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Morningstar | Rogers Continues to Execute as It Wraps Up a Solid Year, but Key 2018 Metrics Will Be Tough to Beat

Narrow-moat Rogers put up another impressive quarter and concluded 2018 with wireless postpaid churn, average billings per user, and net additions looking especially strong. During 2018, revenue and adjusted EBITDA grew 5% and 9%, respectively, and the firm projected similar growth in 2019 (guidance of 3%-5% revenue growth and 7%-9% adjusted EBITDA growth). While a better margin profile will lead us to raise our CAD 60 fair value estimate by about CAD 2, we think Rogers will see headwinds in the next couple of years that were not evident in 2018, and we believe the stock is rich at current levels.

Wireless industry strength in Canada was broad-based in 2018, and Rogers had a historically good year across numerous metrics. Fourth-quarter postpaid customer churn reached a decade low and declined 25 basis points year over year, leading to 1.1% churn for the year. Postpaid net additions continued accelerating in 2018 and numbered over 450,000 for the year after the 112,000 Rogers added in the quarter, and ABPU grew nearly 4% in 2018. As encouraging as the results are, we don't believe they are sustainable. We attribute part of the industry strength to an economy that we think is unlikely to be a continuing tailwind. We also expect Rogers' ABPU growth and wireless margin expansion (100 basis points in 2018) to slow in 2019, as we think both measures benefited in 2018 from the roll-off of a government contract that was lower ABPU and lower margin. As Wind Mobile continues expanding and adding to competition, we project net additions to fall below 400,000 in 2019 while churn ticks up slightly, and we forecast ABPU growth will decelerate to about 2%.

Rogers' cable performance, with 1% revenue growth, was a bit weak, consistent with our industry thesis, although the firm is enhancing profitability more than we expected. As BCE and Telus continue to improve their wireline offerings with fiber to the home, we think the cable providers will be pressured.

Rogers shed 16,000 television subscribers in the quarter and a total of 55,000 in 2018, amounting to a 3% decline in the customer base. We expected a stronger year, considering the firm launched its IgniteTV offering with Comcast technology. We still expect the offering to bear fruit, but we think it will only slow, rather than reverse, the trend of declining television penetration. Year-over-year Internet subscriber growth of 5% exceeded our expectations, but it was offset by lower average revenue per user growth (1%) than we forecast. We expect pricing power to remain constrained due to increased competition from BCE.

We think the modestly negative stock reaction to the quarter is likely due to a rise in capital spending plans in 2019, which will reduce free cash flow. We were already projecting over CAD 2.9 billion in 2019 capital spending (within management's budgeted range of CAD 2.85 billion to CAD 3.05 billion), as we expect spending needs will remain elevated as wireless carriers continue enhancing their networks to accommodate new technology and a higher level of data usage. We think wireless network investment is especially crucial for Rogers, as it has fallen behind Telus and BCE in recent years in industry rankings. We also believe Rogers will continue investing in its cable network as it fights stronger competition from BCE. We applaud the enhanced spending.