Cogeco Communications Inc.

Cogeco Communications Inc. (TSX: CCA) is a communication corporation and is engaged as a cable operator in Canada. The company provides residential and business customers with internet, video, and telephony services with broadband fibre networks. 

Key Highlights:

• Industry beating margin profile: The company commands a higher profit margin than the industry median, which indicates higher operational efficiencies, supported by several savings with digitization strategies implemented during FY21. Gross profit and EBITDA margin stood at 72.7% and 45.9%, respectively, in Q4FY21, as compared to the industry median of 53.3% and 27.1%, respectively. Moreover, the company reported a net margin of 16.3% in Q3FY21, as compared to the industry median of 9.3%.
  

• Encouraging expansion plans: For FY22, the company is planning to reach to additional 70,000 consumers, which would include services like Gig internet, home WiFi, Internet Protocol TV (IPTV) and voice services via advanced Fiber-to-the-Home (FTTH) technology. The company offer FTTH technology, which is likely to provide higher download and upload performance. Within its IPTV service, the group would provide a cloud-based video experience allowing customers to access live and recorded programs. Additionally, the group would also offer unlimited nationwide calling, popular calling features and an online phone manager. Hence, we expect the above is likely to support the company’s upcoming business prospects. Notably, for the above, the company would likely invest ~CAD 82 million.

• Strong cash flow generation: For FY21, the group reported a higher cash flow from operations of CAD 1,019.059 million, significantly higher than CAD 917.819 million in pcp. Additionally, free cash flow stood at CAD 486.877 million during the period, as compared to CAD 455.436 million in pcp. The above is likely to support the company’s overall liquidity.

FY21 Financial Highlights:

• CCA announced its full-year results, wherein the company posted revenue of CAD 2,510.453 million, as compared to CAD 2,384.283 million in FY20. The increase was driven by improved revenue from both Canadian broadband services and American broadband services segments.
• The quarter was marked by higher operating expenses, while partially offset by lower financial expense and management fees. Profit before income taxes stood at CAD 562.373 million, as compared to CAD 508.912 million in pcp.
• The group reported its net profit of CAD 431.647 million, jumped from CAD 396.591 million in pcp, thanks to higher profit before income taxes, partially by higher income taxes.

FY21 Income Statement Highlights (Source: Company Report)

Risks: The operations of the company are capital-intensive in nature, and any delay in the project delivery might lead to hinder in profitability, cash flows etc. Moreover, the telecommunications industry might witness price competition due to the emergence of several players.

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

During FY21, the company organic growth across both the American broadband services and the Canadian broadband services segments, driven by growth in Internet service customers, stemming from the ongoing interest in high-speed Internet offerings. The surge was primarily due to was enhanced since the beginning of the COVID-19 pandemic, and rate increases implemented for certain services.

We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Telus Corp, BCE Inc, etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CCA at the closing price of CAD 96.47 on December 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 December 15, 2021). Analysis by Kalkine Group

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

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