EUR 850.00 For Business Accounts Only

Morningstar | Rogers' Wireless Business Stands Out in Overall Good Quarter, but Outlook Unchanged

Narrow-moat Rogers Communications' wireless business was the standout in the second quarter, but despite what we saw as remarkably low wireless churn and EBITDA numbers, overall results were mostly just consistent with what is widely known to be an excellent business environment, and the company maintained its full-year guidance. On a consolidated basis, year-over-year revenue growth was 4% and adjusted EBITDA margin was up 160 basis points to 40%. We think management was conservative when alluding to its margin expansion this year, and we are increasing our forecast a bit as we now expect better operating efficiency. Updates to our 2018 numbers and slightly improved longer-term margin projections will take our fair value estimate to CAD 57 from CAD 55, but we still see shares as slightly rich.

Wireless service revenue grew 5% year over year, driven both by higher average billings per user and more than 200,000 additional subscribers since last year's second quarter (including over 100,000 net adds this quarter). We believe the 4% ABPU growth (to over CAD 64) is due mostly to the composition of the subscriber base rather than price hikes. Rogers lost a contract to provide services to government employees last year, which will result in lower ABPU plans leaving the postpaid subscriber base over the course of this year. Additionally, Rogers has been adding postpaid subscribers at a strong pace while losing prepaid subscribers, which further shifts the subscriber base to higher-ABPU users. We expected both of these dynamics, and they formed the basis for the 3% ABPU growth we projected this year, a level higher than we think the firm will sustain in subsequent years. Most impressive to us was the 1.01% postpaid churn and 46.5% adjusted EBITDA margin Rogers posted in the quarter. While we don't project either to be sustainable at such levels for the full year, we adjusted our model for both metrics to reflect the better-than-expected results.

Cable service revenue growth was 1.5% year over year, a bit below the 2% growth we forecast. Strength in Internet subscriber additions and pricing was largely offset by continued losses in television subscribers and a downtick in TV ARPU. Rogers has posted television subscriber losses every quarter for over five years. With IgniteTV (on Comcast's platform) gradually rolling out during 2018, we expected TV losses to cease this year before growing again in 2019. While we still expect the turn to happen this year, the slow start leads us to believe 2018 will be another year of net TV subscriber losses before growth in 2019. Cable EBITA margin of 46.6% is consistent with what we see the company posting for the full year.

Rogers' media unit remains pressured, with the 5% year-over-year revenue decline this quarter due to lower revenue from the Toronto Blue Jays and lower advertising revenue. While we forecast 3% revenue growth this year in light of the large distribution from Major League Baseball in the first quarter, we project little to no growth in the segment beyond this year, and we continue to think the potential value lies in a sale rather than as an operating business.