Cogeco Communications Inc

Cogeco Communications Inc (TSX: CCA) provides services like cable operation across the regions of Canada and the USA. The company provides internet, video, and telephony services with broadband fibre networks to residential and business customers. The Group operates through two operating segments, namely, Canadian broadband services and American broadband services.

The Group recently informed that it would redeem senior secured debentures amounting to CAD 200 million, series 2, with a due date of November 16, 2020. The company had determined a redemption price at CAD 1,014.127 plus accrued and unpaid interest amounting to CAD 9.146.

Q3FY20 Financial Highlights: Cogeco Communications reported a stable set of numbers, wherein the company reported a revenue of CAD 605.821 million, reflecting a growth of 3.1% on y-o-y basis. The increase was driven by higher income from both residential and business Internet service customers combined with rate increases and the impact of the Thames Valley Communications acquisition completed on March 10, 2020, in American broadband services segment. Adjusted EBITDA stood at CAD 294.717 million as compared to CAD 283.927 million in the previous corresponding period (pcp). The company reported Adjusted EBITDA margin of 48.6%, improved from 48.3% in pcp. Profit for the period from continuing operations stood at CAD 96.724 million as compared to CAD 99.571 million in pcp. The decrease resulted mainly from higher depreciation and amortization and income tax expenses, partly offset by higher adjusted EBITDA. The Group reported free cash flow at CAD 116.158 million as compared to CAD 136.999 million in Q2FY19 due to the increase in acquisitions of property plant and equipment.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group might face a decline in the number of residential and business consumers due to tepid macro scenario and higher unemployment rate, which might hinder the performance of the Company.

Valuation Methodology: P/E Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CCA stood resilient in the recent past and corrected ~3% in the last six months despite a correction in the broader equity market. The company reported stable financials driven by improved operating performance amid the challenging environment, which is a key positive. For the FY20, the company expects a revenue and EBITDA growth in low-single-digit percentage and free cash flow is expected to grow in mid-single-digit percentage from the previous corresponding quarter. The company has benefitted from the recent acquisition of Thames Valley Communications and expect to realize synergies in the coming quarters. The company has distributed a dividend CAD 0.58 per share, which is encouraging amid a time when most of the companies are cutting or suspending the dividend. At the last traded price, the stock was offering a dividend yield of ~2.3%, which is decent considering the current interest rate environment. We have valued the stock using P/E based relative valuation approach and arrived at a target price offering lower double-digit upside potential (in % terms). We have considered Quebecor Inc, Shaw Communications Inc and Telus Corp, etc., as a peer group. Hence, we recommend a ‘Buy’ on the stock at the closing market price of CAD 99.37 as on July 16, 2020.

CCA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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