TORONTO – Cogeco, despite losing 2,076 net Canadian basic cable subscribers, and adding only 6,311 telephony subscribers, well below the 16,000 forecast in its first quarter, remains a “buy” recommendation. In part because of its strong Free Cash Flow (FCF) guidance that increased to $170 million from $105 million due to its purchase of Atlantic Broadband (ABB) and reduced Canadian capex. This according to analysts Dvai Ghose and Sanford Lee in Canaccord Genuity’s Daily Letter for January 15 who now forecast a target price of $44.00 for Cogeco’s stock.
“Due to weaker than expected subscriber results, at $328 million, revenue was below our $331 million estimate, but up 4.0%. But margins easily exceeded expectations. Consequently, at $147 million, EBITDA beat our $140 million forecast and was up 11.6% on a 319 bps margin expansion,” writes Ghose and Lee.
They concede that Cogeco still faces challenges in the year ahead. In particular: primary service unit (PSU) growth in Canada is slowing significantly due to maturation and incremental competition from Bell, Telus and over-the-top applications; while Cogeco Cable’s expansion into the CLEC and data centre segments should enhance growth, such investments tend to be highly capital intensive and can generate significant upfront cash flow pressure; there is significant integration risk associated with Atlantic Broadband (ABB), which was acquired on November 30, 2012, and Peer 1, which is expected to be acquired in February and investors “remain cynical post the Cabovisao adventure;” as a result of these new acquisitions, net debt to LTM EBITDA is expected to increase to 3.8x from only 1.4x at the end of F2012.
But they add that the ABB acquisition and curtailed Canadian capex and opex could lead to much better than expected FCF generation.
“Our new F2013 FCF estimate without Peer 1 is $171 million or $3.50 per share, and our forecast with Peer 1 dilution is $163 million or $3.35 per share. This implies that the stock offers a very attractive F2013E FCF yield of 8.6%. This is the highest of its Canadian cable and even telco peers.”
They add that “given that it is tough to find value in the Canadian telecom and cable services sector, we urge deep value investors with an above average risk tolerance to take a look.”
