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Summary

  • Intense competition has taken a toll on the company’s wireless segment’s performance.
  • The cable segment’s revenue growth will be challenged by BCE’s Fibe TV.
  • RCI offers a stable dividend yield of 4.2%.

Rogers (NYSE:RCI) is among the leading companies in the Canadian Telecom Industry. The company has been facing intense competition within the industry; its wireless segment, the main revenue generating segment of RCI, has been facing revenue growth pressures due to competition within the industry. RCI's cable segment, which contributes more than 25% towards consolidated revenues, has been delivering healthy results in the recent past. Also, the company has been making efforts to expand its LTE network, which I believe will portend well for future performance. Moreover, the company offers a solid dividend yield of 4.2%.

RCI, the leading telecom and cable operator in Canada, holds an attractive product mix comprising of wireless communications, cable television, media and business solutions. The following table shows revenues, EBITDA and cash flow contribution of each of the segments.

Revenue

EBITDA

FCF

Wireless

57%

63%

85%

Cable

27%

34%

10%

Others

16%

3%

5%

Source: Company's Annual Reports and Calculations

RCI Wireless
RCI, the largest wireless service provider in Canada, with penetration to 95% of the Canadian population, has been struggling to grow its wireless segment's revenues in recent quarters, as competition in the industry stays tough. The industry is dominated by three major companies, including RCI, BCE Inc. (NYSE:BCE) and Telus (NYSE:TU). The Canadian government is looking to dilute the monopoly of three key players by encouraging a new entrance to the market, which brings the threat of more competition within the industry. In an attempt to deal with the threat of new entrants, the key players of the Canadian telecom market (BCE, TU and RCI) agreed in the near past on a policy to reduce prices, which positively affected the company's subscribers base; however, this negatively affected revenues. Moreover, due to the lower prices, RCI experienced lower ARPU growth and softness in margins.

BCE has taken the lead by generating more revenues than RCI in all quarters of 2013. BCE took the lead from RCI in the wireless segment due to increased data usage driven by steady smartphone growth and reduced consumer mobile roaming rates. The following table shows revenue, EBITDA and ARPU growth trends for RCI in recent quarters.

Q1-13

Q2-13

Q3-13

Q4-13

Revenue

4.4%

1.1%

(1%)

(2.5%)

EBITDA

3.8%

3.1%

3.8%

1.3%

ARPU

3.5%

0.4%

(1.7%)

(3.1%)

Source: Company's Quarterly Earnings Report

The following chart shows the wireless segment's revenue growth trend comparison between RCI and BCE.
(click to enlarge)
Source: Quarterly Earnings reports of BCE and RCI

Advancements in the telecom sector, with the adoption of LTE technology, have resulted in better services and created more competition with the industry. As the industry has been evolving and experiencing secular changes, technological advancements have remained in the limelight. RCI has been slightly slow in introducing and expanding its LTE network, which I believe resulted in subscriber migration and an increasing churn in the company's wireless segment. The following chart shows the churn rate trend in all quarters of 2013 for RCI's wireless segment.

Source: Company's Quarterly Reports

Cable - Intense Competition to Pressurize
RCI's cable segment has been delivering a healthy financial performance in recent quarters. The company experienced revenue growth of 2% year-on-year in 2013, which was led by internet services, which grew by 14% year-on-year and cable telephony growth at 2% year-on-year. The cable segment showed operational efficiency, as its margins expanded by 30bps to 49.7%. Also, the shift in revenue growth from high cost TV products to high margin internet services positively affected RCI's margins. The following table shows improving revenue (in $-millions) and EBITDA margins of the cable segment for 2013.

Q1-13

Q2-13

Q3-13

Q4-13

Revenue

861

870

873

871

EBITDA margin

50%

50%

49%

50%

Source: Company's Quarterly Earnings Report

The company's cable segment revenues and margins stay strong; however, I believe the segment is now set to face intense competition with BCE's Fibe TV footprints rolling down to Ontario. By the end of 2013, BCE's Fibe TV rolled down to cover 4.3-4.4 million homes, which adversely affected RCI's subscribers; RCI observed net subscriber addition losses of more than 5% year-on-year in Q4 2013. I expect more subscriber losses and slow ARPU growth for RCI's cable segment in the near future, as BCE continues to offer deep discounts to expand Fibe TV and enhance its penetration in the markets. The following chart shows the trend of change in net subscriber additions in all quarters of 2013.

Source: Company's Quarterly Annual Reports

Airwaves Spectrum Auction
The outcome of the airwaves auction last month suggests competition with the industry is likely to stay high as we move forward. All three major players dominated the auction. The following chart shows the percentage of licenses acquired by the key players in the auction; 97 total licenses were offered in the auction.

Source: mobile syrup

The cost of acquiring the licenses might put pressure on the company's margins and cash flows; however, RCI will benefit from the licenses acquired, which will help the company expand its services and support growing demand for mobile data, such as video streaming. BCE dominated the auction by gaining the highest number of licenses, as shown by the chart above, which could pose a threat to RCI, as with these license acquisitions BCE's LTE network will cover 98% of the Canadian population.

Dividend Yield and Share Buyback Are Backed by Strong Cash Flows
RCI offers an attractive dividend yield of 4.20%. The company has been consistently increasing its dividends; recently the company announced a 5% dividend increase from $1.74 to $1.83. Dividends offered by the company are supported by its cash flows; RCI experienced a 4% year-on-year increase in free cash flows in 2013.

Price Target
I have calculated a price target of $41 for RCI. For my price target calculation, I have used cost of equity 9.20%, after tax cost of debt 4%, WACC 7.38% and nominal growth rate of 1%. Based on my price target calculation, I believe the stock is fairly valued.

2015

2016

2017

Terminal Value

FCF (In $-Millions)

1,924

2,172

2,338

37,012

Present value of FCF (In $-Millions)

1,789

1,883

1,888

29,906

Source = Equity Watch Estimates

Total present value of firm = $35,466

Value of Debt = $14,260

No. of Shares Outstanding = 515

Market value of Equity = $35,466 - $14,260

= $ 21,206

Price target = $21,206/515

= $41

Conclusion
Due to intense competition in the industry, the company's wireless segment's performance remains pressurized. The company's cable segment has been delivering modest revenue growth and has healthy margins; however, I believe the segment is likely to face intense competition due to BCE's Fibe TV expansion. The dividends offered by the company are sustainable despite the ongoing tough competition. Also, I believe the stock is currently fairly valued based on my price target of $41. Due to the above mentioned factors, I have a 'hold' rating on the stock.

Source: Rogers Communications: Mixed Plate Of Fortunes Earns A Hold Rating