Rogers Communications Inc. (TSX: RCI.B) is Canada’s leading telecom and media company. Rogers Communications is among Canada’s Big Three telecom giants that include Telus and Bell. Rogers is the first company to roll out a 5G network in Canada. Further, the company also has one of the most extensive networks that cover almost all of Canada’s population. Rogers operates through three business segments, including Wireless, Cable & Business, and Media.  The company, through its Wireless segment, provides voice and data communication services to about 10.8 million subscribers. Through its Cable segment, Rogers provides high-speed Internet, TV, voice communication, and smart home monitoring services to about 4.5 million homes. The company’s Media segment provides sports media and entertainment services. The company through its Media segment holds 37.5% stake in Maple Leaf Sports & Entertainment Ltd.

Revenue Mix

Source: Annual Report

Investment Rationale

• Expanding 5G Coverage: The company expanded its 5G network to 130 cities and towns across the country. In January 2020, Rogers Communications had initially launched 5G in Vancouver, Toronto, Ottawa and Montreal. The group is excited to roll out 5G to more communities large and small so that Canadians can use the latest 5G devices to their full potential. Rogers is currently using 2.5 GHz, AWS and 600 MHz spectrum to provide 5G coverage.
• Investing in networks and technology: The company has also deployed Dynamic Spectrum Sharing (DSS) technology in a number of these new markets. This technology enables spectrum to be used for 4G and 5G simultaneously on its 600 MHz and AWS spectrum bands. Further, the company announced the acquisitions of Cable Cable Inc. and Ruralwave Inc., local telecommunications companies in the Ontario Kawartha Lakes region, building on the commitment to expand the network and serve more customers. The company’s 5G ecosystem also includes strategic partnerships to research, incubate and commercialize locally developed 5G technology and applications with the University of British Columbia and the University of Waterloo, among other institutions. The Company continued to strengthen its Advanced Services portfolio to help make it easier for businesses and governments to serve their customers and citizens, including new Internet of Things collaborations with bciti, a smart city platform provider that digitally connects residents to their communities and local businesses, and Roambee, a real-time asset monitoring solution provider that transforms supply chain and logistics operations for Canadian businesses.
• Creating best-in-class customer experiences: The group opened virtually our Kelowna Customer Solution Centre as part of our fully Canada-based customer service team. The company Expanded financing to device accessories to make the latest accessories affordable for Rogers customers, including AirPods, Google Nest products, cases, screen protectors, chargers, smart bulbs, and more. The company improved monthly postpaid churn by 10 basis points to 1.10%, despite increased subscriber additions and high consumer activity.
• Ample liquidity: As at on September 30, 2020, the group reported liquidity of CAD 5.5 billion, including CAD 2.2 billion in cash and cash equivalents and a combined CAD 3.3 billion available under the company’s bank credit facility and accounts receivable securitization program, and investment-grade credit ratings with a stable outlook.
• An Income Play: At the last closing, the stock was offering a dividend yield of 3.7%, which is higher amid lower interest rate environment. Also, the company has a track record of dividend payment regardless of economic cycles over the past ten years.

Dividend Payment Over the Past 10-Years. Source: Refinitiv (Thomson Reuters)

• Offering a Solid Free Cash Flow Yield: Rogers stocks are offering a substantially higher free cash flow yield of 7.5%, which provide a margin of safety to the existing as well potential shareholders of the company. Also, it reflects that company has enough cash flow to satisfy all of its obligations. Free Cash Flow Yield is an important metrics for stakeholders (common stock owners, debt holders, preferred stockholders, convertible stockholders, etc.) because it provides a more accurate picture of an entity’s financial health than net income.
• Positive Spread Between ROCE and WACC: A positive spread between ROCE and WACC implies that the company is taking prudent fund deployment decision and choosing projects which are generating returns in excess to its cost of capital. In Rogers’ case, the spread between ROCE and WACC is approximately 5.5%, which reflects financial intelligence of the management in fund deployment.
• Strong Competitive Advantages: In the September quarter, the company’s reported EBITDA margin stood at 45.1% vs 33.2% industry median, an Operating margin of 25.3% vs 7.8% industry median, a Net margin of 14% against industry median of 7%, and ROE of 5.1% vs industry median 1.8%.

Source: Refinitiv (Thomson Reuters), Kalkine Group

• Solid Margin Profile: The group is built upon the solid fundamentals and maintained a robust margin profile. The company has consistently recorded EBITDA margin above 35% over the past ten quarters, Net margin above 10% at the same time with an exception in June 2020 quarter (because of abnormal market conditions).

Source: Refinitiv (Thomson Reuters), Kalkine Group

• Risk Associated with Investment: Upgradation to 5G services is time-consuming and requires huge capital investments. Thus, any setback in operation or any other unprecedented events, which results in a delay of 5G implementation could hamper the financial performance. Furthermore, higher promotional activities and removal of data usage caps are likely to put pressure on the margin of the company in the near term.

3QFY20 Financial Highlights

Source: Company Filings

• During the third quarter of FY20, the company reported profitable growth in all the markets it serves, Wireless postpaid net subscriber additions of 138,000, up 34% reflected strong execution with stores reopening and a recovering economy.
• Further, the company reported an increase in Wireless adjusted EBITDA service margin by 300 basis points; and Cable adjusted EBITDA margin increase by 120 basis points despite COVID-19 impacts.
• The group delivered free cash flow growth of 13% as a result of careful capital management.
• At the end of September quarter, the company reported CAD 5.5 billion of available liquidity, including CAD 2.2 billion in cash and cash equivalents and a combined CAD 3.3 billion available under the company’s bank credit facility and accounts receivable securitization program, and investment-grade credit ratings with a stable outlook.
• Total revenue decreased by 2% during the quarter, largely driven by a 9% decrease in Wireless service revenue.
• The decline in the Wireless service revenue was mainly a result of lower roaming revenue due to global travel restrictions during COVID-19, and lower average revenue, primarily as a result of the continued adoption of Rogers’ Infinite™ unlimited data plans.
• Wireless equipment revenue increased as a result of a shift in the product mix of device sales towards higher-value devices.
• Cable revenue decreased by 1% during the quarter with consistent service revenue and a decrease in equipment revenue.
• Media revenue increased by 1% primarily as a result of higher revenue associated with the resumption of NHL hockey, partially offset by lower revenue at the Toronto Blue Jays™ due to COVID-19.
• Consolidated adjusted EBITDA decreased 4% during the quarter, and the adjusted EBITDA margin was down 90 basis points, driven by 4% reduction in the wireless adjusted EBITDA and 32% plunge in the Media adjusted EBITDA, which was partially offset by a 2% improvement in the Cable adjusted EBITDA.
• During the quarter under review, net income and adjusted net income both decreased by 14% and 12%, respectively, primarily as a result of the decrease in adjusted EBITDA.

Top-Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 33.82% of the total shareholding. Rogers Control Trust is the entity holding maximum shares in the company at 9.78%. Beutel, Goodman & Company Ltd. is the second-largest shareholder, with a holding of 5.40%. Further, four out of top-10 shareholder have increased the stake in the company, with Fidelity Investments Canada ULC and 1832 Asset Management L.P. are among the top-10 shareholder those have increased their position by 0.59 million and 0.57 million respectively.

Source: Refinitiv (Thomson Reuters)

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

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The group reported decent performance in the third quarter of 2020, with Wireless postpaid net subscriber additions of 138,000, up 34%, reflecting strong execution with stores reopening, and a recovering economy. The group delivered free cash flow growth of 13% as a result of careful capital management. Further, continued investments in infrastructure positions the company to provide a superior network, which is likely to improve the group’s performance.

Rogers shares are offering a substantially higher free cash flow yield of 7.5%, which provide a margin of safety to the existing as well as potential shareholders of the company. Also, it reflects that company has enough cash flow to meet all of its obligations. Also, Rogers stock offering a decent dividend yield of 3.7%, higher than 10-year Canada Government Bond Yield and higher than TSX Composite Index dividend yield of 3.57%. Also, the company has a proven track record of dividend payment over the past 10-years. High yielding stocks with a proven track record of dividend payment amid lower interest rate environment tend to remain in the investor’s limelight. 

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 54.12 on October 30, 2020.

1-Year Price Chart (as on October 30^th, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

* Recommendation is valid at November 2, 2020 price as well.

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.