Cogeco Communications Inc.
Q2/21 Preview - In Pursuit of Incremental Growth
Opportunities
Cogeco will report Q2/21 results after market close on Tuesday, April 13th, and host an 11am ET conference call on Wednesday (#647-788-4919). Following a rolling forward of the basis of our valuation and modest upward estimate revisions, our target price increases from $116 to $121.
Key points:
• In pursuit of incremental growth opportunities. Cogeco is proving resilient to COVID-19 impacts reflecting high revenue exposure to strong demand for Internet while avoiding the direct COVID-19 impacts on wireless and media revenues (unlike the case for other Canadian operators). While Cogeco’s competitive position longer-term is somewhat uncertain given the absence of wireless against the backdrop of expanding FTTH/5G footprints, we do see incremental growth opportunities for Canadian Broadband under various wireless regulatory and M&A scenarios, as well as with rural broadband expansion. Furthermore, we believe management continues to execute well on the American Broadband growth strategy leveraging a strong competitive position in Internet with the potential for further cable acquisitions.
• Ready, willing and able (but waiting) on wireless. As outlined in our January 8, 2021 RBC Telecom Scenario Report, United We Stand, Divided We Fall, we view the outcomes of the CRTC wireless reviews as the single biggest "known unknowns" that could have a major impact on M&A decisions over the next decade. Management reiterated its desire to enter the wireless market in Canada within its cable footprint and is optimistic that the outcome of the CRTC wireless review could provide a cost-effective path to do so (a CRTC decision is imminent). Furthermore, we view Cogeco as one of the logical buyers of Shaw's wireless assets in Ontario should such a divestiture be required for the Rogers- Shaw transaction to gain regulatory approval. While such outcomes will inevitably influence the company's go-to-market wireless strategy, management has indicated a high degree of preparedness with respect to non-RAN components (network core, transport, commissioning, billing, etc.).
• Summary of our Q2/21 expectations. For Q2/21, we forecast revenues and EBITDA of $625MM (+6.6% YoY) and $294MM (+6.2%), respectively, versus consensus of $625MM and $300MM. Our forecast factors in the acquisition of DERYtelecom (closed December 14th), higher operating costs at Canadian Broadband (including sales and marketing expenses) and updated FX. As 2021 progresses, we expect Canadian Broadband to benefit from the deployment of IPTV (>85% of the footprint), an average price increase of +3% instituted in June/November, DERYtelecom synergies and rural broadband expansion, and American Broadband ARPU and margins to benefit from the "broadband first" strategy and price increases. Other issues in focus: (i) updated impacts from lockdowns in Canada/re-opening in the U.S.; and (ii) an update on the M&A environment in the U.S.