Company Profile

Rogers Communications Inc. (TSX: RCI.B) is a leading telecom and media company based out of Canada and has a subscriber base of more than 10.8 million. Rogers Communication is the first company to roll out a 5G network in Canada and has one of the most extensive networks covering almost 4.5 million homes.  The Group operates through three business segments, namely wireless, media and cable services.

Investment Rationale:

• Dividend play: The Company has a strong history of dividend payments, which is an important parameter from income investors’ point of view. At the last traded price, the stock carries an attractive dividend yield of ~3.73%, which is lucrative amidst the current interest rate scenario. Notably, despite a tepid macro scenario and weak economic outlook, the Company did not lower its dividend payout, which is a key positive and illustrates management confidence on its operational efficiencies. 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. 

• Investment in networks and technology (5G) to drive growth: The company is Canada’s first company to launch 5G technology in four cities and is planning 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, the group is still ahead of the curve. 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. 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 the group is expected to witness an upward swing in its revenues in the coming years. 

• Strong Liquidity and Cash flow: In the recent past, while most of the businesses are struggling with a cash crunch and lower liquidity levels due to demand destruction on account of COVID 19, Rogers Communications Inc,  generated a strong operating cash flows and had access to ample liquidity. During the First quarter of FY20, the Company reported a higher free cash flow of CAD 462 million, reflecting a solid growth of 14% on y-o-y basis. The Company ended the quarter with liquidity of CAD 3.8 billion, which seems sufficient to weather the current challenging environment. Furthermore, we believe that the growth in free cash flow is expected to continue in the coming years driven by the implementation of 5G combined with various cost efficiencies and productivity initiatives. 

• Rise in Internet & data usage: The current lock-down situation is likely to stimulate data usage on a per-customer basis. As consumers are staying at home, we believe the data consumption is likely to rise driven by a rise in video and media streaming coupled with increased viewers across the OTT platforms. Further, the work from home concept augurs well for higher internet usage driven by an increase in conference and video calls, which would further support the company’s cash flows and income in the coming days. Total Internet subscribers grew from 2.44 million to 2.55 million during the first quarter of FY20. Meanwhile, in the recent past, the company removed data usage caps for customers on limited home Internet plans from mid-March until at least the end of June on account of COVID 19 pandemic. This is likely to help company in maintaining its customer base.

• Innovative products offerings to drive customer-base: In the recent past, the Company expanded its network across 250,000 households with 340 housing partners, through a low-cost Internet program. The Company offered continued news reporting across the media assets through radio and television broadcasting. The Company created original content and programming for Sportsnet viewers given the suspension of live sports during the COVID-19 pandemic, which is likely to help in retaining the customer base. Furthermore, the Company has supported its customers by implementing flexible payment options due to the current financial uncertainty with no account suspensions or disconnections until at least the end of June. The above measures are expected to build the customer’s confidence and would help the Company to retain its market share, which is praiseworthy.

• Risks associated with the 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.

Recent Developments

The Company collaborated with bciti, an innovative smart city platform provider to provide critical smart city services to the Canadians. The collaboration would enable Canadians to remotely access important municipal services and information from home via their smartphones.

Q1FY20 Operational Highlights

The group declared quarterly results, wherein the Company reported total revenue of CAD 3.42 billion, reflecting a decline of 5% on y-o-y basis, primarily attributable to lower income from wireless and media segments. The group witnessed a decline in the postpaid subscribers as the group closed its retail locations and reduced promotional activity to protect employee’s health and maintain social distancing measures. The quarter was marked by solid growth within the cable segment, and the Company added 17,000 Internet connections and 2,000 net new customer relationships during the quarter. The Company’s Wireless service performance was dampened by lower roaming activities in Canada on account of restrictions imposed due to COVID-19 pandemic. 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. Net income plunged by ~10% on y-o-y basis to CAD 352 million, due to higher depreciation & amortization costs and significantly higher finance costs, while partially offset by lower operating costs.

Q1FY20 Income Statement 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 average 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 by 12% to CAD 412 million, reflecting lower sports revenues due to the suspension of major sports events. Further, lower advertising revenues remained a drag.

Q1FY20 Balance sheet and Cash flow

At the end of Q1FY20, the Company reported cash and cash equivalents of CAD 1.94 billion, significantly higher than CAD 494 million at the end of FY19. Total asset was reported higher at CAD 40.08 billion, as compared to CAD 37.02 billion in FY19. Total long-term debt stood at CAD 19.3 billion, higher than CAD 15.97 billion in FY19. Capital expenditure declined to CAD 593 million compared to CAD 617 million in pcp. The decline was primarily attributable to lower purchases of customer premise equipment during this quarter and lower investments in the network and IT infrastructure, as the Company is focusing on capital efficiencies and improved capital intensity.

Top 10 Shareholders

The top 10 shareholders have been highlighted in the table, which together form around 33.88% of the total shareholding. Rogers Control Trust and Beutel, Goodman & Company Ltd. hold the maximum interests in the company at 9.78% and 5.33%, respectively. At, the end of the first quarter of FY20, TD Asset Management Inc. and GWL Investment Management Ltd. have increased its stakes by 1.87 million and 0.89 million, respectively.  

Source: Refinitiv (Thomson Reuters)

Valuation Methodology: Price to Earnings based Relative Valuation (illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected ~10% and ~17% in the last three months and six-months, respectively due to weak investors' sentiment across the global equity markets on account of COVID 19 pandemic. The company holds one of the highest market shares within the industry and is focused on enhancing its operational efficiencies. In the recent past, the company has invested wisely and has started 5G services in few areas and intends to increase across Canada, which is a key positive. The company maintains a strong liquidity position and generates ample cash flows to support its growth initiatives and dividend payouts.  Moreover, we believe, the company is likely to benefit from rising data demand and the company's continued investments in infrastructure positions it well to benefit from a superior network. Further, the stock is offering a dividend yield of ~3.7%, which is decent, considering the current interest rate environment. We have valued the stock using the Price to Earnings based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). For the said purpose, we have considered peers like AT&T Inc, Shaw Communication and Telus Corporation etc.  Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 53.59 as on July 10, 2020. 

* Recommendation is valid at July 13, 2020 price as well.

*Please be aware that dividends are variable and not guaranteed.

RCI.B Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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