Cogeco is still a bargain, Echelon Wealth says

Despite underperforming in its Canada cable and telecom divisions, Cogeco Communications (Cogeco Stock Quote, Chart, News: TSX:CCA) still has an attractive valuation, says analyst Rob Goff of Echelon Wealth Partners, who on Friday reiterated his “Buy” recommendation with a reduced target price of $85.00.

Last Thursday, Montreal-based Cogeco reported its FY18 second quarter financials, posting revenues for the period of $599 million, a 6.8 jump from the previous year, and EBITDA of $268 million, also up 5.6 per cent year over year.

Those numbers came in below expectations, however, says Goff, who noted that Cogeco’s revenue was $3.1 million below his forecast and $7.6 million below consensus, while the reported EBITDA came in $7.7 million below his forecast and $3.7 below consensus.

The cable, internet and telephone service provider has operations in both the US and Canada, with the Canadian division taking the blame for Q2’s underperformance, says Goff, who nonetheless remains bullish on the company.

“Arguably the disappointing Canadian results together with a lack of momentum from Business ICT would support an element of pressure on the valuation that would be somewhat countered by the solid ABB performance given its weighting at 37 per cent of F19 EBITDA,” says Goff in a note to clients. “We see attractive value and support given F2019 free cash flow yield of 11.5 per cent. However, we look for evidence of stronger Canadian results and positive momentum at Business ICT before moving more aggressively.”

Goff says that among its telco peers, Rogers, Shaw and Quebecor rank higher in his estimation than Cogeco, although the latter is still priced at a discount.

“CCA’s current 6.7x/8.2x C2017/18 EV/EBITDA multiples reflect a discount to peers Shaw at 7.9x/8.0x and Rogers at 8.0x/7.7x,” says the analyst. “Our $85 price target reflects 7.8x C2019 EV/EBITDA. Cogeco’s free cash flow yield at 11.5 per cent for F2019 provides downside support.”

Goff predicts Cogeco will produce revenue and Adj. EBITDA in 2018 of $2,399 million (down from $2,393 million) and $1,044 million (down from $1,094 million), respectively.

His $85.00 target price (down from $96.00) represents a projected return of 29 per cent as of publication date.