Quebecor: An Information And Communications Convergence Play

Dec. 7.11 | About: Quebecor Inc. (QBCRF)

Quebecor (OTCPK:QBCRF) and (QBR-B.TO) is a company in the Consumer discretionary sector and Publishing industry. It operates media businesses primarily through subsidiary Quebecor Media Inc. with activities in cable distribution, residential and business telecommunications, newspapers, broadcasting, retailing of books, magazines and videos, publishing and distribution, recording and distribution of music, the Internet and new media.

Quebecor is a holding company with a 54.7% interest in Quebecor Media Inc., one of Canada's largest media groups, with more than 16,000 employees. Quebecor Media Inc., through its subsidiary Videotron Ltd., is an integrated communications company engaged in cable television, interactive multimedia development, Internet access services, cable telephone services and mobile telephone services. Through Sun Media Corporation, Quebecor Media Inc. is the largest publisher of newspapers in Canada. It also operates Canoe Inc. and its network of English and French language Internet properties in Canada. In the broadcasting sector, Quebecor Media Inc. operates, through TVA Group Inc., the number one French language general interest television network in Quebec, a number of specialty channels and the Sun News English language channel. Another subsidiary of Quebecor Media Inc., Nurun Inc., is a major interactive technologies and communications agency with offices in Canada, the United States, Europe and Asia. Quebecor Media Inc. is also active in magazine publishing (TVA Publishing Inc.), book publishing and distribution (Sogides Group Inc. and CEC Publishing Inc.), the production, distribution and retailing of cultural products (Archambault Group Inc. and TVA Films), DVD, Blu-ray disc and videogame rental and retailing (Le SuperClub Videotron Ltd), the printing and distribution of regional newspapers and flyers (Quebecor Media Printing Inc. and Quebecor Media Network Inc.), news content production and distribution (QMI Agency), multiplatform advertising solutions (QMI Sales) and the publishing of printed and online directories, through Quebecor MediaPages.

Segmented Data: 12 months ended Dec. 31/09

Revenue by industry

News media: 27.2%

Leisure & entertainment: 8.1%

Interactive technologies: 2.4%

Broadcasting: 11.6%

Telecommunications: 52.9%

Head office & intersegment: -2.3%

Operating income by industry

News media: 15.6%

Leisure & entertainment: 2.0%

Interactive technologies: 0.3%

Broadcasting: 6.3%

Telecommunications: 76.2%

Head office & intersegment: -0.4%

Capital expenditures by industry

News media: 6.8%

Leisure & entertainment: 0.7%

Interactive technologies: 0.6%

Broadcasting: 3.3%

Telecommunications: 87.8%

Head office: 0.8%

Source: Financial Post Report

Consensus Recommendation of 14 Analysts Buy

Consensus Target Price of 13 Analysts $42.12

First Call Earnings Valuation Report

Sell

0

Under Perform

0

Hold

1

Buy

9

Strong Buy

2

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Source:Thomson Reuters I/B/E/S

Dvai Ghose of Canaccord Genuity has a buy rating on the stock relying mostly on its medium to long-term prospects. The stock is facing more competitive pressures and some segments are reaching maturity. Thus cable margins are near peak, but cable telephony still has some potential. The cyclical recovery in the media advertising is also near its peak. Free cash flows are decreasing because of important capital investments in a 3.5G+ wireless network. Cash flows went from $321M in 2009 to $175M in 2010 (forecast). Mr. Ghose expects cash flows per share of $1.30 to $2.25 in 2011, $3.13 in 2012 and $4.11 in 2013.

Mr. Ghose forecasts that Quebecor could increase significantly the dividend (actually $0.20$ per share) in 2012 and suggests a price target of $45. With an actual price of $32.56 it would represents a 38% return. The valuation measures compared with the industry are much lower while profitability measures are higher. Recently, Quebecor had two news items that may benefit it in the medium and long term.

  1. Quebecor and its journalist ended a two-year lock-out at Journal de Montréal, where the employer won important concessions from the employees (i.e. from 260 employees it would now be 62).
  2. It is officially involved in the construction of a new arena in Quebec City, where Quebecor will be the name sponsor and the manager of the building. Quebecor is betting on the acquisition of a NHL franchise and could get important benefits from events at the arena. Evenko, the event company of the Montreal Canadiens’ owners (Molson family) is making a lot of money in the second most used arena in North America (Bell Centre). The investment is $33M for the name without a hockey team and an annual rent of $3.15M or $63.5M with a hockey team and an annual rent of $5M.

Fundamentals

Market Cap 2.1B Beta 0.62
Revenue (FYR) $4.0B EPS $2.60
Shares Out. 63.6M Book Value $21.95
Dividend Yield 0.62% P/E 12.5x
Div/Share $0.20 Price/Sales (FYR)0.5
Ex-Div Date11/23/11 P/Cash Flow (TTM)2.4x
Pay Date 12/20/11 Operating Margin33.22%
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Source: Thomson Reuters

Quebecor4 has a 10% shares buyback program for B shares ending August 2012.

Source: Financial Post Report

Key Statistics

Data provided by Capital IQ, except where noted.

Valuation Measures
Market Cap (intraday)1: 2.06B
Trailing P/E (ttm, intraday): 12.62
Price/Sales (ttm): 0.50
Price/Book (mrq): 1.48
Financial Highlights
Fiscal Year Ends: Dec 31
Most Recent Quarter (mrq): Sep 30, 2011
Profitability
Profit Margin (ttm): 4.03%
Operating Margin (ttm): 20.02%
Management Effectiveness
Return on Assets (ttm): 5.90%
Return on Equity (ttm): 11.62%
Income Statement
Revenue (ttm): 4.15B
Revenue Per Share (ttm): 64.57
Qtrly Revenue Growth (yoy): 4.60%
EBITDA (ttm)2: 1.33B
Net Income Avl to Common (ttm): 167.00M
Diluted EPS (ttm): 2.57
Qtrly Earnings Growth (yoy): -68.60%
Balance Sheet
Total Cash (mrq): 152.40M
Total Cash Per Share (mrq): 2.40
Total Debt (mrq): 4.14B
Total Debt/Equity (mrq): 147.38
Current Ratio (mrq): 0.90
Book Value Per Share (mrq): 21.89
Cash Flow Statement
Operating Cash Flow (ttm): 881.40M
Levered Free Cash Flow (ttm): -133.41M
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Abbreviation Guide: K = Thousands; M = Millions; B = Billions

mrq = Most Recent Quarter (as of Sep 30, 2011)

ttm = Trailing Twelve Months (as of Sep 30, 2011)

yoy = Year Over Year (as of Sep 30, 2011)

lfy = Last Fiscal Year (as of Dec 31, 2010)

fye = Fiscal Year Ending

1 Shares outstanding is taken from the most recently filed quarterly or annual report and Market Cap is calculated using shares outstanding.

2 EBITDA is calculated by Capital IQ using methodology that may differ from that used by a company in its reporting

The rest of information is provided by Yahoo Finance

Currency in CAD.

Fundamentals

Per Share Data QBCRF.PK Industry
Earnings (TTM) $2.60 $2.75
Book Value $21.95 $17.62
Valuation
Price/Earnings 12.5x 13.9x
Price/Sales (FYR) 0.5x 1.6x
Price/Book (MRQ) 1.5x 2.7x
Price/Cash Flow (TTM) 2.4x 10.4x
Profitability (TTM)
Gross Margin 15.57% 10.77%
Operating Margin 33.22% 17.79%
Profit Margin 11.66% 8.62%
Mgmt Effectiveness (TTM)
Return on Assets 7.95% 8.27%
Return on Equity 17.82% 17.13%
Return on Investment 8.58% 15.34%
Dividend (TTM)
Annual Dividend Rate 0.20 0.61
Dividend Yield 0.62% 2.23%
Payout Ratio 0.1x 0.6x
Financial Strength (MRQ)
Debt to Capital 55.80% 30.63%
Current Ratio 1.0x 1.5x
Quick Ratio 0.7x 0.9x
Size
Market Cap $2.1B $846.5M
Revenue $4.0B $33.9B
Shares Outstanding 63.6M 561.6M
Employees 16,360 66,252
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Source: Yahoo Finance

Source: Thomson Reuters

Results from third quarter of 2011

Quebecor reported its consolidated financial results for the third quarter of 2011 on November 9. Quebecor consolidates the financial results of its Quebecor Media Inc. ("Quebecor Media") subsidiary, in which it holds a 54.7% interest.

Quebecor adopted International Financial Reporting Standards ("IFRS") on January 1, 2011. The Corporation's condensed consolidated financial statements for the three-month and nine-month periods ended September 30, 2011, have therefore been prepared in accordance with IFRS and comparative figures for 2010 have been restated.

Third quarter 2011 highlights

  • Revenue: $1.01 billion, up $44.9 million (4.6%) from third-quarter 2010.
  • Operating income(1) down $12.3 million (-3.7%) to $319.7 million.
  • Net income attributable to shareholders: $26.1 million ($0.41 per basic share), down $56.9 million ($0.88 per basic share) from $83.0 million ($1.29 per basic share) in the third quarter of 2010.
  • Adjusted income from continuing operations:(2) $40.0 million in the third quarter of 2011 ($0.63 per basic share), down $16.1 million ($0.24 per basic share) from $56.1 million ($0.87 per basic share) in the third quarter of 2010.
  • Videotron Ltd. ("Videotron") has recorded the largest quarterly customer growth since its acquisition by Quebecor Media in 2000; adding 168,700 revenue-generating units,(3) up 79.9% from the growth recorded in the same quarter of 2010:
  • Net increase of 43,500 cable television customers, including a 77,700-subscriber increase for the digital service, the strongest quarterly growth for cable television since March 1999 and the strongest growth for the digital service since its launch, raising its penetration rate, as a proportion of all cable television customers, to 73.1%; Net increase of 39,900 customers for the cable Internet access service, the largest increase in the last three years;
  • Net increase of 37,800 customers for the cable telephone service, the largest increase in the last two years;
  • Net increase of 47,500 subscriber connections to the mobile telephone service, the largest quarterly increase since the service was launched.

Said Pierre Karl Peladeau, President and Chief Executive Officer of Quebecor:

Quebecor grew its revenues in the third quarter of 2011, mainly on the strength of the excellent performance of its Telecommunications segment.

Thanks in particular to effective strategies to market bundled services, including mobile telephone service, at a time when over-the-air analog television broadcasting was ending, Videotron posted the strongest quarterly growth in its total customer base since its acquisition by Quebecor Media in October 2000. The increase in revenue-generating units was 79.9% greater than the growth recorded in the same period of 2010. In terms of financial performance, the Telecommunications segment's operating income increased by $10.9 million (4.1%) in the third quarter of 2011 despite additional operating costs generated by the new mobile telephone service. There were a total of 253,900 subscriber connections to Videotron's 4G network as of September 30, 2011, including 181,200 new connections and 72,700 migrations from the mobile virtual network operator ("MVNO") service. It was an exceptional quarter for all of our Telecommunications segment's services from every point of view.

Finally, when it comes to our financial results, it is important to note that the $56.9 million decrease in net income attributable to shareholders in the third quarter of 2011 was caused mainly by remeasurement of financial instruments, which had an unfavorable non-cash impact in the amount of $48.4 million, net of taxes and non-controlling interest. The balance of the decrease was due to operating items, including investments in new products and services. Higher subscriber acquisition costs for the new 4G network and an increase in the amortization charge for 4G network equipment and licenses reduced net income by a total of $14.9 million, net of income taxes and non-controlling interest.

In short, it was an excellent quarter for Quebecor in terms of customer growth, product development and business opportunities, strengthening the foundations for the Corporation's future growth.

Conclusion

All valuations metrics of Quebecor are lower than the industry. Profitability measures are higher than the industry. Management effectiveness measures are higher, except for the ROI. It appears that overall, the stock is undervalued. However, the company is in highly competitive industries, requires capital intensive investments and is highly leveraged. We can affirm that the risk is medium in the medium term and the potential for returns is high.

With a better product portfolio of smartphones, Videotron (telephony division) will obtain more subscribers in the Canadian market, which is also one of the most expensive markets in the world for wireless packages. Cable telephony is still also in the growth stage. Investments in the capital expenditures for the wireless networks are reducing earnings per share, but it is temporary. Quebecor’s business model relies heavily on the convergence between its content and pipes divisions: media, publishing, telecommunications and broadcasting. Few information and communications holdings possess the leverage of owning content and pipes and delivering positive profits. In Canada, Quebecor, Rogers Communications and to a lower extent BCE rely on convergence business models. BCE, which has previously discarded the convergence model, just bought completely CTV, a broadcasting network with many TV channels. The idea of owning the content and pipes was severely criticized with the AOL-Time Warner merger of 2000. However, AOL had a declining dial-up Internet user base and paid too much for the acquisition of Time Warner.

One similarity in the case of Quebecor is that it paid too much for the acquisition of Videotron: $5.4B CAN in 2001. Operational synergies took time to realize and finally, Quebecor started new cross-promotional projects that became very lucrative (i.e. the Quebecer “American idol” TV show Star Académie was a huge hit starting in 2003 across many divisions: broadcasting, publishing, Internet, etc.). Quebecor has also started offering quadruple plays: telephony, cable, Internet and wireless. Now that Quebecor owns its 3.5G wireless network, instead of being a MVNO, it represents a higher potential for profits. Opportunities to cross-sell products and services across divisions will be higher with the future launch of the 4G mobile network.

Quebecor has discarded the struggling printing division Quebecor World in 2008 and the independent division fell in bankruptcy later. Now, the cash cow of Quebecor is Quebecor Media with Videotron and its Internet properties. Canada is a wireless market with little competition where the price of wireless packages for data and voice are among the highest in the world. What it means is that new comers had poor performance due to the oligopoly of big operators. However, there is one exception with the new comers: Videotron Wireless. With the quadruple play, and the scale of an information and communications holding, several analysts predict a bright future for Videotron Wireless. In the short term, it represents higher capital expenditures for the building of a 4G network, but in the medium term, cross-promotional offers will bring a decent growth in profits. In the long term, if Quebec City receives a hockey team, Quebecor could duplicate the success of the Montreal Canadiens franchise (to a certain extent) and in entertainment (i.e. Evenko in show management).

Even if Quebec City doesn’t have a hockey team, Quebecor is a Buy with medium risk mainly due to its balance sheet; and the stock has also a high potential since it is undervalued and possess interesting growth avenues. A median target of $42, according to the 13 analysts following the company, seems realistic.

Disclosure: I am long OTCPK:QBCRF, QBR-B.TO