Enthusiasm for Rogers’ Stellar Q2 Dampened by Yet Another Side Issue—July’s Network Outage

Business Strategy & Outlook

Rogers has alleviated the concern one has long had that its wireless network is falling behind rivals Telus and BCE and that BCE’s fiber-to-the-home build-out would dent Rogers’ cable dominance. It has invested to improve its wireless network, and it has skirted Shaw’s fate of cable customer losses in the face of its competitor’s network improvement, mitigating market share losses. Its proposed acquisition of Shaw will be value neutral, but the purchase price and integration uncertainty bring greater risk. Rogers is investing heavily in its wireless network. It was the biggest spender in 2019’s 600-megahertz spectrum auction and 2021’s 3500-megahertz spectrum auction. The firm is also rolling out its 5G network, which one doesn’t expect to be consequential in the near term but should ensure that Rogers doesn’t lag competitors.

While Rogers’ network has clearly been behind Telus and BCE in network speed ratings, one doesn’t think it has a practical effect on service customers receive. Nonetheless, Rogers to close the gap as it rolls out its newly acquired spectrum and transitions to a 5G network. The enhanced network in conjunction with the industry consolidation will result in churn declining, pricing power increasing, and margins expanding. Rogers will face tougher cable competition, but with BCE’s network revamp more than 50% complete, Rogers has been holding its own. Rogers has averaged better than 4% annual broadband subscriber growth since 2016. TV and phone subscribers continue to decline, which will continue, but phone service will make up only 6% of cable revenue in 2019, and the smaller TV subscriber base will be somewhat offset by the premium Ignite TV offering. The Rogers’ media unit, or at least parts of it, has more value in a sale than it does as an operating business. According to Forbes magazine estimates, the Blue Jays are worth USD 1.8 billion, but the team generates no operating profit. The move away from linear TV viewership and the shift to digital media content has impaired print publication and television and radio station holdings.

Financial Strengths

Rogers’ leverage has been significantly higher than usual in recent years, as the firm has been upgrading its networks, participating in spectrum auctions, and deploying capital to enhance its television offerings. The leverage will remain somewhat elevated in coming years as the firm’s elevated network spending continues. However, one doesn’t foresee any difficulty in Rogers’ ability to meet its obligations as the economy turns down. Though Rogers targets a net debt to EBITDA ratio under 2.5, it was 3.2 as of June 30, 2022 (excluding debt the firm has taken on and reserved for the Shaw purchase), and to remain above 3.0 through 2023, as spectrum auctions and the Shaw merger will keep debt levels heightened. However, interest coverage remains strong, with an adjusted EBITDA to interest expense ratio of nearly 7.0 at the end of 2021. The current dividend is well covered, with free cash flow still covering the dividend by nearly two times. One doesn’t think the dividend is ironclad in a prolonged period of weakness, but the firm did not cut it amid the COVID-19 outbreak, and one doesn’t anticipate it will even need to consider it unless a major recession coincides with the near-term merger and spectrum obligations. However, one doesn’t expect regular dividend increases while leverage is elevated and spectrum outlays continue.

Bulls Say

With the Canadian wireless market less penetration than the U.S. and Europe and the country receptive to immigrants and foreign workers, wireless subscriber growth should remain high. As the industry leader, Rogers is well positioned.
Rogers’ media unit is worth far more than the market is giving it credit for. If that continues, Rogers can sell some assets to create significant value.
A gradual return of roaming traffic gives a long runway for heightened wireless average revenue per customer growth.

Company Description

Rogers is the largest wireless service provider in Canada, with its more than 10 million subscribers equating to one third of the total Canadian market. Rogers’ wireless business accounted for 60% of the company’s total sales in 2021 and has increasingly provided a bigger portion of total company sales over the last several years. Rogers’ cable segment, which provides about one fourth of total sales, offers home Internet, television, and landline phone service to consumers and businesses. Remaining sales come from Rogers’ media unit, which owns and operates various television and radio stations and the Toronto Blue Jays. Rogers’ significant exposure to sports also includes ownership stakes in the Toronto Maple Leafs, Raptors, FC, and Argonauts.

(Source: Morningstar)

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