CA - Rogers Communications: Fundamentals Remain Strong On Path To Deleverage Balance Sheet

2023-08-10 00:23:35 ET

Summary

• Rogers Communications demonstrates strong fundamentals, with solid growth potential across its wireless, cable, and media segments.
• RCI deleveraging its balance sheet should improve its valuation over time.
• I expect to see more synergies being realized, given that the integration seems to be doing well so far.

Investment action

Based on my current outlook and analysis of Rogers Communications (RCI) ( RCI.B:CA ), I recommend a buy rating. I expect valuation to inch closer to peers’ levels as the business pays down its debt. There should be no issue for RCI to deleverage its balance sheet, as I expect EBITDA to continue being positive and growing healthily.

Basic info

RCI is a wireless, cable, and media company. The Company provides connectivity and entertainment services through cable, wireless, media, high-speed internet, machine-to-machine communications, broadcasting, publishing, and digital solutions.

Review

RCI reported consolidated results that were mostly in-line with consensus estimates. PF service revenue came in at C$4.534 billion vs con C$4.549 billion, total PF revenue saw C$5.046 billion vs cons C$5.057 billion, PF EBITDA saw C$2.19 billion vs cons C$2.181 billion, and PF EPS come in at C$1.02 vs cons C$1.12.

In the Wireless segment, RCI added 430,000 net new postpaid phone customers despite fears of rising competition in the wireless market. I attribute this to RCI's ability to capture market share in the immigration market, its robust retail distribution network, and promotional strategy. With regards to market share gains, I note that it has been less than six months since the deal closed , and already management is sounding optimistic about expanding their market share in British Columbia and Alberta. This gives me confidence that the integration process is proceeding smoothly, and we should see more synergies ahead. In terms of promotion, as long as RCI keeps up the successful promotional strategy, I have no doubt that they can maintain the current momentum.

“And notwithstanding some of the promotional data buckets you see, we just look at what the customers are telling us, and as I said in my opening comments, they continue to flock to the unlimited plans and the value that offers.” 2Q2023 earnings call

In terms of projections, I anticipate that volume (net adds) will continue growing while ARPU may be impacted slightly due to dilution from Shaw Mobile (Shaw Mobile has many discounted plan subs), but things should pick up at the end of 3Q23. Nonetheless, there are underlying drivers that could improve RCI organic ARPU (excluding impact from one-time dilution from the integration). For instance, RCI's new pricing plans are also driving flanker subs to the 5G network. This factor, along with the eventual migration of Shaw Mobile's subsegments to 5G, should boost the company's ARPU in the coming quarters. RCI should also see a seasonal increase in demand for data roaming during 3Q23, so ARPU should increase during this time.

As for Cable, the solid trends in Internet net adds have been the highlight, as they indicate a return to penetration in the former Shaw service area. I want to emphasize again how impressive it is that this return to strength has occurred in less than six months after the deal has closed. As RCI works to boost penetration rates and accelerate footprint expansion in the west, I anticipate these positive trends to continue.

“We have seen market share gains in the West, including double-digit subscriber growth, and we expect our share in the West to continue to grow in the coming quarters.”

“And so, when you combine that with some of the things we're focused on in terms of getting our penetration up in both East and West, what you see with 25,000 internet net adds in the second quarter is the beginning of that pacing of a focus on increasing penetration.” 2Q23

With increasing penetration comes a high incremental margin, so I anticipate that cable revenue will continue growing and margins will improve. I am optimistic that revenue/cost synergies will be achieved with little to no difficulty, given the positive signs of execution and integration.

Valuation

I think RCI will experience strong reported growth as a result of the merger in FY23, then normalized growth in the following years (similar to how it has previously performed). However, FY24 should be a year of higher growth as it captures the long-hanging fruit opportunity (migration of Shaw subscribers to 5G and increased penetration in areas of the legacy Shaw network). Consequently, margin should expand given the increased utilization of fixed assets (i.e., incremental margin flowing in).

I believe the key reason RCI is trading at a discount relative to peers is the steep leverage profile that it is carrying on its balance sheet (a debt-to-equity ratio of near 400%, relative to the median of 150%). As RCI pays down this debt, multiples should trend up closer to peers’ levels. There should be no issues with RCI paying down this debt load as it continues to generate positive EBITDA with a cumulative value of near CADC$30 billion from FY23 to FY25 (60% of total debt). At 13x forward PE, RCI should be worth CADC$102.

Risk and final thoughts

As the balance sheet is a concern, any acts that disrupt the business's ability to pay down debt or generate cash flow will continue to pressure the valuation. Specifically for RCI, if CAPEX runs ahead of expectation, the market might see that as a risk to its deleveraging path, thereby continuing to put a lid on how much valuation can rerate upwards. In conclusion, With strong performance in wireless, cable, and media segments, RCI's ability to capture market share, execute integration, and implement successful promotional strategies bolsters its growth potential. Anticipated increases in net adds, ARPU, and cable revenue further contribute to favorable growth ahead. The discounted valuation relative to peers is primarily attributed to high leverage, but I expect RCI to pay down its debt over time through positive EBITDA generation.

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