Canada’s biggest telecom company by subscriber base, Roger Communications (TSX:RCI.B) has begun a new growth path. Its much-awaited acquisition of Shaw Communications closed last month. Now that the uncertainties regarding the merger are over, investors can look ahead and hope for a decent value with its improved scale.
Rogers stock lost 4% in the last 12 months yet has returned 25% in the last three years. That’s quite an underperformance compared to its peers BCE (TSX:BCE) and TELUS (TSX:T).
What’s next for Rogers Communications?
Rogers announced its plans to acquire Shaw in March 2021. However, the deal got delayed as the regulators were concerned that competition would be hurt. So, to address those issues, Rogers and Shaw agreed to sell the latter’s Freedom Mobile to Videotron—a part of Quebecor.
The Canadian wireless industry, where bills are some of the highest globally, is dominated by three players. Each caters to almost 30% of the market share, with Rogers leading with over 10 million wireless subscribers.
Almost two-thirds of Rogers’ revenues come from the wireless business. Nearly 26% comes from the Cable segment, and the media operations derive the rest.
Telecom is a slow-growing industry. But Rogers showed even slower growth compared to its peers. It managed to boost its net income by 1%, compounded annually in the last five years. However, its operating profit margin has been quite stable at around 40%. Shaw also witnessed a similar margin and growth profile in the last few years.
Note that Rogers generates a higher operating margin from its Cable segment compared with its wireless vertical. With the recent Shaw acquisition and its cable business, Rogers has gained significant scale, which should help its margins. Rogers aims to invest $6.5 billion in the next five years and plans to expand in Western Canada. The investment will primarily go toward network improvements and expand 5G connectivity.
Debt burden or a growth engine?
At the same time, Rogers’ aggressive growth plans might face hindrances due to its steep debt burden. It has total long-term debt of over $32 billion as of March 31, 2023.
Note that it is the smallest by market capitalization in the three-player industry but has the highest debt among peers. Its leverage ratio comes to around 5.5 times, whereas BCE’s is at 3.3 times and TELUS’ at 4.4 times.
Higher interest expenses in a rising rate environment might weigh on the company’s profitability. With an already high debt pile, Rogers might face lesser flexibility going forward to deploy growth capital.
In comparison, a relatively lesser debt burden might allow peers to focus on organic growth. For example, BCE has upped its capital expenditure plan in the last few years to improve its network infrastructure.
Telecom companies pay stable dividends due to their relatively higher cash flow predictability. Rogers pays dividends that yield 3%, whereas BCE and T yield 6% and 5%, respectively.
Valuation and conclusion
On the valuation front, Rogers stock trades at 19 times earnings compared to the industry average of 22x. This indicates its relatively discounted valuation and investors’ lower growth expectations.
The scale in the cable business and wireless subscriber growth will likely be key growth drivers for the company going forward. It will be interesting to see how this telco expands in the West and the synergies play out in the long term. At the same time, whether its debt acts as a growth pedal or burden will also be important to watch.
