Quebecor wins upgrade at RBC

Count RBC Dominion Securities analyst Drew McReynolds as a believer in telco stock Quebecor (Quebecor Stock Quote, Chart, News, Analysts, Financials TSX:QBR.B).

As reported by The Globe and Mail, the analyst December 18 upgraded QBR.B from “Sector Perform” to “Outperform” while raising his price target on the stock from $37.00 to $39.00.

McReynolds says he has been trying to get a handle on Quebecor’s value since a recent major acquisition.

“Since the acquisition of Freedom Mobile, our focus has been two-fold: (i) assessing the true financial impact of wireless expansion including understanding the ways Quebecor can sustainably and profitably differentiate its wireless offerings; and (ii) monitoring notably higher competitive intensity inside Quebec,” he said. “Following a period of downward estimate revisions since the acquisition and what we believe are now lowered growth expectations for both inside and outside Quebec, we see the risk-reward set-up as more attractive.”

McReynolds says tailwinds may be forming in the Canadian telecom sector.

“Despite stronger than forecast wireless net additions in 2024, wireless ARPU [average revenue per user] and cable revenues remain under considerable pressure acting as a drag on NAV [net asset value] growth,” he wrote. “While we expect the company’s growth versus profitability balance to remain a work-in-progress, we do see Quebecor as a likely beneficiary of a more disciplined wireless and Internet pricing environment beginning in 2025 with the potential for renewed growth in the Telecommunications segment, which could be a catalyst for multiple expansion versus the current FTM EV/EBITDA multiple of 6.2 times. In the absence of renewed growth and/or multiple expansion and even with rising capex, we still see some (albeit less) upside potential in the shares on the back of equity reflation driven by FCF generation and outright debt repayment given the relatively low dividend payout ratio (approximately 30 per cent of FCF). We expect the pricing environment to improve in 2025 but less market expansion points to another low revenue growth environment. With this subdued growth outlook and valuations that we view as reasonable in the current interest rate environment – neither cheap nor expensive – we see limited potential for meaningful sector-wide multiple expansion therefore putting greater emphasis on NAV growth, dividend yields and any company-specific re- rating catalysts to drive total returns for investors.”