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 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:

• 5G to support future performance: The group is the pioneer of 5G network in Canada, and at present, it has the largest 5G network covering more than 130 communities within the country. The group has remained aligned with the changing market dynamics and has been able to meet the changing customer preferences much ahead of its peers, which is noteworthy. The company has invested more CAD 30 billion in wireless networks segment over the past 35 years. We believe, as the industry moves towards 5G, the company would have the upper hand on catering to the growing customer-base for 5G. Moreover, implementation of the 5G networks augurs well for a higher monthly recurring revenue from the expected increase in tariffs. Moreover, to support the company’s 5G segment, recently, the company launched a 5G Smart Campus at the University of Waterloo to support the research and commercialization of made-in-Canada 5G technology and applications.

• Bullish technical indicators: The stock is trading in a strong bullish zone as the group’s shares, at the last closing price, closed above the long-term simple moving average (SMA) of 100-days, 150-days and 200-days, indicating a bullish pattern.

Source: Refinitiv (Thomson Reuters) 

• Strong sequential performance: The company impresses with its Q3FY20 financial numbers, and posted revenue, gross profit and operating income at CAD 3,665 million, CAD 1,638 million and CAD 926 million, as compared to CAD 3,155 million, CAD 1,294 million and CAD 602 million in Q2FY20. The group performance was supported by ~300,000 addition of new customers within the wireless segments during Q3FY20, which reached to 2.2 billion customers. Moreover, on the margin front, the group reported EBITDA margin, operating margin and a net margin of 45.1%, 25.3% and 14%, respectively, increased from 41.5%, 19.1% and 8.8% in Q2FY20. An improved sequential performance, amidst the ongoing down-turn, suggest a strong revival in the operations.

• Consistent dividend payment: Over the years, the company reported stable dividend payment across economic cycles, which indicates operational resiliency, sustainable cash flows etc. At the last closing price, the stock of RCI.B was offering a dividend yield of ~3.25%, at par with TSX Composite of ~3.3%.

Five- years Dividend History (Source: Refinitiv, Thomson Reuters)

• Outperformed industry median margins in 3QFY20: The group has reported impressive margins during Q3FY20 and outscored the industry median, which is encouraging, considering the current economic cycle and declining ARPU (Average Revenue Per Unit) of the industry. EBITDA margin and operating margin stood at ~45.1% and 25.3%, respectively in Q3FY20, higher than 34.8% and 7.6% of the industry median. Moreover, the company’s net margin stood significantly higher at 14% in Q3FY20, compared to 5.9% of the industry median, indicates operational efficiency.

Source: Refinitiv (Thomson Reuters)

• Diversified revenue-base: The group’s operations are not confined to wireless business only, it derives a significant amount from the cable and media segments also, which augurs well for dilution of the risk profile. During FY19, the cable and media segments constitute nearly ~39% of the total income. However, in FY19, the majority of the Adjusted EBITDA is being generated from the wireless segment (~68%), while cable and media contributed ~30% and ~2%, respectively.

• Enhanced offerings to increase customer base: The operating segments require constant innovation and upgradation of networks and technology in order to stay afloat within the industry. The company is offering added services in order to retain the customer base and has offered exclusive offer to provide the first six months free when signing up to Apple Music for customers on selecting Rogers Infinite plans. To provide its users with access to the favorite streaming services in one place, the company also launched Ignite™ SmartStream™, an entertainment add-on for Ignite Internet™.

• Focusing on inorganic growth: In order to expand the network, recently, the group announced its acquisitions of Cable Cable Inc. and Ruralwave Inc., local telecommunications companies across Ontario Kawartha Lakes region, seems impressive.

• Ample liquidity: The company has ample liquidity of CAD 5.5 billion, which seems to be sufficient to meet its near-term working capital requirements, and capital investments. Moreover, the group has delivered stable cash flows from operations at CAD 3,374 million in 9MFY20, slightly higher than CAD 3,360 million, a year ago. Moreover, the group has followed a prudent strategy by reducing its capital expenditure in Q3FY20 (CAD 504 million versus CAD 559 million in Q2FY10), to retain the company’s overall liquidity levels. Free cash flow increased to CAD 868 million in Q3FY20, significantly higher than CAD 468 million in Q2FY19, which is encouraging considering the current operating environment.

• Improved Operation Metrics: The Current ratio, improved to 1.07 in Q3FY20, from 1.03 in the previous quarter, which indicates the group is able to repay its short-term obligations more promptly. Notably, RCI.B has reported a lower cash cycle day of 80.4 days in Q3FY20, as compared to 99 days in Q2FY20, which is a key positive. Cash cycle day represents the time-period between cash payment to the suppliers and cash received from the customers. Hence, a lower trend suggests a higher demand for the company’s products and services.

• Risks Associated with the investment: The operations of RCI.B are capital intensive in nature, and hence any delay or cancellation in the funding might hinder the company’s overall prospects and working capital. The profitability of the media segment stood considerably lower from the other two segments, and the continuation of such a trend would take a toll on the group’s overall profitability and return ratios. Also, any set back to 5G implementation would hamper the group’s performance.

Q3FY20 Financial Highlights:

• B announced its quarterly results, wherein the company posted its revenue of CAD 3,665 million, slightly lower than CAD 3,754 million in the previous corresponding period (pcp). The decline was primarily due to a marginal decline in Wireless and Cable segments.
• The group reported a decline in the operating costs (CAD 2,027 million, versus CAD 2,042 million in pcp), higher depreciation and amortization (CAD 663 million, versus CAD 627 million in pcp).
• Adjusted EBITDA stood at CAD 1,638 million, down 4% on y-o-y basis, due to a lower contribution from Wireless segment (CAD 1,089 million versus CAD 1,138 million in Q3FY19) and media segment (CAD 89 million versus CAD 130 million in pcp), partially offset by an improved Cable revenue (CAD 508 million versus CAD 499 million in pcp).
• The company reported net income of CAD 512 million, as compared to CAD 593 million in Q3FY19.
• Cash and cash equivalents stood at CAD 2,248 million, while total assets were recorded at CAD 39,010 million.
• Capital expenditures stood relatively lower at CAD 504 million, as compared to CAD 657 million as on December 31, 2019.

Income Statement Highlights (Source: Company Reports)

Top 10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 34.95% of the total shareholding. Rogers Control Trust Inc. and Beutel, Goodman & Company Ltd. hold the maximum interests in the company at 9.78% and 4.97%, respectively.

(Source: Refinitiv, Thomson Reuters)

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

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

Peer Comparison

(Source: Refinitiv, Thomson Reuters)

Stock Recommendation:

The group is focusing on investing in the networks and technology to deliver leading performance and reliability in order to drive profitable growth across all the markets the group caters. In order to retain its market share, the company would deliver innovative solutions and exciting content to its customers, which is a key positive. Going forward, the group would focus on maintaining financial strength and strong free cash flow growth, which looks impressive. In FY19, the group has returned ~CAD 1.7 billion to its shareholders, representing ~36% of the total return to shareholders in the last three years. We expect the above momentum to continue in the foreseeable future, supported growing customer-base within the wireless segment. Moreover, the group has a strong track record of consistent dividend payment, which reflects ~45% (during FY19) of the total free cash flows. Moreover, the group is built upon 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)

We have valued the stock using Price to earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 61.51 on January 22, 2021.

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

*Recommendation is valid at January 25, 2021 price as well.

Disclaimer

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