Take a pass on Quebecor Inc., Canaccord Genuity says

Strong growth in wireless subscriptions is expected of media and telco company Quebecor Inc. (Quebecor Stock Quote, Chart, News: TSX:QBR.B, TSX:QBR.A) ahead of its first quarter 2018 earnings report due tomorrow, says Canaccord Genuity’s Aravinda Galappatthige. Nevertheless, in a company update to clients, the analyst maintains his “Hold” rating and $25.50 price target.

“We are looking for solid growth in wireless yet again with revenues projected to grow 18.5 per cent year over year to $169.4 million, reflecting no loss of momentum from recent quarters,” says the analyst. “We are calling for 24,900 in wireless net adds in Q1/18 versus 27,000 last year, generally in line with street expectations. However, considering the Q4/17 beat and current industry strength we would not be surprised to see another above-consensus result.”

The analyst projects the company’s consolidated EBITDA to be $385.3 million, compared to the consensus $386.5 million, along with a revenue estimate of $1,026.1 million, which would represent a 3.0 per cent growth year over year. His Adj. EPS projection is at $0.29 versus the consensus $0.32.

Galappatthige estimates Quebecor’s media revenue to decline by 2.6 per cent over the quarter to $179.3 million, with media EBITDA coming out flat at negative $2.3 million versus negative $2.2 million over the same quarter last year.

Last year, Quebecor made a deal with the Caisse de dépôt et placement du Québec to buy back and then cancel approximately 540,000 shares of its operating subsidiary Quebecor Media Inc., which left Caisse with still an 18.5-per-cent stake in Quebecor Media. Galappatthige says that investors are keen to get the deal done so as to remove the holding company discount currently being applied to Quebecor’s stock price.

“We believe investors will remain focused on the potential Caisse repurchase and the January 2019 timeline, not to mention QBR’s holdco discount,” he says. “We believe the holdco discount remains material despite the sharp upswing in the stock in 2017 and could further dissipate as we get close to the January 2019 timeline, even in the event of a partial (but material) repurchase of the remaining 18.47 per cent interest. With QBR’s balance sheet leverage now down to 2.6x net debt/LTM EBITDA, we believe the company will be in a position support this repurchase organically. On the Q4/17 call management alluded to turning its attention to dividend policy, while remaining inside 4x leverage. Given its strong FCF generation and low payout (less than ten per cent), we expect the company to announce a ~20 per cent DPS increase alongside the Q1/18 release.”

The analyst’s $25.50 target represents a 12 month return on investment of 2.8 per cent at the time of publication.