Buy Quebecor for “peer leading execution”, Echelon Wealth Partners says

New developments at Quebecor (TSX:QBR.B Quote, Chart) have Echelon Wealth Partners analyst Rob Goff feeling good about the prospects for shareholders.

On Monday, Quebecor announced it had issued a redemption notice to the holders of its currently outstanding 4.125 per cent convertible unsecured subordinated debentures due Oct. 15, 2018. The company says it intends to redeem all of the issued and outstanding debentures on Oct. 12, 2018. As of last Friday, Quebecor had $362.5-million aggregate principal amount of the debentures issued and outstanding

“The decision to exercise Quebecor’s share redemption payment right followed our analysis of the relevant factors, including current and targeted market liquidity in the Class B shares, as well as the potential incremental leverage impact of further cash settlements, in particular following Quebecor’s optional cash redemptions of $137.5-million aggregate principal amount of debentures since 2017,” CEO Pierre Peladeau said. “This is consistent with our prudent approach towards balance sheet management.”

Goff explained the ramifications of the deal.

“The full equity backing of the refinancing is roughly $0.02-$0.03 dilutive to EPS except where the newly issued shares are offset by QBR’s NCIB, where it is able to repurchase up to 7.8M shares over the next 12 months,” he said. “The proactive move with a full equity redemption removes potential short covering immediately ahead of the redemption. The modest EPS dilution should not change PTs, where the Company arguably has greater leverage to adopting a more conservative financing strategy where it leads to an acceleration of prospective dividend increases.”

In a research update to clients today, Goff maintained his “Buy” rating and one-year price target of $32.00 on Quebecor, implying a return of 22 per cent at the time of publication.

The analyst thinks the company will post Adjusted EBITDA of $1.68-billion on revenue of $4.30-billion in fiscal 2018.

“For a stock that has been awarded a discounted valuation to its peers despite peer leading execution, the prospect that its dividend yield may evolve as a valuation consideration together with holding company discount debates being obsolete is a significant positive,” Goff adds. “We are bullish on the prospects of moving to a dividend yield/growth model with strong FCF support.”