Even though trading Canadian stocks has gotten quite a bit easier in recent years, a lot of Canadian companies don't really get the sort of attention you might expect if they were a U.S. company. Quebecor (OTCPK:QBCRF) (QBR-B.TO) looks like a good case in point, as this large Montreal-based media holding company is all but unknown to many American investors.
With their high debt levels and distant free cash flow streams, media and communications companies can be tricky to value and Quebecor is no exception. I do like the company's efforts to reduce its exposure to the low margin and declining newspaper business, as well as the company's willingness to let BCE's (BCE) Bell Canada gain share at the cost of margins. The market is likely to remain nervous about the company's ambitions in wireless and its growth potential in cable, but I believe a fair value above C$30 makes these shares worth considering.
Quebecor's unsponsored ADRs trade infrequently and I would strongly suggest buying the Toronto-listed shares. Many (if not most) brokerages allow U.S. investors to buy and sell Canadian stocks at reasonable commissions.
Riding Along With A Diversified Communications Holding Company
Quebecor is the holding company that owns the majority (about 75%) of Quebecor Media, which owns the assets I will generally be referring to as "Quebecor". Quebecor itself was founded by the Peladeau family and they still own more than a quarter of the equity and a supermajority of the voting shares. It's up to readers to decide how much that concerns them, though the shares have historically traded at a discount whether due to a "conglomerate discount" or that controlling interest.
Quebecor (or Quebecor Media, more precisely) has multiple operating subsidiaries. The largest, in terms of revenue and EBITDA is Videotron - a cable and cable-related services (internet, telephony) provider. Other major operations include the TVA Group (broadcasting), Sun Media (newspapers), and a collection of book, magazine, and music assets reporting as "Leisure and Entertainment".
Videotron is the largest traditional cable provider in Quebec (also serving francophone customers in New Brunswick and eastern Ontario), where it competes with Cogeco. Videotron has also been seeing extensive competition from IPTV services offered by BCE, Telus (TU), and Shaw (SJR). Cable penetration is already high in Quebec, though, Videotron already has above-average triple-play (TV, internet, phone) penetration relative to service providers in Canada and the U.S. With that, the company has seen its subscriber growth weaken substantially, due in no small part to aggressive pricing and promotion from BCE.
Shrinking Newspapers, Expanding Wireless
Looking to augment slowing cable growth, Videotron is expanding its wireless business. Quebecor already boasts almost half a million wireless subs and the company has a strong spectrum position in its core market. The question now is how aggressively the company will pursue expansion.
The company has made no secret of the fact that it is considering westward expansion, and the company is bidding against Telus for the assets of Mobilicity. Mobilicity is a struggling provider with coverage in major cities like Toronto, Calgary, Edmonton, and Vancouver, and it would seem unlikely that regulators would allow Telus to acquire the business - giving Quebecor the chance to add spectrum and existing coverage at an attractive price. There is also speculation that Quebecor might bid for Wind Mobile, particularly given well-publicized squabbles between Wind's majority owner VimpelCom (VIP) and Canadian regulators.
While Quebecor considers enlarging its wireless footprint, it seems willing to shrink its newspaper exposure. Not that long ago, Quebecor agreed to sell 74 community papers in Quebec to Transcontinental for just $75 million. That leaves the company with over 100 newspapers in Ontario and more than 40 more in Western Canada, and this business still represented about 20% of overall revenue in the third quarter (before the deal was announced). Even so, the margins are not great and I would expect the company to look for additional opportunities to divest newspaper assets and reinvest the proceeds either in higher-margin businesses or debt reduction.
In between these two is the broadcast business. The margins here are not great, but TVA Sports did sign a sub-licensing deal with Rogers (RCI) to carry French language NHL programming in Quebec. That deal shoves RDS (majority-owned by BCE) aside and could be a growth catalyst for the business.
Improving Prospects, But Valuation Is Messy
Due in part to the large capital expenditures needed to grow and support the business, Quebecor doesn't have what you'd call a spotless record of FCF generation. Likewise, its collection of assets is not top-notch in terms of the margins they produce. BCE and Shaw both sport trailing EBITDA margins of 40% and Rogers is not far behind at 38%, while Quebecor comes in at 33%. The core cable, internet, and wireless operations generate good margins on the whole, but those are dragged down by the low-to-mid teens margins of the newspaper, broadcast, and leisure/entertainment operations.
I do believe, though, that the company is on a better path. Shrinking the newspaper business should help reduce the negative influence of that segment, while adding NHL programming to the broadcasting business should also be a meaningful help. More importantly, Quebecor is trying to find that right mix of growth and margin - management is willing to invest the money to grow the wireless business (even though margins won't be great at first), but is also willing to let BCE win lower-margin cable subs while prioritizing their higher-margin customers.
All told, I'm only looking for Quebecor to grow revenue at a long-term clip of around 2% to 3%, but I expect free cash flow margins to improve into the high single digits as the company leverages its higher-margin cable and nascent wireless businesses, while hopefully shrinking lower-margin operations like newspapers.
The trick is in how to value that. Quebecor carries a whopping debt load and giving full "value" to that suggests a DCF-based fair value of less than $10. Just ignoring the debt (as the Street often will) suggests a fair value well into the high $30s. In an attempt to split the difference, I look at the debt in terms of what is normal for the industry, and doing so suggests a fair value around C$28.
Looking instead at EV/EBITDA (which is a more popular metric for companies like Quebecor), some of the same challenges appear. At less than 5x 2014 EBITDA, Quebecor would seem unreasonably cheap compared to companies like BCE, Telus, Rogers, Shaw, and Cogeco which collectively trade closer to 6.75x EBITDA. Keep in mind, though, that Quebecor has significantly more debt than this comp group and lower margins as well. If I give a 20% haircut to the Quebecor multiple (roughly 5.5x), I come up with a fair value of almost C$32 for the shares.
The Bottom Line
Admittedly all of those valuation exercises have a lot of subjectivity in them, and that has long been an issue with valuing this entire sector. Nevertheless, I believe there is a case to be made that Quebecor is getting better, investing for both growth and margins, and is not getting full credit for those improvements. I do expect further investments in wireless to create some periodic overhangs for these shares, but on balance I find this a very interesting stock to consider at these prices.