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 Updates:

• Strong profitability margins: The company command robust profitability margin when compared to the industry median, which indicates improved operational efficiencies. Notably, EBITDA margin and operating margin stood at 48.0% and 27.3%, respectively, in FY21, as compared to the industry median of 25.9% and 18.1%, respectively. Additionally, net margin stood at 17.2% in FY21, as compared to the industry median of 6.9%.

• Improved cash conversion period: In FY21, the group reported a strong operational metrics and posted its cash conversion period of 12.4 days, as compared to the industry median of 18.9 days, which indicates that the organization is takes lower time to convert its inventory to cash flow.

• Focusing on cost optimization: During FY21, the company launched and implemented new ways of working, shared services and automation initiatives, which has resulted to improved service and resulted to higher customer satisfaction. Moreover, the company continued to improve its customer digital platforms resulting in an increase of online transactions and lower delivery costs. For FY22, the group is focusing to simplify its ways of working to further increase efficiency and productivity.

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.

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 growth was aided 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 surged to CAD 562.373 million, from CAD 508.912 million in pcp.
• The company posted 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)

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

For FY22, the group is targeting to reach to additional 70,000 consumers, and would provide services like Gig internet, home WiFi, Internet Protocol TV (IPTV) and voice services via advanced Fiber-to-the-Home (FTTH) technology. Additionally, the group would also offer unlimited nationwide calling, popular calling features and an online phone manager. Hence, we expect the above is likely increase the company’s market share, which is a key positive. 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 Shaw Communications Inc, BCE Inc, etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CCA at the closing price of CAD 99.72 on December 29, 2021.

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

Technical Summary Analysis

One-Year Technical Price Chart (as on December 29, 2021). Analysis by Kalkine Group

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

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