TORONTO – Facing a "moderate recession" in Canada, our cable and media companies seem well positioned to weather a deteriorating economy, says a recent analyst’s research report.
BMO Capital Markets financial analyst Tim Casey – who covers cable and media in Canada – admitted that while he was lowering his overall earnings forecasts “for the second time in three weeks” based on an “underlying thesis” of a “moderate recession in Canada” like the one we endured in the early 1990s, most companies seem well positioned to ride it out.
On the radio side, which is of course tied to local advertising, Casey has predicted revenue declines of about 2% “and a modest margin contraction such that we estimate EBITDA would fall in the -5% range. A more severe recession would lead to declines in at least the -5% to -10% ranges,” he wrote.
On the television side, it will be a tale of two formats: over-the-air and specialty, with specialty continuing to grow. “We expect a moderate recession would lead to (conventional OTA) revenue and EBITDA declines in the -3% and -7% ranges, respectively,” writes Casey. “A more severe recession would lead to declines in at least the -10% and -20% ranges.
“We expect specialty revenues would still increase in a moderate recession, albeit at low single digits as opposed to high-single-digit rates, and would decline modestly through a severe protracted recession,” he said.
Cable, as has been known through performance in past recessions, has generally been very resilient to economic dips, and with additional products on offer this time around (phone and Internet) the industry is even stronger.
“We believe data services (i.e. residential broadband) will also be a very defensive business in an economic slowdown. It is our view that Internet access is now an essential service in most households,” reads Casey’s report.
“Revenue growth has averaged 12% per annum since 2001. EBITDA gains have averaged (about) 15% over the last five years and are expected to be up more than that in 2008 versus 2007.
“It must be emphasized that cable equities offer entirely different investment characteristics during this cycle compared to previous economic slowdowns. During past recessions, the business was a pure video play, financed with stretched balance sheets. Now, it offers three services (video, data, voice),” he added.
“Based on the defensive nature of the core business, we expect cable cash flows to hold up relatively well in a mild recession… in a mild recession, we expect EBITDA in the mid to high single digits across the various cable operators.”
However, if Canada goes through “a prolonged, severe recession, we expect the underlying defensive nature of the cable business’s core product will still hold firm. However, consumers would very likely trade down from higher-priced premium video and data packages, which would mitigate growth and compress margins based on the fixed cost nature of the business. We estimate EBITDA growth would eventually decline in the -5% range, but the subscription nature of the business would result in a lagged impact on financials.”
BMO Capital Markets rates the Canadian public companies Rogers Communications, Cogeco Cable and Shaw Communications as “outperform”; Astral Media, Corus Entertainment, Quebecor Media (because of upcoming wireless investments), as just “market perform; and CanWest Global as “underperform” thanks to its significant newspaper and OTA TV exposure.
– Greg O’Brien
