Desjardins analyst Jerome Dubreuil is feeling less optimistic about the prospects for Cogeco Communications (Cogeco Communications Stock Quote, Chart, News, Analysts, Financials TSX:CCA).
On January 10, Cogeco reported its Q1, 2024 results. The company posted Adjusted EBITDA of $359.0-million on revenue of $747.7-million, a topline that was down 1.9 per cent over the same period a year prior.
“The first months of fiscal 2024 were transformational and historic moments for our company,” CEO Philippe Jette said. “We recently announced that Cogeco Communications bought back 2.3 million of its shares at a discounted market price per share, providing free cash flow per share accretion. In conjunction with this transaction, the public float of Cogeco Communications was increased therefore enhancing trading liquidity. This opportunity represented a unique and attractive use of our capital to build value for our shareholders, while strengthening our existing partnership with CDPQ as an anchor investor in Cogeco Communications. Another important milestone for us was when we secured wireless spectrum critical for the 5G technology and now have spectrum coverage for 100 per cent of our wireline footprint. This spectrum was secured at a significantly lower cost compared with past spectrum auctions.”
As reported by the Globe and Mail, the analyst says CCA stock has become pricey.
“CCA’s outperformance since the end of the last telco earnings season (up 14 per cent vs up 5 per cent average for other Canadian telcos) has prompted us to move to the sidelines as network convergence between wireless and wireline finally appears to be gaining traction,” he said. “Moreover, despite elevated capex for several years, top-line growth remains under pressure at CCA, which, with higher leverage, a tighter valuation gap and little potential for meaningful short-term catalysts, takes us away from buy territory.”
In a research update to clients January 12, Dubreuil lowered his rating on CCA from “Buy” to “Hold” while maintaining his price target of $70.00 on the stock.
“Given the stock’s recent performance, the spread between CCA’s EV/NTM [next 12-month] EBITDA and that of U.S. peers is now one standard deviation tighter than the two-year average,” the analyst added. “While we note that several historical U.S. cable transactions were completed at higher valuations than the multiple we assign to CCA’s U.S. operations, the company needs to be willing to sell some assets for investors to unlock the higher valuation. In addition, we would note that the stock currently has only a negative 0.6 times EV/2025E EBITDA multiple spread vs QBR, which we would rather own given its more attractive growth profile.”
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