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 the residential and business customers. The Group operates through two operating segments, namely, Canadian broadband services and American broadband services.

The Company has informed that it will disclose its third-quarter results on July 15, 2020. The Group withdrew its FY20 guidance due to the prevailing COVID 19 pandemic.

Q2FY20 Financial Highlights: For the period ended February 29, 2020, CCA reported flat revenue of CAD 586.46 million, as compared to CAD 584.13 million in the previous corresponding period. Income from Canadian broadband services was down 1.4% on y-o-y basis, while American broadband services grew 2.7% over the corresponding quarter. Adjusted EBITDA margin shrank to 47.3% from 48.0% in pcp. The decline was primarily attributed to a rise in the operating expenses and management fees, as compared to the previous corresponding quarter. The period was marked by a significant improvement in the bottom-line, primarily attributable to a remarkably lower finance expense. Profit for the period soared CAD 114.01 million, reflecting a growth of 32.4% over Q2FY19. Free cash flow stood at CAD 125.06 million, as compared to CAD 125.31 million in pcp. The Company exited the quarter with cash and cash equivalents of CAD 501.89 million, while total assets stood at CAD 6,994.45 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to Earnings Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of CCA appreciated 6% in the last one year amidst a major correction across the broader market. The business stood resilient as it has been categorized under essential services, and the Group reported sustainable cash flow. During the pandemic, the Company introduced customer-friendly video technology which provided self-installation and remote repairs to the customers. The Group also increased the network capacity to handle more traffic which was coming during the lockdown. The Group mentioned that it had not experienced any material impact on the business to date. Within the Canada segment, the Group has a strong foothold along with a decent market presence which aids to strong cash flow generation along with industry-leading margins. The Company is likely to tap the organic growth opportunity within the non-metropolitan markets across the USA. Investors should note that the stock is trading above its 50-days simple moving average (SMA) of CAD 99.61, indicating a bullish trend. We have valued the stock using Price/Earnings based relative valuation approach and considered industry (Media & Publishing) average on NTM basis and arrived at a target price offering double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 100.38 as on June 10, 2020.

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

Quebecor Inc.

Quebecor Inc. (TSX: QBR.B) is a leading Canadian based integrated telecommunications company, which provides telecommunication, entertainment, news, media and culture services. The Group operates through three operating segments, namely telecommunications, media and sports & entertainment.

Q1FY20 Financial Highlights: Quebecor declared its quarterly results, wherein the Company reported revenue of CAD 1,055.5 million, as compared to CAD 1,027.3 million in pcp. The improvement was driven by decent growth in its telephony service, aided by a higher number of subscriber connections. A significant improvement in the customer equipment sales further supported the topline. Videotron’s total ABPU remained flat at CAD 49.87 in Q1FY20. The quarter was marked by a net increase of 14,200 revenue-generating units, which includes 39,300 connections within the mobile telephony service,  12,400 subscriptions to the Club illico over the top video service followed by  8,600 subscriptions to the cable Internet access service. Income from continuing operations was significantly higher at CAD 130.1 million, as compared to CAD 89.4 million in the previous corresponding quarter. The increase was driven by higher revenue including a gain on valuation and translation of financial instruments while higher financial expenses, rise in the purchase of goods and services and higher depreciation and amortization costs remained a drag.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to Earnings Based Relative Valuation (Illustrative)

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

Stock recommendation: The group is witnessing a significant jump in traffic owing to the COVID-19 pandemic. The Company received tremendous response for its Helix entertainment and home management platform accounting for more than 230,000 RGUs since its launch in August 2019, though the pace of installation is slowed down owing to lockdown measures. The Company showed resilient performance and added 39,300 subscriber connections during the first quarter of FY20, which augers well for the Company’s top-line growth. Within the television segment, the group reported an increase in the market share of 2.1 points, to 40.4%. The Company focused on new avenues too and launched QUB musique (a music streaming platform), which can be accessed via a mobile app or on through the Website. The above platform contains more than 50 million tracks, which are available as per the customer’s request, is expected to enhance the traffic and retention of customer-base for the Company in the coming days. Investors should note that the stock is trading above the 20-days and 50-days simple moving average (SMA) of CAD 29.58 and CAD 29.98, respectively indicating a bullish trend. We have valued the stock using Price/Earnings based relative valuation approach and considered peers like Shaw Communications Inc (TSX: SJR.BO), Telus Corp (TSX: T) and Rogers Communications Inc (RCI.B) etc. and arrived at a target price offering double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the stock at the current price of CAD 30.18 as on June 10, 2020.

QRB.B Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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