Rogers Communications Inc.

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 ten million. Rogers Communication is the first company to roll out a 5G network in Canada and has one of the most extensive networks and operates through three business segments, namely wireless, media and cable services.

Investment Rationale:

• An income Play: Historically, the company reported a consistent dividend payout, despite economic cycles. Notably, dividend distribution stood at CAD 504 million in H1FY21, at par with CAD 505 million in pcp. Moreover, the stock of RCI.B carries a dividend yield of ~3.296% on an annualized basis, which looks attractive considering the ongoing interest rate scenario.              

• Robust Profitability margins: In Q2FY21, the group reported higher profit margins than its peers, which indicates better operational efficiency. Notably, EBITDA margin and operating margin stood at 38.8% and 17.1% respectively in Q2FY21, higher than the industry median of 33.9% and 13.4%, respectively. Moreover, the net margin, during the period stood at 8.4%, higher than the industry median of 4.8%.
  

• Growth potential within the wireless segment remains high: The group derives its majority revenue from the wireless segment, while the penetration of the above segment in Canada still remains lower than most of the developed nations. Hence, the opportunity for expansion for the company remains high in the coming days. We believe the key growth drivers would be elevated data demand, driven by increasing video consumption on account of changes in consumer preferences.

Source: Company Presentation

• Network Expansion: The company is constantly expanding its network in order to reach out to a larger number of audiences. Recently the company enhanced its fibre network presence by using fibre-to-the-home technology to more than 24,000 homes and businesses across Ottawa, Clarence-Rockland, North Grenville and Carleton Place. Furthermore, it also expanded its 5G network across eleven new cities and towns in the Quebec region and in some other areas of Dartmouth and Bedford in Nova Scotia region, which resulted its presence across six communities in Atlantic Canada.

• Growing traction from the Media segment: In the recent past, the company’s media segment reported tremendous revenue growth supported by higher advertising and Toronto Blue Jays™ revenue due to the resumption of live sports. Notably, in Q2FY21, topline stood at CAD 546 million, grew 84% on a y-o-y basis, while in H1FY21, the group reported a 39% on a y-o-y growth in the revenue of CAD 986 million. Recently, the company relaunched SN NOW, which would allow the customers to access live sports content in Canada at an affordable price. The above is expected to attract higher audiences in the coming days.

• Ample liquidity to support upcoming operations: At the end of Q2FY21, the group reported CAD 6.9 billion of available liquidity, which includes CAD 4 billion of revolving credit facility. We believe the above is sufficient to fund its upcoming capital expenditure.

• Acquisition of Shaw Communication to support future growth:  During the first half of FY21, the company acquired Shaw Communications Inc. which is a leading provider of broadband cable television, Internet, home phone, telecommunications services etc. The above acquisition would help the group to build its assets and capabilities, needed for the wireless broadband and network expansion.

• Constant decline in Total debt: Despite a capital-intensive business, the company reported a constant reduction in its total borrowings, which indicates prudent capital management. Notably, interest on borrowing stood at CAD 181 million in Q2FY21, decline from CAD 197 million in pcp, which supported the overall profitability. Moreover, the company reported the lowest total debt in the last five quarters, which is impressive as well.  
  

• Risks associated with the investment: The operations are capital intensive in nature, and hence a shift in consumer demand would dampen the company’s ROE and profitability. Moreover, the Media segment is yet to mark its profitability, which remains a key concern for the group.
  

Q2FY21 Income Statement Highlights:

• Growth in revenue: Rogers Communication declared its second quarter result, wherein revenue stood at CAD 3,582 million, surged from CAD 3,155 million in the previous corresponding period (pcp). The increase was supported by improved revenue from the cable and wireless segment. The quarter witnessed an 84% y-o-y jump from the media segment to CAD 546 million, which further contributed to the topline growth.
• Rise in Operating costs: The company reported an increase in the operating cost (CAD 2,208 million v/s CAD 1,861 million in pcp) due to higher spending from the media segment (CAD 546 million v/s CAD 296 million in pcp).
• Impressive Adjusted EBITDA: In Q2FY21, the company’s adjusted EBITDA stood at CAD 1,374 million, reflecting a 6% growth on y-o-y basis. The above was supported by impressive growth from the wireless and cable segments, partially offset by a tepid performance from the media segment.
• Elevated bottom-line: Net income stood higher at CAD 302 million, grew from CAD 279 million in the previous corresponding period (pcp).

Q2FY21 Income Statement Highlights (Source: Company Report)

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 40.84% stake, with Rogers Control Trust and Fidelity International are the major share holders in the company with an outstanding position of 9.89% and 5.75%, respectively.

Source: REFINITIV, Analysis by Kalkine Group.

Valuation Methodology (Illustrative): Price to CF based

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:

The company offered the first 5G network across Canada and has launched favorable data plans to attract a larger customer base. In the recent past, the company invested more than CAD 3.3 billion in the 3500 MHz band spectrum, covering ~99.4% of the Canadian population, which has positioned the company as the largest single investor within the 5G spectrum in the country across rural, suburban and urban markets. A growing digital market coupled with higher mobile penetration would likely lead to higher dependence on the 5G network across Canada, which would eventually support the company’s upcoming performances. We have valued the stock using Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like BCE Inc and Telus Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of RCI.B at the last closing price of CAD 60.68 on October 15, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on October 15, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at October 18, 2021 price as well.

Disclaimer

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