Company Reports

Quebecor’s quarterly results reflected continued progress in integrating Freedom Mobile and expanding its presence as a national wireless carrier. The rest of Quebecor’s business continues to struggle amid a challenging landscape, as internet revenue growth slowed, and other businesses declined year over year. However, wireless is the most important growth business, and we remain confident in Quebecor’s ability to add both wireless and internet subscribers. We’re maintaining our CAD 40 per share fair value estimate and believe shares are undervalued.

After a promising third quarter—in what was Quebecor’s first since acquiring Freedom Mobile and gaining a national wireless presence—Quebecor’s wireless performance relative to competitors took a step backward during the fourth quarter. New customer additions, average revenue per user, or ARPU, and telecom profits were all weaker than we expected. However, the relative performance is generally consistent with our view that Quebecor’s national presence will bring much more competitive intensity to Canada’s wireless industry but won’t result in major market share shifts. We expect only modest sales growth for Quebecor over our forecast, yet the stock still appears materially undervalued relative to our unchanged CAD 40 fair value estimate.

Telecom dominates Quebecor’s business, making up more than 85% of revenue and nearly all of its EBITDA. The firm has historically focused its telecom efforts in Quebec, where it dominates the fixed-line market--providing broadband service to 60% of the homes its network passes--and holding its own in wireless against national providers. We estimate Quebecor has a 21% wireless market share in Quebec.

Quebecor had a stronger quarter of wireless subscriber additions than we anticipated in the second quarter since it acquired Freedom Mobile. The rest of Quebecor’s business mirrored recent trends, with a stagnant internet business and all other businesses slowly declining. However, wireless is easily the most important business line, and we expect both wireless and internet subscriber growth to accelerate as Quebecor continues to find its footing outside Quebec. We’re raising our fair value estimate to CAD 40 from CAD 38.

Telecom dominates Quebecor’s business, making up more than 85% of revenue and all of its EBITDA. The firm has historically focused its telecom efforts in Quebec, where it dominates the fixed-line market--providing broadband service to 60% of the homes its network passes--and holding its own in wireless against national providers. We estimate Quebecor has a 21% wireless market share in Quebec.

Quebecor has a long way to go before it’s a legitimate fourth national wireless competitor. While results are not yet impressive, the firm has already made several strides to improve the Freedom offering within that brand’s footprint. More important, because of the bargain price we believe Quebecor paid, we see the possibility of substantial upside—even assuming Quebecor remains a distant fourth national competitor—with lower risk. After getting our first look at the effect that Freedom has on Quebecor’s financials, we are raising our fair value estimate to CAD 38 from CAD 35.

Telecom dominates Quebecor’s business, making up more than 85% of revenue and all of its EBITDA. The firm has historically focused its telecom efforts in Quebec, where it dominates the fixed-line market--providing broadband service to 60% of the homes its network passes--and holding its own in wireless against national providers. We estimate Quebecor has a 21% wireless market share in Quebec.

Quebecor’s performance accelerated across its telecom business in the first quarter, but overall results were held back by rising media costs. With over 80% of the firm’s sales and all its profits attributable to telecom, the underlying trends were very encouraging. However, with the acquisition of Freedom Mobile at the beginning of the second quarter, prospective telecom performance will ride on much more than the narrower business that drove first-quarter results. We are maintaining our CAD 35 fair value estimate until we learn more specifics about the Freedom customer base and financial profile that Quebecor acquired. We will get insight into these components and the initial performance with next quarter’s results.

Telecom dominates Quebecor’s business, making up more than 80% of revenue and nearly 100% of EBITDA. The firm has historically focused its telecom efforts in Quebec, where it dominates the fixed-line market--providing broadband service to 60% of the homes its network passes--and holding its own in wireless against national providers. We estimate Quebecor has a 21% wireless market share in Quebec.

After two years and numerous twists and turns, Rogers and Shaw finally received the final approval needed to complete their merger, with consent from the industry minister for Innovation, Science, and Economic Development, or ISED. As previously agreed, Quebecor will take over Freedom Mobile, which comprises most of Shaw’s wireless business. The ISED formalized some requirements for Rogers and Quebecor, but most of these were consistent with terms the two companies previously stated were acceptable. Nothing in the approval changed our long-held view that the deal is valuation neutral for Rogers and positive for Quebecor. We already expected the deal to be approved, so we are maintaining our fair value estimates of CAD 73 for Rogers and CAD 35 for Quebecor.

As has been the case recently, there was not much interesting in Quebecor’s fourth-quarter results. The mobile and broadband customer bases are growing slowly while the firm manages declines in television and wireline phone subscribers and holds margins in a tight range. We expect the inertia to soon break. Either the approval of the Rogers/Shaw merger will result in Shaw’s Freedom Mobile going to Quebecor, or Quebecor will begin organic expansion into the national wireless market. Our model currently assumes the organic wireless expansion, and we are maintaining our CAD 35 fair value estimate. However, we expect a decision on Freedom Mobile any day, and if the deal is approved, we will revisit our forecast.

Shaw reported a generally poor fiscal first quarter, though it was largely consistent with recent trends. We expect the merger with Rogers—along with the divestiture of Freedom Mobile to Quebecor—to be approved, so we see these results as mostly relevant for Rogers and Quebecor. We’re maintaining our probability-adjusted CAD 38 fair value estimate for Shaw. We believe the reasoning of the Competition Tribunal in saying that the proposed transaction is not anticompetitive was solid and expect the decision to hold up on appeal, paving the way for merger completion. However, Shaw’s upside remains capped at CAD 40.50, and we believe there is significant downside if the Competition Bureau’s appeal of the Tribunal’s decision is successful.

Consistent with what we thought proper, Canada’s Competition Tribunal dismissed the Competition Bureau’s complaint following a trial that sought to block the merger between Rogers and Shaw, which also entails Quebecor acquiring Shaw’s Freedom Mobile wireless unit. However, the decision has been stayed pending the Bureau’s appeal. In appealing, the Bureau appears more interested in pursuing its agenda to block the merger than in looking out for consumers’ best interests. While the process will now be drawn out further, we still expect the deal to close and maintain our probability-adjusted fair value estimate of CAD 38 for Shaw as well as our fair value estimates for Rogers and Quebecor of CAD 70 and CAD 35, respectively.

Telecom dominates Quebecor’s business, making up more than 80% of revenue and about 95% of EBITDA. The firm has historically focused its telecom efforts in Quebec, where it dominates the fixed-line market--providing broadband service to 60% of the homes its network passes--and holding its own in wireless against national providers. We estimate Quebecor has a 21% wireless market share in Quebec.

After several quarters of mixed or mediocre results, Quebecor's third quarter in its telecom business was much stronger, most notably with a materially higher level of internet and wireless subscriber additions and growing revenue per user in those categories. The firm's media business—which makes up less than 15% of revenue—was weak, with a decline in advertising revenue as the biggest culprit. For Quebecor's stock, however, the uncertainty surrounding its future as a national wireless competitor is currently the biggest variable. We expect the Freedom Mobile acquisition to close, but even if it doesn't, we expect Quebecor to begin competing nationally by 2023. We are not making material changes to our forecast, and are maintaining our CAD 35 fair value estimate.

Rogers, Shaw, and Quebecor will take another shot at mediation in hopes of reaching an agreement with the Competition Bureau for approval of Rogers’ acquisition of Shaw, with Shaw’s Freedom Mobile wireless business going to Quebecor. We don’t have high hopes that mediation will result in a resolution, but Shaw and Rogers have both delayed the timing of their typical October earnings reports, which we see as a sign they hold out some hope mediation will be successful. There’s no change to our view that approval is ultimately more likely than not, and we are maintaining our fair value estimates of CAD 38 for Shaw, CAD 70 for Rogers, and CAD 35 for Quebecor.

While Quebecor’s revenue declined for the second straight quarter (down 1% year over year in the second quarter, attributable solely to a decline in equipment sales that don’t contribute to profits), its performance improved in several important categories. Most notably, mobile phone services revenue continued to grow rapidly, as customer growth accelerated and average revenue per user continues to increase after several years of consistent declines. However, Quebecor is largely in a holding pattern until there is a regulatory decision on the Rogers-Shaw combination, which would result in Quebecor acquiring Shaw’s Freedom Mobile if the broader merger is approved. We are maintaining our CAD 35 fair value estimate and think Quebecor will be in a much stronger position with Freedom Mobile than without.

Quebecor has agreed to buy Shaw’s Freedom Mobile for CAD 2.85 billion in a deal that is contingent on regulatory approval of the Rogers/Shaw merger, which we now think is more likely in light of this agreement.

We generally think all the major Canadian telecom companies have strong businesses and are worthy of investment at the right price. We favor the businesses of the three biggest wireless providers—Rogers, BCE, and Telus—the most. We see them as low-uncertainty stocks with stable businesses and narrow moats. Recently, the stock market has favored stability, to the benefit of the Big Three. BCE and Telus look fairly valued relative to our CAD 67 and CAD 32 fair value estimates, respectively. Rogers has only recently dropped materially below our fair value estimate due to uncertainty surrounding its Shaw acquisition, which won’t materially change our CAD 70 fair value estimate regardless of how the deal plays out. The selloff makes Rogers’ stock attractive currently, in our view.

Quebecor reported a decent first quarter that was generally consistent with our expectations and the recent muted trends. Telecom, which accounts for more than 80% of revenue and essentially all profits, posted decent results, with good mobile performance and stable internet revenue, while TV and voice sales continue to decline. In our view, most of the pressure on the stock is due to uncertainty surrounding the fate of Shaw’s Freedom Mobile, which has been at the top of the news this week as Rogers attempts to salvage its merger with Shaw.