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Quebecor is my Top Pick, this portfolio manager says

Canadian telcos have been doing well lately during a skittish market but one outlier has been Quebecor (Quebecor Stock Quote, Charts, News, Analysts, Financials TSX:QBR.B), which is still underwater over the past 12 months. But there are plenty of reasons for investors to be looking at the stock, says Brian Madden of First Avenue Investment Counsel, who just named Quebecor as one of his top picks for the year ahead.

“This is a defensive exposure. It’s telecom and cable exposure with a regional footprint. Obviously, the name suggests where they play and it’s in the province of Quebec where they’re the dominant cable operator. And they’re a new-ish cell phone competitor in that market with I believe it’s a 21 per cent market share,” said Madden, speaking on a BNN Bloomberg segment on Wednesday. 

“But they’re the fastest growing cell phone player in that market, and there’s a bit of a reopening exposure here. People are taking their cell phones when travelling outside of the country, so more roaming charges and that sort of thing,” he said. 

“There’s also a small sports and entertainment business in here and it’s kind of a rounding error on the overall business but they do own a big arena in Quebec City in two QMJHL Junior Hockey franchises. But the big story here is really the telco and the cable and that’s all domestic,” Madden said.

Quebecor, with a market cap of $7 billion and a dividend yield currently at about four per cent, has seen its share price drop over the past year, going from just under $36 last April to now a bit below $30. That’s in contrast to telecom companies like BCE, Rogers and Telus which have posted strong gains over the same time period. 

The company has been doing well on a quarterly basis, logging a revenue rise of 5.5 per cent for 2021 compared to 2020 at $4.55 billion, up $236.6 million, while earnings have been steady, hitting $1.97 billion in adjusted EBITDA for 2021 to register an uptick of 1.1 per cent. 

For the fourth quarter 2021, delivered in February, Quebecor’s revenue was up 3.2 per cent to $1.18 billion but adjusted EBITDA was down 5.3 per cent to $498.8 million, with EPS of $0.67 per share compared to $0.64 per share a year earlier. Analysts had been calling for $0.71 per share.

Looking deeper, Quebecor’s TVA Network and specialty channels posted strong advertising revenues over the Q4 at $24.3 million, up 16.5 per cent, while the company’s OTT video service added 36,200 subscribers for a 7.7 per cent year-over-year increase.

The company has continued its 5G network rollout in Quebec and acquired 294 blocks of 5G spectrum in December, with half of that investment concentrated outside la belle province in Ontario, Manitoba, Alberta and BC.

“We stayed focused on the sound management of our operations, our balance sheet and our investments, as evidenced, among other things, by the 7.4 per cent increase in adjusted cash flows from operations in the fourth quarter of 2021. With net available liquidity of $1.57 billion as at December 31, 2021, we have a solid foundation to pursue our strategic priorities and offer our growing customer base the most innovative technology at the best price,” said Quebecor President and CEO Pierre Karl Péladeau in a press release.

Quebecor has been featured in discussions related to the merger between Rogers and Shaw Communications, proposed last year and still being vetted by federal regulatory bodies. Many see the sale of Shaw’s wireless asset, Freedom Mobile, as a contingency of the deal in order to preserve healthy competition within the space, and Quebecor, in effort to strengthen its presence outside Quebec, is said to be interested in buying the business.

Madden says the Rogers-Shaw merger could be a big moment for Quebecor.

“Quebecor has no commodity exposure and there’s not a lot of wage inflation pressure here because it is a capital-intensive, tech-intensive business,” Madden said. “We like the dividend yield at a little over per cent, which it’s growing at nine per cent a year. The balance sheet is strong.”

“Probably the most important thing is there are some interesting catalysts coming down the pipeline. The blockbuster Rogers-Shaw deal is slated to close this quarter, in the next two months and that’s an all-cash deal, so it may have telecom sector investors looking for reinvestment opportunities,” he said.

“There are not many in Canada and Quebecor was an obvious candidate. And Quebecor would be a logical buyer of the Freedom Mobile spectrum which is likely to be required to be divested if Rogers completes the Shaw deal (which we think they will),” Madden said. “So, good exposure here. It’s a new name for us but we’re comfortable buying it today. I think good things lie ahead.”

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