Desjardins Analyst: Rogers Communications 'Oversold'

When it comes to the ongoing weakness in Roger Communications Inc. (RCI) shares, Desjardins Securites analyst Joseph MacKay says enough already.

In a note to clients, he wrote:

To us, the market appears to be overreacting to a potential Bell (BCE)/Telus (TU) HSPA overbuild, and we would buy Rogers on continued weakness if Bell/Telus announce an overbuild strategy this week.

He reiterated his "top pick" rating and C$56.50 price target for Rogers shares.

The stock, which has fallen 26% from north of C$46 in mid-May, was up 3% to C$34.61 in early afternoon trading on Tuesday.

While Rogers management team now openly concedes that Bell/TELUS will build a next-generation HSPA network over their current CDMA network, they don't believe the new network will be GSM-compatible, leaving Rogers still as the only national GSM operator in Canada.

That, in turn, they said has positive competitive ramifications for Rogers for several reasons:

1. HSPA-only handsets remain more expensive than GSM and CDMA-only handsets, thereby increasing the cost of acquisition for Bell/Telus.
2. No HSPA/CDMA handsets will be offered in Canada or anywhere else, thus limiting roaming on the Bell/Telus footprint.
3. It would likely take 24 to 36 months for Bell/Telus to build out an HSPA network to the extent of Rogers' HSPA network.

As a result, Rogers is confident that roaming revenue, a major concern of the market, will likely only be impacted on a very limited basis, Mr. MacKay added.

In terms of the threat brought by new entrants such as Shaw(SJR), Videotron and Eastlink which have recently purchased valuable wireless spectrum, Rogers expects them to avoid building a network in Ontario, thus generating wireless roaming revenue for the company. It also expects the new entrants to build their own network towers since the current towers aren’t engineered to handle the weight of new equipment to be installed.