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.

Revenue Mix

Source: Annual Report

Investment Rationale

Solid Competitive Advantages: The company is built upon strong fundamentals and commands a strong competitive advantage against the peers’ group within the industry, with industry leading EBITDA margin, Operating margin, Net margin, and Return on Equity. For the 4QFY20, the company’s EBITDA margin stood at 43.8% vs 35.7% industry median, Operating margin of 23.1% vs 11.2% industry median, Net margin of 12.2% against industry median of 1.8%, and ROE of 4.6% vs industry median 1.8%.

Source: Refinitiv

Solid Fundamentals: The company has consistently recorded an EBITDA margin above 35% over the past eight quarters, Net margin above 10% at the same time, with an exception in the June 2020 quarter (because of abnormal market conditions).  

Source: Refinitiv (Thomson Reuters)

Expanding 5G coverage: The company Launched and expanded Canada's first and largest 5G network to 160 cities and towns and started rolling out Canada’s first 5G standalone core network in Montreal, Ottawa, Toronto, and Vancouver. The company is ready to support future devices and chipsets as they become available. Further, the group named the best wireless network in Canada for the second year in a row, in July, by umlaut, the global leader in mobile network benchmarking. The company also earned the number one spot in the Canada Wireless Network Quality Study by J.D. Power in the West and Ontario. The company also ranked the most consistent national wireless and broadband Internet provider in Canada by Ookla.

Substantial cash flow and available liquidity: At the end of the Q4FY20, the company has CAD 5.7 billion of available liquidity, including CAD 2.5 billion in cash and cash equivalents and a combined CAD 3.2 billion available under the company’s bank credit facility and receivables securitization program, and investment-grade credit ratings with a stable outlook.

Consistent Dividend Payer: At the last closing, the company was offering a dividend yield of 3.7%, which is decent amid a lower interest rate environment. Also, the company has a track record of dividend payment regardless of economic cycles over the past ten years. High Yielding stocks with a proven track record of dividend payment like Rogers Communications tend to be popular among the investor community, especially among the income-seeking investors, as it provides an opportunity to capitalize on high yield amid a lower interest rate environment.

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 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 the 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.); the higher, the better.

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. 

4QFY20 Financial Highlights

Source: Company Filing

• During the fourth quarter under consideration, the company’s total revenue decreased by 7%, largely driven by an 8% decrease in Wireless service revenue.
• The Wireless service revenue decrease was mainly a result of lower roaming revenue due to global travel restrictions during COVID-19, and lower overage revenue, primarily as a result of the continued adoption of the company’s Rogers Infinite™ unlimited data plans. Wireless equipment revenue decreased as a result of a lower gross additions and lower device upgrades by existing subscribers during COVID-19.
• Cable revenue increased by 3% this quarter as a result of the movement of Internet customers from the company’s legacy Internet to the company’s Ignite Internet offerings and service pricing changes and discipline.
• Media revenue decreased by 23% this quarter, primarily as a result of the postponement of the start of the 2020-2021 NHL and NBA seasons, which traditionally start early in the fourth quarter, and softness in the advertising market due to COVID-19, partially offset by higher revenue at Today's Shopping Choice™
• Consolidated adjusted EBITDA increased 4% this quarter and the company’s adjusted EBITDA margin increased by 450 basis points. Wireless adjusted EBITDA decreased by 3%, while Cable adjusted EBITDA increased by 5% this quarter and Media adjusted EBITDA increased by CAD 60 million this quarter primarily due to lower programming and production costs associated with the delayed start of major sports leagues.
• Net income and adjusted net income decreased this quarter by 4% and 2%, respectively, primarily as a result of higher depreciation and amortization and higher other expenses, partially offset by higher adjusted EBITDA.
• During the quarter under consideration, the company generated cash flow from operating activities of CAD 947 million, down 19% because of an increase in net working capital and cash income taxes. The group reported a free cash flow of CAD 568 million, up 14%.
• Further, at the end of the Q4FY20 the company had CAD 5.7 billion of available liquidity, including CAD 2.5 billion in cash and cash equivalents and a combined CAD 3.2 billion available under the company’s bank credit facility and receivables securitization program, and investment-grade credit ratings with a stable outlook.
• The company returned CAD 253 million in dividends to shareholders this quarter and the group declared a CAD 0.50 per share dividend on January 27, 2021.

Top-Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 36.95% 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 5.43%.  The institutional ownership stood at 65.31% and strategic ownership stood at 11.43%, respectively.  

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales 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: Rogers continued to see sequential improvement in Q4, finishing the year with solid efficiency gains across all of its businesses, a strong balance sheet, solid Wireless postpaid net subscribers, and continued momentum in cash flow growth in the Cable business.

The company expanded consolidated adjusted EBITDA margin by 90 basis point, and generated free cash flow of CAD 2,366 million, up 4%.  Further, the company attracted 245,000 net Wireless postpaid subscribers, 57,000 net Internet subscribers, and 218,000 net Ignite TV subscribers.

Moreover, the company launched and expanded Canada's first and largest 5G network to 160 cities and towns and started rolling out Canada’s first 5G standalone core network in Montreal, Ottawa, Toronto, and Vancouver. Also, the company strengthened its Advanced Services portfolio to help make it easier for businesses and governments to serve their customers and citizens, including with new Internet of Things (IoT) collaborations, and established the Rogers Internet of Things Chair with the University of Calgary to advance IoT research.

Therefore, based on the above rationale and valuation done using the above methodology, we recommend a “Buy” recommendation at the closing price of CAD 55.77 on February 19, 2021.

1-Year Price Chart (as on February 19^th, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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