Rogers Communications Inc. (TSX: RCI.B) is Canada’s leading telecom and media company. Rogers Communications is among Canada’s Big Three telecom giants that include Telus and Bell. Rogers is the first company to roll out the 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 a 37.5% stake in Maple Leaf Sports & Entertainment Ltd.

Revenue Mix

Source: Company Presentation FY20

Investment Rationale

• Reported Decent Performance: During the quarter ended March 31, 2021, the company's revenue increased by 2%, largely driven by a 5% increase in Cable service revenue. This was largely on account of cable revenue growth of 5% this quarter as a result of disciplined promotional activity, service pricing changes, and increases in the Internet and Ignite TV subscriber bases. Media revenue increased by 7% this quarter, primarily as a result of higher sports and Today's Shopping Choice™ revenue, partially offset by softness in the radio advertising market due to COVID-19. Consolidated adjusted EBITDA increased 4% this quarter and adjusted EBITDA margin increased by 80 basis points. Net income and adjusted net income increased by 3% and 7%, respectively, primarily as a result of higher adjusted EBITDA, partially offset by higher income tax expense.

Source: Company Filing

• Outperformed Industry Median: The company delivered a decent quarterly result and outperformed the industry median on various financial parameters, which is evident from the below chart.

Source: Refinitiv (Thomson Reuters)

• Shaw Transaction- Expected synergies and Integration: On March 15, 2021, the group announced an agreement with Shaw Communications Inc. (Shaw) to acquire all of Shaw's issued and outstanding Class A Participating Shares and Class B Non-Voting Participating Shares for a price of CAD 40.50 per share in cash, except for the shares held by the Shaw Family Living Trust, the controlling shareholder of Shaw, and related persons (Shaw Family Shareholders). The transaction's expected synergies are likely to exceed CAD1 billion annually within two years of closing, and the transaction would be significantly accretive to earnings and cash flow per share as of the first year after closing. 

• Strong Balance Sheet and Healthy Liquidity: At the end of the quarter, the company holds the liquidity of CAD 4.0 billion, which seems sufficient to fund the group's near-term requirement. The company is maintaining a balance between shareholders return, and internal funding of projects as the group is distributing ~43% of its free cash flow as a dividend. 

• Advancing 5G Research and Development: Rogers constantly ventures into new initiative related to technological advancement. It consistently deploys resources for adding and modifying current product specifications, making it valuable to the end-users. Rogers is investing in made-in Canada technology and establishing a key partnership in research to commercialize 5G technology. Also, Rogers is collaborating with global telecom players on 5G applications engineering and to accelerate 5G adoption.

• Consistent Dividend Payer: At the last closing price, the company was offering a dividend yield of ~3.28%, which is decent amid a low-interest-rate environment. Also, the company has a track record of dividend payment regardless of the operating environment 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 is offering a substantially higher free cash flow yield of 5.4%, 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 stakeholders because it provides a more accurate picture of an 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 position to meet the goals of the entity and its' stakeholders (debt reduction, dividends, stock buybacks, acquisitions, etc.). The higher the free cash flow yield is, 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. Further, Achieving the anticipated benefits of the Shaw Transaction depends on its ability to consolidate and integrate Shaw's businesses, operations, and workforce in a manner that facilitates growth opportunities and achieves the projected cost savings and revenue growth without adversely affecting the combined company's current operations.

Financial Highlights: Q1FY21

Source: Company Filing

• During the first quarter of 2021, the group's revenue increased by 2%, largely driven by a 5% increase in Cable service revenue. This was primarily driven by growth in the Cable revenue by 5% to CAD 1,020 million as compared to CAD 973 million in Q1FY20 as a result of disciplined promotional activity, service pricing changes, and increases in our Internet and Ignite TV subscriber bases. Also, Media segment revenue increased by 7% to CAD 440 million as compared to CAD 412 million in the same quarter of the previous financial year, primarily because of higher sports and Today's Shopping Choice™ revenue, partially offset by softness in the radio advertising market due to COVID-19.
• Revenue growth was partially offset by a decline in the Wireless service revenue, down 6% as a result of lower roaming revenue due to continued global travel restrictions during COVID-19, and lower average revenue, primarily as a result of the continued adoption of our Rogers Infinite™ unlimited data plans.
• Consolidated adjusted EBITDA increased 4% to CAD 1,391 million, and adjusted EBITDA margin increased by 80 basis points.
• Cable adjusted EBITDA increased by 8% this quarter, primarily as a result of higher service revenue. This resulted in a 110bps margin improvement to 47.7%.
• Given the seasonal nature of our Media business, Media adjusted EBITDA is negative but improved by CAD26 million this quarter, primarily due to higher revenue.
• Wireless adjusted EBITDA decreased by 1%, primarily as a result of the flow-through impact of the decrease in service revenue, partially offset by the shift to device financing, which has improved the Wireless equipment margin, and various cost efficiencies. This gave rise to the adjusted EBITDA service margin of 63.0%, an improvement of 310 basis points from last year.
• Net income and adjusted net income increased this quarter by 3% and 7%, respectively, primarily as a result of higher adjusted EBITDA, partially offset by higher income tax expense.
• The group generated cash flow from operating activities of CAD 679 million, down 29%, and free cash flow of CAD 394 million, down 15%, as a result of increases in cash income taxes.
• As of March 31, 2021, the group had CAD 4.0 billion of available liquidity, including CAD 0.8 billion in cash and cash equivalents and a combined CAD 3.2 billion available under the bank credit facility and receivables securitization program.

Top-Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 37.06% of the total shareholding. Rogers Control Trust is the entity holding maximum shares in the company at 9.89%. Fidelity Investment Canada ULC is the second-largest shareholder, with a holding of 5.43%. Further, five out of the top-10 shareholders have increased their stake in the company.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: During the quarter, the company reported decent performance with top-line growth of 5% and bottom-line growth of 3% on a YoY basis and expanded Canada's first and largest 5G network to 10 more cities, now in 173 markets across Canada, and announced a smart city initiative with Communitech to develop 5G transportation solutions of the future. Rogers expanded the availability of its 5G service in British Columbia, Ontario and Quebec. Also, the company strengthened the 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.

Further, Cable and Media segment moving well during the quarter, with both the segment reported revenue growth and margin expansion. Also, Cable segment performance bolstered mainly on account of a 5% increase in service revenue.  Also, the group remain focused on their Connected Home roadmap, driven by their Ignite TV product.

The company is built upon strong fundamentals and maintained a solid, stable margin profile over the past several quarters, which is commendable.

Source: Refinitiv (Thomson Reuters)

Further, the company is offering a decent dividend yield of 3.28%, which is significantly higher than the risk-free rate on Canada 10-Year Bond Yield of 1.52%, which provide a margin of safety for the investors as together with potential capital gain they will earn with decent dividend income.

At the last traded price, its shares traded well above the crucial short-term as well as long-term support levels of 50-day and 200-day SMAs, which suggest that the stock is trading in a bullish zone.

Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation at the closing price of CAD 61.07 on April 23, 2021. 

1-Year Price Chart (as on April 23, 2021, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at April 26, 2021 price as well.

Disclaimer

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