Cogeco Communications has a 24 per cent upside, Echelon Wealth says

Cogeco Communications’ (TSX:CCA) fiscal third quarter of 2018 arrived last week, with analyst Rob Goff of Echelon Wealth Partners saying that he’s maintaining his “Buy” recommendation and $85.00 target price for CCA, implying a projected return of 24 per cent at the time of publication.

Cable, internet and telephone company Cogeco reported its fiscal Q3 on July 11, which featured revenue of $637.1 million, a 12.7 per cent increase, driven by gains in its American broadband services segment and stable results from its Canadian broadband segment, according to CEO Louis Audet.

“Overall we are satisfied with our performance for the third quarter of fiscal 2018,” said Audet in a press release. “Results at Cogeco Connexion have remained stable compared to the third quarter of fiscal 2017, despite the fact that our Canadian broadband services subsidiary implemented a new advanced customer management system and had consequently temporarily reduced its marketing and sales activities during the system integration period.”

Goff says he’s encouraged by CCA’s strong Atlantic Broadband results, although he is looking for evidence of better results from the Canadian segment along with positive momentum in its Business Information and Communications Technology segment before moving more aggressively with CCA.

“We maintain our outlook of modest growth from AB, improving results from Cogeco Peer 1 and stable results to modest growth in the Canadian cable,” says the analyst in a client update on July 12. “We look for some caution to prevail as wireless plans await clarity and given somewhat disappointing Canadian cable results over the past two quarters. Disappointing subscriber performance from the Canadian cable was in part attributed to disruption about the adoption of a new customer service platform.”

Goff notes that Cogeco’s $637 million in revenue was $12 million above his forecast and $2 million below consensus, while its reported EBITDA of $287 million was $0.4 million below his estimate and $1.3 million below the Street’s. CCA posted EPS of $1.23, which compares to Goff’s $1.27 and the consensus $1.52.

“CCA’s current 6.1x/6.7x C2017/18 EV/EBITDA multiples reflect a discount to peers Shaw at 8.4x/7.9x and Rogers at 8.8x/8.4x,” says the analyst. “Our $85 PT reflects 7.9x C2019 EV/EBITDA — a 24 per cent return. Cogeco’s FCF yield at 11.5 per cent for F2019 provides downside support.”

Goff has revised his estimates, now calling for 2018 revenue, EBITDA and EPS of $2,419 million (was $2,399 million), $1,067 million (was $1,044 million) and $7.26 (was $7.39), respectively