EUR 850.00 For Business Accounts Only

Morningstar | RCI.B Updated Star Rating from 22 Apr 2019

Narrow-moat Rogers reported a disappointing first quarter across most metrics, with the firm adding its fewest number of postpaid wireless subscribers in three years and revenue falling below our projections in each of its three segments. Adjusting for an accounting change, the EBITDA margin was flat, despite tepid customer growth. While those results were clearly negative, record-low wireless churn, better pricing, and the firm's recent spectrum win bode well for Rogers' long-term prospects. With a more optimistic view about Rogers' competitive position offsetting current operating weakness and higher spectrum spending than we anticipated, we are maintaining our CAD 62 fair value estimate.

Postpaid wireless net additions totaled 23,000 in the quarter, which is weak considering the firm's postpaid churn was 0.99%, its lowest level ever and a continuation of a steady decline. We've previously stated that we thought 2018 was a near-term high-water mark for Canadian postpaid wireless subscriber growth, and given the low churn, we expect the quarter's weakness is likely industrywide rather than company specific. We were encouraged to see year-over-year average billings per user, or ABPU, growth exceeding 3%, tracking ahead of the 2% we project for the year. Moreover, we have been concerned that Rogers' wireless network has been falling behind the shared network of Telus and BCE, its primary rivals, but our concerns are being alleviated. Rogers acquired far more 600 MHz spectrum than Telus and BCE combined, and we now think its network will make up ground with its rivals once it begins deploying the spectrum next year. With lower normalized churn, good pricing, an improving network, and a Canadian wireless industry that we believe is fundamentally healthy despite potential near-term weakness, our long-term outlook for Rogers' wireless business has improved.

Results in Rogers' cable segment were not particularly good, either, although the firm continued to add Internet subscribers and saw average Internet pricing rise more than 2%, which is crucial considering Internet access will form the core of the firm's long-term service offering. We expect Rogers to suffer as BCE continues to roll out fiber to the home and improve its competitive offering, but considering seasonality, the firm's muted first-quarter subscriber result is consistent with the 73,000 new Internet subscribers and pricing growth we project for the year.

We are more concerned with the television and phone performance in the cable segment. Rogers shed 28,000 TV subscribers (half as many as it lost in all of 2018), which is especially disappointing because we forecast the firm to return to TV subscriber growth in 2019 on the back of its expanded IgniteTV offering, which we think is more attractive for consumers. Rogers also saw average revenue per phone user drop 20%, continuing its trend of double-digit year-over-year price deflation, but still lost 10,000 phone subscribers. Given secular trends, we don't expect either TV or phone to contribute to Rogers' long-term growth, but we expected losses to moderate due to the price slashing on phone service and improved TV offering.

We knew media revenue would be down year over year due to last year's one-time payment from Major League Baseball, which we estimate to have been about CAD 39 million. But even excluding that payment, we estimate media revenue was down 5%, exhibiting continuing weakness and pacing below the flat revenue we are projecting for 2019. Management attributed the decline to one-time payments, but we are not optimistic about the segment, and we project little long-term growth.

Excluding last year's payment from MLB, adjusted EBITDA was up 7%. However, management indicated that about half of the growth was due to the IFRS 16 accounting change, which just went into effect and requires the firm to capitalize operating leases. After adjusting for the accounting change, adjusted EBITDA grew similarly to the firm's adjusted 3% service revenue growth (adjusted for the MLB payment). IFRS 16 materially affects only Rogers' wireless business, and we will adjust our margin outlook accordingly. However, cash payments and economics are unchanged, so it will not affect our valuation or our view on the firm's ability to increase profitability.