Resilient Business, Strong Liquidity: Cogeco Communications Inc. (TSX: CCA) is the eighth largest cable operator in North America. The company offers Internet, video and telephony services to both residential and business customers. The company operates under the brand name of Cogeco Connexion in Canada, and Atlantic Broadband in the United States.

Investors should note that the company’s offerings fall under the purview of essential services. Recently, the company announced that it is witnessing a spike in demand as people stay indoors. The company stated that over the past month it has marked about 40% increase in traffic for its video-on-demand services. Moreover, it witnessed growth of about 20%-40% for other popular video streaming services, like Netflix. Further, usage of its telephony services increased 45%, while internet usage increased by 60%.

Guidance rollback: In response to the COVID-19 outbreak, the company withdrew its FY20 guidance, given the uncertainty surrounding the economy. CCA expects the crisis to impact its revenues and EBITDA in the near term. However, the company doesn’t expect any noteworthy impact on free cash flows.

Q2FY20 Financial Highlights: For the period ended February 29, 2020, CCA announced its quarterly results, wherein the company reported revenues of CAD 586.5 million, up about 0.4% over Q2FY19. Growth in the American broadband services was partially offset by decline in the Canadian broadband services. Profit from continuing operations jumped 33.9% to CAD 109.39 million, reflecting a significant decline in finance cost and lower taxes. The company reported Cash and cash equivalents of CAD 501.89 million, while free cash flows for the first half stood at CAD 227.91 million.

Financial Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): EV/EBITDA Multiple Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: CCA stock is down about 15.5% so far this year, which we believe presents an excellent opportunity to buy the stock for long term. The company’s offerings are considered as essentials, which imply that CCA’s business is somewhat immune to the economic cycles. Though the company expects its revenues and EBITDA to take hit in the short-term, it remains well-positioned to gain in the long-term. Cogeco Communications has strong liquidity position. The company has about CAD 502 million in cash and CAD 948 million in unused credit facilities, which is more than enough to meet its financial obligations in the near-term. CCA stock is trading at a discount to its peers and offers a healthy dividend yield of about 2.4%. We took Quebecor (TSX: QBR.B), Rogers Communication (RCI.B), Shaw Communications (SJR.B) etc. as peer group. We have valued CCA stock using the EV/EBITDA based relative valuation method and arrived at a target price implying a potential upside in low double-digits. Hence, we recommend a “Buy” on the CCA stock at the closing market price of CAD 95.65 as on April 15, 2020.

CCA One-Year Daily Price Chart (Source: Thomson Reuters)

Disclaimer

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