Dialing up a Rogers resurgence
SHARES JUMP AFTER EARNINGS REPORT
If you thought the trade in boring and stable dividend-paying utilitytype stocks was over in the wake of the post-election surge in growth- oriented cyclicals, Rogers Communications Inc. has news for you.
The s t ock j umped as much as eight per cent after the Canadian telecom giant reported fourth quarter revenues of $ 3.15 billion and earnings per share of 74 cents before markets opened on Thursday morning.
North American telecom stocks have underperformed the broader market since Donald Trump’s victory on Nov. 8, as the U.S. President’s pro- growth policies boosted expectations for both inflation and interest rates.
However, the rally in Rogers is more about fundamentals than the macro environment, as the yield trade that had been boosting consumer staples, utilities and telecoms has lost some of its shine.
The strong results were highlighted by impressive numbers in the key wireless and cable segments, which overshadowed a $ 9- million net loss.
While Rogers’ headline revenue number fell a little short of consensus estimates, EBITDA of $ 1.26 billion was in l i ne with forecasts, and EPS beat the Street at 72 cents.
Even more impressive, was the blowout figure of 93,000 wireless postpaid net subscribed additions, and average year- over- year revenue per user growth of 2.6 per cent.
The cable business, which includes Rogers’ digital and Internet subscribers, also saw positive results for the second consecutive quarter.
Robert Bek, an analyst at CIBC World Markets, noted that all of this came without sacrificing profitability, as EBITDA margins also expanded.
“There wasn’t much not to like in Rogers’ Q4 numbers, as the company appears to be firing on all cylinders,” he said. “Both wireless and cable operating and financial metrics continue to trend in the right direction, and the guidance suggests management is confident on building on the recent momentum into 2017.”
Canada’s incumbent carriers posted impressive wireless subscriber additions throughout 2016, and the recent uptick in pricing trends points to further strength in this business for Rogers, BCE Inc. and Telus Corp.
While Rogers’ Q4 perf ormance s upports t his outlook, Canaccord Genuity analyst Aravinda Galappatthige noted that it also points to the sustainability of the company’s recent wireless resurgence.
He noted that Rogers’ share of net subscriber additions among incumbent carriers rose to 37 per cent in Q3 2016, from 17 per cent in Q4 2015.
Galappatthige thinks the company is poised to boost that figure to 35 to 40 per cent in Q4.
“With a favourable twothirds EBITDA mix in wirel ess, Rogers is well- positioned to benefit from these trends,” the analyst said, upgrading the stock to buy from hold.
Galappatthige acknowledged that the leadership transition period may be volatile, as former Telus chief executive Joe Natale isn’t expected to join the company until July. However, the analyst is confident that Rogers’ fundamentals — in wireless specifically — sets the stage for strong returns going forward.
Maher Yaghi at Desjardins Securities thinks Natale’s first priority may be to focus on operational excellence, and to pull back from aggressive pricing strategies.
“This is likely to result in slower subscriber growth metrics in wireless, but improved pricing and margins,” the analyst said.
Yaghi highlighted mana gement’s g ui dance of three to five per cent revenue growth in 2017, and two to four per cent growth in EBITDA and free cash flow.
He believes the EBITDA margin pressure implied in Rogers’ guidance is the result of the upcoming X1 cloud- based TV platform launch, which is a partnership with U. S. cable giant Comcast Corp.
“While we believe this trend could continue as the product gets deployed, we believe i nvestors should focus on free cash flow, as we see higher opex being offset by lower capex spending going forward,” Yaghi said.
Rogers was forced to take a $484 million writedown in Q4, as it abandoned plans to build its own IPTV service and opted to make the X1 deal with Comcast.
Yaghi noted that while positive momentum could carry Rogers, he cautioned that valuation should temper the outlook, as the stock is now trading at a premium to both BCE and Telus.
“Leverage and growth continue to be factors that are holding the company back from increasing the dividend,” the analyst said.
“We think those issues should be resolved in 2018.”
Richard Choe at J. P. Morgan also cited the flat dividend and high multiple for his recommendation to stay on the sidelines for now.
The analyst doesn’t think Rogers will raise its dividend until after Natale takes over.
Choe noted that Rogers trades at a relatively expensive 8.2x 2017 estimated EV/ EBITDA and 17.5x P/ E multiple. That compares with BCE at 8.2x and 16.1x, respectively, and Telus at 8.0x and 16.2x.
Rogers’ current dividend yield is also the lowest of the three, and not growing at 3.2 per cent, versus 4.7 per cent for BCE and 4.5 per cent for Telus.
“While we see solid growth prospects for the company, the stock trades at a relatively high EV/ EBITDA and P/ E multiple and low dividend yield relative to other companies in the space,” Choe said, adding that he doesn’t expect a dividend hike in the near term.