Quebecor Inc. (TSX: QBR.B) is a communication holding company, which operates through the Telecommunication segment and offers services like television distribution, internet access, business solutions, cable and mobile telephony and over-the-top video services. 

Investment Rationale:

• An income play: The stock of QBR.B carries an annualized dividend yield of ~3.479%, which looks attractive considering the persisting interest rate scenario. Moreover, the company paid a total dividend of CAD 135.0 million in H1FY21, higher than CAD 101.2 million in pcp. The above is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity.

Five years dividend distribution, Analysis by Kalkine

• Industry beating margin profile: The group commands a solid profit margin over its peers, which is a key positive as it depicts improved operational efficiency. Notably, in Q2FY21, the company posted EBITDA margin and operating margin of 44% and 21.6%, respectively, as compared to the industry median of 26.8% and 19.4%, respectively. Moreover, the company reported its net margin of 11% in Q2FY21, higher than the industry median of 8%.

• New 5G rollout: Recently, the company has been focusing on its business expansion, wherein the company reported the acquisition of 294 blocks of spectrum within the 3500 MHz bands across Canada. The above also marks the company’s footprint within the 5th generation mobile technology (in 3500 MHz band category) across four Canadian provinces outside Québec, namely southern and eastern Ontario, Manitoba, Alberta and British Columbia. Moreover, the management guided that it is focusing on rolling out its mobile telephone service across some urban and rural areas located in the rest of Canada.

• Launch of ambitious digital project: Recently, the company launched QUB, whichis a content stream aggregator and includes four segments like news, video, music and radio. etc. The user would be able to access millions of contents live or on-demand like news, video & radio clips, music playlists, podcasts etc., from one platform. As per the management, the above service would provide the best-in-class content across the Québec region and is expected to enhance consumer satisfaction with a superior browsing experience.

• Strong momentum from the media segment: The group reported solid growth from its media segment in the recent past and reported revenue of CAD 198.2 million and CAD 373.0 million in Q2FY21 and H1FY21, respectively, increased from CAD 132.7 million and CAD 307.5 million, respectively, in Q2FY20 and H1FY20, respectively. The growth was supported by higher advertising revenues from the TVA Network and the specialty channels, combined with higher revenues from the newspapers and Quebecor Out of Home.

• Increased revenue-generating unit (RGUs): The company reported growth in its revenue-generating unit (RGU) at 6,121.0 in Q2FY21 v/s 6,100.2 in Q2FY20. An RGU denotes an individual service subscriber who generates recurring revenue for the company. Increased growth in RGU is a healthy sign and indicates revenue stability. The improvement was supported by strong growth from the Mobile telephony segment.

• Revenues from Internet access services grew 9.3% y-o-y basis: In Q2FY21, the company reported a 9.3% growth from its Internet access services supported by growth from average per-subscriber revenues and subscriber base. Moreover, the company reported that Videotron’s Internet access reported an improved penetration rate of 59.9% in Q2FY21, higher than 58.9% in the previous corresponding period (pcp), which is a key positive.

• Technical chart suggests a potential upside: On the weekly chart, QBR.B stock prices are trading above the rising trendline support and continuously taking support of the same. Moreover, stock prices are moving in higher tops and higher bottoms, which indicates bulls are in action. The momentum oscillator RSI (14-Period) is trading at ~CAD 48.39 level, which indicates positive momentum in the price.

           

Weekly Price Chart (Source: REFINITIV, Analysis by Kalkine Group)

Q2FY21 Financial Highlights:

  Q2FY21 Income Statement Highlights (Source: Company Report)

• Elevated revenue: QBR.B announced its quarterly result, wherein the company posted revenue of CAD 1,131.2 million, increased from CAD 1,003.8 million in the previous corresponding period (pcp). The growth was driven by increased revenue from the company in all three operating segments.

• Adjusted EBITDA grew 5.4% on y-o-y basis: In Q2FY21, the company reported its Adjusted EBITDA of CAD 501.4 million, grew from CAD 475.7 million in pcp. The company reported a solid momentum in EBITDA from the all the segments, ie, media segment (EBITDA of CAD 16.7 million v/s CAD 7.6 million in pcp), while Telecommunications segment (EBITDA of CAD 481.5 million v/s CAD 463.6 million in pcp) and Sports & Entertainment segment(EBITDA of CAD 3.1 million v/s CAD 2.8 million in pcp).

• Higher input costs led to suppressed profitability: The quarter was marked by higher employee costs, increase in the purchase of goods and services coupled with a surge in financial expenses. Moreover, the company reported a loss on debt refinancing amounting to CAD 80.9 million, which acted as a drag. Income before income taxes slide to CAD 164.5 million, from CAD 192.3 million in pcp.
  

• Lower net income: In Q2FY21, the company posted its net profit of CAD 124.7 million, as compared to CAD 174.0 million in pcp. The decrease was primarily driven by the above-mentioned factors, partially supported by lower income tax expenses.

Risks associated with the investment

The operations are capital intensive in nature, and hence a shift in consumer demand would dampen the company’s ROE and profitability. Additionally, the company reported a constant surge in its total debt in the recent quarters, and the continuation of the above trend might impact the company’s financial flexibility.

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 44.38% stake, with Fidelity Management & Research Company LLC and RBC Global Asset Management Inc. are the major shareholders in the company with an outstanding position of 9.38% and 6.84%, respectively.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): Price to CF based

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 has a strong brand presence, which contributes to deeper market penetration of the existing suite of services. Moreover, the successful introduction of new services is expected to support the company’s growth in the coming days. The corporation has an impressive LTE-A network of ~94% across the Greater Ottawa Area region and is also enhancing its presence across rest of Canada. With the growing demand for data (5G) services due to an increase in video consumption and increased work from home options, we believe the internet service market in Canada is likely to grow in the coming years, while we believe QBR.B is highly poised to take advantage of the above demand dynamics. We have valued the stock using Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Rogers Communications Inc, BCE Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of QBR.B at the last closing price of CAD 31.62 on October 22, 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:

One-Year Technical Price Chart (as on October 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on October 25, 2021 price as well.

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Disclaimer

 

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