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

Key Highlights:

• Increased revenue: For Q2FY22 the company reported an increase in the total revenue to CAD 782.54 million as compared to the revenue of CAD 634.54 million in the Q2FY21. The American broadband services segment sales stood at CAD 366.22 million during the same period (Q2FY22), against CAD 279.64 million in Q2FY21, and the increase in sales was also supported by the acquisition of Ohio broadband systems. The Canadian broadband revenue increased marginally to CAD 362.32 million in Q2FY22 vs the revenue of CAD 354.90 million in Q2FY21.

• Higher adjusted EBITDA: The company witnessed an increase in the adjusted EBITDA of CAD 349.08 million in Q2FY22 against the adjusted EBITDA of CAD 306.99 million in Q2FY21. The American broadband services reported a higher adjusted EBITDA of CAD 169.79 million in Q2FY22, against CAD 129.52 million in pcp, which was primarily derived from the acquisition of the Ohio broadband system and the growth in organic revenue from the overall impact of high-speed internet services additions and rise in the annual charges, which pushed the overall adjusted EBITDA higher in Q2FY22.

• Improved liquidity: During Q2FY22, the group reported an increase in the free cash flows of CAD 153.00 million as compared to CAD 142.76 million in Q2FY21. Further, the group's cash flow from operation also increased to CAD 281.19 million during Q2FY22, as compared to CAD 231.16 million in Q2FY21. The increased liquidity is essential for the group to meet its operating expenses as well as to carry out the strategic growth objectives.

• Industry beating profitability margins: In Q2FY22, the company witnessed an increase in the revenues, due to the positive impact of the acquisition, and the increase in annual charges, helped the company in attaining higher profit margins as compared to the industry median, which is represented below.

Source: Refinitiv, Analysis by Kalkine Group    

Risks associated with investment

The group is majorly exposed to the pricing war because of increased competition, the risk of acquiring companies at higher valuations, rising interest rates which could slow down the CAPEX plans, etc. 

Financial overview of Q2FY22 (Expressed in thousands of CAD)

Source: Company Filing 

• The group reported an increase in total revenues to CAD 54 million in Q2FY22 as compared to CAD 634.54 million in Q2FY21. The increase in revenue was majorly from the American broadband segment on account of the recent acquisition and higher increasing organic revenue growth because of the higher annual charges. 

• During Q2FY22, the operating expenses increased to CAD 373.89 million vs CAD 321.70 million in Q2FY21, and the financial expenses rose to CAD 44.97 million in Q2FY22 as compared to the financial expenses of CAD 31.83 million in the pcp. These two pushed overall expenses higher in Q2FY22 to CAD 575.91 vs the over expenses of CAD 488.57 million in pcp.

• The group reported a profit of CAD 119.91 million in Q2FY22 as compared to a profit of CAD 110.55 million in Q2FY21.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The group reported an increase in the total revenue to CAD 728.54 million during Q2FY22 vs the total revenue of CAD 634.54 million in Q2FY21, which was majorly driven by the American broadband segment on account of the positive impact of acquisitions and increase in the annual charges. Also, the adjusted EBITDA rose to CAD 349.08 million in the same period (Q2FY22) against the adjusted EBITDA of CAD 306.99 million in Q2FY21, and the profit for Q2FY22 improved to CAD 119.91 million, which is higher than the profit of CAD 110.55 million in pcp. Recently the board declared a quarterly dividend of CAD 0.705 and the Q3FY22 results will be declared on July 13, 2022. On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and we have considered Altice USA Inc., WideOpenWest Inc., etc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock of CCA at the last closing price of CAD 99.47 on June 07, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of June 07, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV 

Technical Analysis Summary

Disclaimer

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