2020, a decrease of CAD 51.4 million (CAD 0.19 per basic share).
• Adjusted income from continuing operating activities stood at CAD 158.3 million (CAD 0.65 per basic share) in the second quarter of 2021, compared with CAD 144.9 million (CAD 0.57 per basic share) in the same period of 2020, an increase of CAD 13.4 million (CAD 0.08 per basic share).
• Cash flows from operations stood at CAD 338.1 million, a CAD 12.0 million (3.7%) increase due to the CAD 25.7 million increase in adjusted EBITDA, partially offset by a CAD 13.7 million increase in additions to property, plant and equipment and to intangible assets.
• Videotron’s total ABPU was CAD 50.63 in the second quarter of 2021, compared with CAD 49.62 in the same period of 2020, a CAD 1.01 (2.0%) increase. Mobile ABPU was CAD 50.30 in the second quarter of 2021, compared with CAD 50.32 in the same period of 2020, a CAD 0.02 decrease.
• The number of subscribers to television services stood at 1,441,400 on June 30, 2021, a decrease of 16,100 (-1.1%) from the end of the first quarter of 2021 (compared with a decrease of 14,800 in the same period of 2020) and a 12-month decrease of 55,900 (-3.7%). On June 30, 2021, television services had a household and business penetration rate of 47.7% versus 50.4% a year earlier.
• The number of subscribers to Internet access services stood at 1,810,200 on June 30, 2021, an increase of 5,300 (0.3%) from the end of the first quarter of 2021 (compared with an increase of 15,900 in the same period of 2020) and a 12-month increase of 60,900 (3.5%). As of June 30, 2021, Videotron’s Internet access services had a household and business penetration rate (number of subscribers as a proportion of the total 3,020,900 homes and businesses passed by Videotron’s network as of June 30, 2021, up from 2,970,900 one year earlier) of 59.9% compared with 58.9% a year earlier.

Top-10 Shareholders

Top-10 shareholders together hold 47.33% in the company, with Fidelity Management & Research Company LLC and RBC Global Asset Management Inc. are major shareholders with an outstanding position of 11.01% and 7.9%.

Valuation Methodology (Illustrative): Price to Earnings based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: The company reported decent performance in the second quarter of 2021. The telecommunications segment posted 6.8% revenue growth to CAD 928.4 million on the back of a 127% increase in wireline equipment, media segment revenues rose to CAD 198.2 million from CAD 132.7 million and sports and entertainment revenues were CAD 33.5 million, up from CAD 25.9 million. Mobile telephone connections increased 1.8% or 27,200 while internet subscriptions increased by 5,300.

Further, Videotron has long been a forerunner in the industry. The Quebecor subsidiary was the first to offer pick-and-pay television plans, the first to launch a video streaming service with Club illico, and most recently, the first in Canada to create an all-digital telecom brand with Fizz. Videotron has invested billions over decades to create distinctive offerings and services and to build out a reliable, powerful, robust telecommunications network.

The recent investment of nearly CAD 830 million in the acquisition of 294 blocks of spectrum in the 3500 MHz band across the country would pave the way for large-scale projects in Québec and other Canadian provinces in the coming years.

Moreover, the group is a friend of income investors and has consistently increased the dividend distribution over a period of time.

Hence, based on the aforementioned facts and valuation, we recommend a ‘Buy' rating on the stock at the closing price of CAD 31.01 on August 09, 2021.

*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

1-Year Price Chart (as on August 09, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid at August 10, 2021 price as well.

Disclaimer

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