Ahead of Thursday’s Q1/18 financial results from Rogers Communications (TSX:RCI.B, NYSE:RCI), analyst Aravinda Galappatthige of Canaccord Genuity believes that if the Canadian telecom company can keep up its strong growth in its wireless division, investors will see RCI’s share price recover some of the ground it lost so far in 2018.
On Tuesday, Galappatthige reiterated his “Buy” recommendation for Rogers with a reduced price target of $66.00.
Year to date, Rogers’ share price is down over ten per cent, a trend that started last November. Galappatthige gives a few reasons for the decline: (1) rising interest rates; (2) Rogers’ decision to not increase its dividend in January; (3) soft Q4/17 wireless postpaid net adds; and (4) a loss of momentum in cable subscription loading.
But the analyst is positive on Rogers, expecting to see sector-leading 6.8 per cent adj. EBITDA growth in the company’s wireless over Q1/18, along with an overall 6.2 per cent year over year adj. EBITDA growth for the quarter.
Galappatthige has a list of concerns he’d like to see addressed by management, particularly, the pressure being put on Rogers’ dominance in the greater Toronto area by Shaw Communication’s discount provider, Freedom Mobile.
“There are a number of items to consider regarding RCI’s outlook,” says the analyst. “First, given the recent traction (sub loading) at Freedom, we expect greater emphasis on RCI’s net adds given that much of Freedom’s gains were in the GTA. Second, wireless EBITDA growth (9 per cent Q2-Q4/17) has been at elevated levels, while we expect that a ~6 per cent growth level can be achieved in 2018, investors would be paying attention to trajectory and ARPU trends. Third, cable sub trends are likely to see some pressure and with Bell launching its new all-fibre broadband products in the GTA and X1 unlikely to be a factor for Rogers in 2018, we expect these trends to continue.”
Galappatthige says that factoring year-to-date interest rate increases and the near-term threat to Rogers’ wireless subscription loading strength from Freedom, his wireless target multiple is lowered from 9.0x to 8.5x, along with a slight trim to RCI’s cable multiple (from 6.25x to 6.5x). Those considerations have lowered his price target from $71.00 to $66.00, based on a valuation of 7.7x 2019E consolidated EV/EBITDA.
The analyst forecasts RCI posting Adj. EBITDA of $5,601 million in 2018 and $5,808 million in 2019. His $66.00 target represents a potential return of 15.2 per cent at the time of publication.