Rogers Communications Inc. (TSX: RCI.B) is Canada’s leading telecom and media company. Also, 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. Rogers, through its Media segment, provides sports media and entertainment services. The company through its Media segment holds 37.5% stake in Maple Leaf Sports & Entertainment Ltd. 

Investment Thesis:

• 5G deployment to boost growth: Rogers is Canada’s first company to launch 5G technology in four cities. Besides, the company expects to expand its services to 20 markets by the end of 2020. Though the coronavirus spread and regulations could stall the company’s expansion plans, Rogers is still ahead of the curve. Notably, Rogers continues to invest in digital infrastructure and network technology to provide the best network and fast internet. In 2019, the company invested CAD 2.5 billion in network infrastructure. For 5G expansion, the company needs a low-frequency spectrum. Notably, Rogers has already secured 600 MHz in every single province and territory. Notably, 5G technology is not just an upgrade; it is likely to boost speed and reduce latency in an unprecedented way. The company partnered with Ericsson to roll out 5G technology. We believe, advance technology is likely to drive the majority of revenues for telecom companies in the future and Rogers, leading the Canadian market is expected to witness an upward swing in its revenues in the coming years.

• Key Performance Indicators Remain Strong: The company’s first-quarter performance was impacted by the negative impact of COVID-19 pandemic. Rogers reported lower revenues and net income in the first quarter. We expect these challenges to be transitory and unlikely to impact the company’s long-term growth. While uncertainty prevails, Rogers’ key performance indicators remain solid, which is encouraging. The company continues to add new subscribers in the Wireless segment taking its total subscriber base to 10.8 million. Meanwhile, it is witnessing increased demand for internet with increased penetration in the Cable segment. While the company’s media revenues remain challenged in the near-term, it is expected to bounce back strongly. We believe the company’s continued investment in network infrastructure and roll out 5G services bodes well for future growth with continued growth in subscriber base and stable ABPU.

• Dividend play: Rogers, despite strong investment in infrastructure, continues to boost shareholders’ returns through consistent dividends payout and share buy-backs. In 2019, Rogers returned CAD 1.7 billion to its shareholders through dividends and share buy-backs. Rogers paid CAD 1.02 billion in the form of dividends and repurchased shares worth CAD 655 million. Further, the company’s dividend payout ratio remains healthy and sustainable in the long run. Despite disruptions from the COVID-19 spread, Rogers did not announce any cut or reduction in dividends. Investors should note that Rogers provides essential services which imply that its business remains relatively immune to the current crisis and the company remains on track to generate strong free cash flows and sustain dividend payments. In the most recent quarter, Rogers paid CAD 253 million in dividends, thanks to the 14% increase in free cash flows.

• Strong financial position: Rogers continues to maintain a strong investment-grade balance sheet and ample liquidity to survive the current crisis. Besides, Rogers’ business is unlikely to take much of impact from the COVID-19 outbreak. Though we expect near-term hiccups, particularly from the increase in the unemployment rate and lack of sporting events, it is unlikely to affect the company’s fundamental strength and the long-term growth prospect. As on March 31, Rogers had CAD 3.8 billion in liquidity, including CAD 1.9 billion in cash and cash equivalents and a CAD 1.9 billion in credit facility and others. The company’s debt leverage ratio (adjusted net debt to TTM adjusted EBITDA) improved to 2.7 in 1QFY20, from 2.9 in at the end of the fourth quarter.

Q1FY20 Financial Highlights: On April 22, Rogers announced its first quarter result. The company posted total revenues of CAD 3.41 billion, down about 5% from CAD 3.59 billion in the first quarter of the prior year. The decline in total revenues reflects a 17% drop in Wireless equipment sales on account of lower subscriber activity related to the COVID-19 pandemic. Besides, the lack of sporting events negatively impacted Media revenues, in turn, overall revenues of the company. Despite lower revenues, adjusted EBITDA stayed flat at CAD 1.34 billion. Meanwhile, adjusted EBITDA margin expanded 190 basis points to 39.1%, reflecting the lower net cost of equipment, cost efficiencies, and productivity savings. Rogers posted adjusted net income of CAD 367 million, down from 405 million in the prior year. The decline in net income comes on the back of increased finance costs owing to the higher amount of debt.

Total debt stood at CAD 20.0 billion, reflecting increased investments in infrastructure. Cash provided by operating activities came in at CAD 959 million, down 4% y-o-y, while the company reported free cash flows of CAD 462 million, up 14% y-o-y.

Q1FY20 Financial Highlights (Source: Company Reports)

Q1FY20 Segment Performance:

Revenues in the company’s Wireless segment fell 5% y-o-y to CAD 2.08 billion, reflecting declines in both service and equipment revenues. Service revenues fell by 2% y-o-y to CAD 1.71 billion due to a decline in overage revenues and lower roaming fees. Meanwhile, equipment revenues fell by 17% y-o-y to CAD 365 million, reflecting lower gross additions and decline in device upgrades. However, a shift in the product mix supported revenues. Adjusted EBITDA increased 1% to CAD 1.03 billion, while adjusted EBIDTA margin expanded 300 basis points to 49.4%.

Wireless segment’s key performance indicators remained strong despite lower ARPU. Wireless segment’s net additions stood at about 251,000 with a total post-paid subscriber base of 9.43 million. Post-paid churn rate also improved to 0.93% from 0.99% in the prior-year period. Total prepaid subscribers stood at 1.34 million, reflecting a net addition of about 75,000.

Blended ABPU (monthly) increased to CAD 65.14 from CAD 64.62 in the first quarter of FY19. However, blended ARPU (monthly) decreased to CAD 52.85 from CAD 54.13.  

The Cable segment’s revenues remained almost flat at CAD 973 million as a decrease in ARPA was offset by favorable pricing for internet and television. Adjusted EBITDA increased 2% to CAD 453 million, reflecting cost efficiencies. Meanwhile, adjusted EBITDA margin expanded by 100 basis points to 46.6%. 

The segment’s internet division’s total subscribers stood at 2.55 million, reflecting net additions of about 17000. Meanwhile, its Ignite TV subscribers came in at 417,000, up 91,000. Cable total customer relationship stood at 2.51 million, higher than 2.49 million in the prior year.

Media segment’s revenues decreased 12% to CAD 412 million, reflecting lower sports revenues due to the suspension of major sports events. Further, lower advertising revenues remained a drag.

FY19 Financial Recap:  Rogers Communications posted revenues of CAD 15.07 billion in FY19, which was flat when compared to the prior year. The growth in Wireless and Cable segment was offset by a decline in the Media segment. Increased demand for data and higher subscriber base supported growth in the Wireless segment. The company’s adjusted EBITDA increased 4% y-o-y to CAD 6.21 billion, while adjusted EBITDA margin expanded 160 basis points to 41.2%. The company’s cost and productivity savings initiatives drove EBITDA margin growth. Adjusted net income fell by 5% y-o-y to CAD 2.13 billion, reflecting increased finance costs. Cash provided by operating activities increased 6% y-o-y to 4.53 billion, reflecting cost efficiencies. Moreover, free cash flows rose by 7% to CAD 2.28 billion. Wireless subscribers stood at 10.8 million, while blended ABPU (monthly) increased to CAD 66.23 from 64.74. 

2019 Financial Highlights (Source: Company Reports)

 Top 10 Shareholders:

The top 10 shareholders have been highlighted in the table, which together forms around 33.68% 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%.

Top Ten Shareholders (Source: Thomson Reuters) 

Key Metrics:  

In FY19, the company had a gross margin and EBITDA margin of 41.2% and 41.6%, which is higher than the FY18 figure of 39.6% and 40.0%, respectively. The company debt-to-equity multiple in FY19 stood at of 2.12x, higher than the debt-to-equity of 2.02x in FY18. The increase in debt was on account of increased investments in network infrastructure. Net margins in FY19 stood at 13.6%, at par with the prior year.

Key Metrics (Source: Thomson Reuters)  

Key Valuation Metrics:

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology (Illustrative): Price/Cash Flow Multiple Approach 

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

Stock Recommendation: As on April 24, the stock had a market cap of ~CAD 29.69 billion with a PE (TTM) multiple of ~14.92x. Being one of the largest telecom companies in Canada, Rogers Communications remains well positioned to benefit from strong demand for data and an increase in subscriber base. Despite challenges from the COVID-19 outbreak, Rogers Communications’ key performance indicators remain strong with sustained momentum in the Wireless segment. The company’s continued investments in infrastructure positions it well to benefit from a superior network. Further, the company launched its 5G services in four cities and remains on track to expand it further in newer markets. The company maintains a strong liquidity position and generates ample cash flows to support its growth initiatives and dividend payouts. We have valued the stock using relative valuation methods, i.e., Price/Cash Flows and for the said purpose, we have considered peers like Telus Corp (TSX: T), BCE Inc (TSX: BCE), and Shaw Communications (TSX: SJR.B). We have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the closing market price of CAD 58.22 per share on April 24, 2020.

RCI.B One-Year Daily Price Chart (Source: Thomson Reuters)

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