Quarterly results reporting begins this week
By Greg O’Brien
TORONTO – Both Cogeco Inc. and Shaw Communications will release their fiscal 2020 second quarter results this week, but since their quarters ended February 29th, those numbers will resemble more of a time capsule than an account of what is going on in the market right now and the real news will be what the companies have to say about what’s happened since with the Covid-19 crisis.
“We believe Canadian telcos and cablecos remain structurally sound and even after our target price revisions, we believe the sector will provide investors attractive potential total return of at least 20% including the dividend, which we believe is safe,” for the six publicly traded companies Rogers, Bell, Telus, Shaw, Quebecor and Cogeco, wrote Scotiabank telecom analyst Jeff Fan in a research note to investors last week
However, with so much still unknown, Fan presented scenarios where Covid-19 shutdowns ease in time for Victoria Day (bull), the summer civic holiday (base) and Canadian Thanksgiving (bear). The global oil price war will also throw another wrench into the economic gears, especially for western-based operators Shaw and Telus.
What’s going to happen first with the public companies is their annual guidance when it comes to earnings, subscriber counts and so on will be changed, or outright removed for the year. For those who follow company quarterly reporting, the opening slide always provides a caution on forward-looking statements, saying something like “these statements are not guarantees of future performance and are subject to numerous risks and uncertainties.” This period of time is nothing if not uncertain.
BMO Capital Markets’ Tim Casey also published a recent note to investors, emphasizing the “mission critical nature” of the connectivity business in Canada. “While broadband will remain an in-demand service, no business is immune to economic cycles and revenue, EBITDA, and free cash flow will contract across the group in 2020. While it is too early to revise forecasts with any conviction, we believe the cash flow profiles and balance sheets will support dividend payments,” wrote Casey. “We expect to revise target prices prospectively as we obtain more clarity as to the depth and duration of the crisis.”
“We think the crisis has reinforced the importance of network investment and the facility-based competition model.” – Jeff Fan, Scotiabank
As the pandemic and the lockdowns continue and economic activity slows considerably, “we believe there are important implications that are not yet quantifiable,” adds Fan’s report. “We think the crisis has reinforced the importance of network investment and the facility-based competition model. Generally speaking, facility-based operators’ networks have held up well but wholesale ISPs are under significant pressure.”
Fan points to numerous items which are now up in the air, including the CRTC’s release of its decisions stemming from the wireless policy review (especially any call on mandated MVNOs), whether or not the 3500 MHz spectrum auction will continue as planned in December where the deadline to apply is October 13th and the carriers’ financial positions by then will surely be impacted.
Of the publicly-traded companies analyzed “we believe Quebecor and Shaw are the least impacted because of the spectrum set aside in the auction and the limited competition that we expect them to see in the set aside blocks. It is still unclear whether Cogeco will participate which we believe will depend on the CRTC MVNO decision. If the CRTC does not mandate Cogeco’s proposal of a hybrid mobile virtual operator (HMNO), then we believe Cogeco will remain on the sidelines,” wrote Fan.
Plus, just what might need to happen inside carriers’ operations and networks as they are forced to adjust on the fly to organizations and consumers adopting digital practices and needing edge computing and cloud far more quickly than they might have, is unknown, too.
“We expect to see an acceleration in digitization. For the telecom/cable sector, this includes digital sales channels and customer care channels. For those companies that have not invested enough before Covid-19, this has been a wake-up call. On the other hand, we could see less emphasis on the brick-and-mortar retail channels.”
Fan also pointed out Telus is well positioned to benefit from what is, and will likely continue to be, a far faster pace of transition to e-health, thanks to the company’s heavy investment in Telus Health.
While consumers are considered unlikely to dramatically pare back their connectivity because it is so needed, Fan cautions the business telecom side is likely to take a big hit. “For many businesses that are still operating and have enacted work from home and other business continuity processes, we believe telecom services is critical. For many other businesses that are operating at well below capacity, we think telecom spending cuts are likely dramatic. Scotiabank’s latest economic forecast published March 26 calls for -15% in business spending in 2020. We used that as a starting point for the telecom industry and we estimate the impact to B2B telecom spending is in the range of -10% to -25%.”
“The mission critical nature of this business has never been more obvious than it is today.” – Tim Casey, BMO
Because of plummeting world oil prices and the impact on the Alberta economy, Fan says it’s likely Telus and Shaw will be hit at the higher end of that range and will likely be extended beyond the Covid-19 impact.
Overall, adds Casey’s report, “the core business of this group is enabling broadband and connectivity to Canadians. The mission critical nature of this business has never been more obvious than it is today. Broadband effectively represents more than 50% of revenues for all the names and service revenues should be very stable.
However, wireless roaming revenue, subscriber additions, equipment revenue and ad sales to these companies’ media divisions will all slow during the crisis while working capital will shrink with data limits waived, price increases postponed and companies become more lenient to those who can’t afford to pay their bills right now. Casey also expects cord-cutting to traditional TV packages to accelerate, too “after the crisis abates as consumers explore more streaming options.”
“One positive out of this might be the regulatory environment, given that network investment and the facilities-based competition model have served Canada very well so far in this crisis compared to other jurisdictions,” he wrote.
“It seems to us that the importance of network investment and facilities-based competition (the north star of the Canadian regulatory structure) have been definitively validated during this crisis. We think it would be irresponsible of regulators to not acknowledge this in the context of upcoming decisions.”
