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, 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.

Revenue Mix

Source: Annual Report

Investment Rationale

• 5G Expansion to Fuel 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, the group 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. For 5G expansion, the company needs a low-frequency spectrum, and 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, 5G rollout 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.

• Strong Balance Sheet: The group’s balance sheet remains strong and bolstered in the second quarter of FY20. The group ended the quarter with a strong balance sheet with available liquidity of CAD 5.4 billion (including CAD 1.8 billion of cash), an increase of $2.9 billion from December 31, 2019. The group’s debt/equity ratio at the end of Q2FY20 stood higher at 2.16x against industry median of 1.14x. However, the group’s, interest coverage ratio of above 4x reflects that the company has sufficient operating income to cover its debt obligation. This also implies a lower balance sheet risk regardless of a higher debt contribution.

• Offering a Solid Free Cash Flow Yield: The group is offering a substantially higher free cash flow yield of 7.9%, 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 all stakeholders because it provides an accurate picture of the entity’s financial health than net income. This is because net income includes non-cash accounting adjustments and may not accurately reflect crucial aspects of a company’s health. Free Cash Flow metrics evaluate whether a company has sufficient cash resources to meet the goals of the entity and its’ stakeholders (debt reduction, dividends, stock buybacks, acquisitions, etc.). A higher cash flow yield is better for investors.

• A Dividend Play: Given the falling interest rate environment in the wake of COVID-19 pandemic and plummeted interest income on the Government Bonds, we believe that RCI shares are offering a decent dividend yield of 3.8%, which is outperforming the TSX Composite dividend yield of 3.6% and 10-Year Canada Government Bond Yield of 0.55%. Also, the company has a track record of consistent dividend payment over the past 10-years.

• Risk Associated to 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.

2QFY20 Financial Highlights

Source: Company Presentation 

Consolidated

• Total revenue decreased by 17% on an annual basis during the quarter, largely driven by 13% and 17% decreases in Wireless service and equipment revenue, respectively along with a 50% reduction in Media revenue.
• Group’s capital intensity decreased by 1.9 percentage points through careful capital expenditure management.
• The group ended the quarter with a strong balance sheet with available liquidity of CAD 5.4 billion, including CAD 1.8 billion of cash. The total liquidity increased by CAD 2.9 billion from December 31, 2019.
• The group generated substantial cash flow from operating activities of CAD 1,429 million, up 35% on an annual basis.

Wireless Segment

• Service revenue plummeted 13% on a YoY basis to CAD 216 million, due to lower roaming revenue on account of global travel restrictions during COVID-19 and waiving fees until April 30, 2020. Further, a decrease in average revenue as a result of strong customer adoption to the group’s Infinite unlimited data plans and lower wireless data usage further build pressure on the revenue.
• Equipment revenue declined by 17% to CAD 356 million, due to lower gross additions and device upgrades by existing customers, in part due to the COVID-19 pandemic. This was partially offset by a shift in the product mix of device sales towards higher-value devices along with lower promotional activity in consideration of changing economic conditions.
• Operating costs reduced by 28% on a YoY basis due to lower gross additions and device upgrades by existing customers, in part due to the COVID-19 pandemic.
• Adjusted EBITDA decreased 19% on a YoY basis led by a reduction in revenue.

Cable Segment

• In the second quarter, cable segment recorded a 3% decrease in revenue on a YoY basis due to a 4% decline in ARPA as a result of bundled pricing that provides a home phone for a lower incremental cost and waiving certain fees and the programs implemented to help customers during the COVID-19 pandemic. This was partially offset by the impact of Internet service pricing changes in 2019 along with the increase in total customer relationships over the past year due to growth in Internet and Ignite TV subscriber base.
• Adjusted EBITDA declined by 5% as a result of lower revenue.

Media Segment

• Second-quarter revenue plummeted by 50%, led by lower advertising revenue as a result of softness in the advertising market due to COVID-19; and lower sports revenue including at the Toronto Blue Jays, primarily as a result of the suspension of major sports leagues due to COVID-19.
• Operating expenses reduced by 36% on a YoY basis.

Stock Performance

At the last close (on September 25, 2020), RCI.B shares traded 0.91% higher at CAD 52.03. In a year over period, its shares have tested a 52W High price of CAD 67.43 (on January 22, 2020) and a 52W low of CAD 46.81 (on March 23, 2020). At the last traded price, its shares traded approximately 23% below its 52W Low and 11.15% above its 52W low.

1-Year Price Return (September 25, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

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 their stake in the company over the last quarter, with Fidelity Investments Canada ULC and 1832 Asset Management L.P. are among the top shareholders who have increased their position by 0.59 million and 0.57 million.

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 company is built upon strong fundamentals. The group has maintained an EBITDA margin above 35% over the last eight quarters and net margin above 10% at the same time barring the latest quarter. Though the net margin dipped below 10% in the latest quarter, it was still above the industry median of 6.5%. The company continued to generate strong cash flow.  Further, continued investments in infrastructure positions the company to provide a superior network, which is likely to improve the group’s performance. Further, the company launched its 5G services in four cities and remained 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 pay-out.

Further, Rogers stocks are offering a substantially higher free cash flow yield of 7.9%, which provide a margin of safety to the existing as well as potential shareholders of the company.  Moreover, the stock is offering a dividend yield of 3.81%, higher than 10-year Canada Government Bond Yield and higher than TSX Composite Index dividend yield of 3.6%. Higher dividend yield amid lower interest rate environment with a consistent track record of dividend payment would bring its shares in the investor’s limelight.

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). Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 52.03 on September 25, 2020.

 

*Recommendation is valid at September 28, 2020 price as well.

*Please be aware that dividend is variable and not guaranteed.

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Disclaimer

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