Cogeco Growth Plans Focus on US Acquisitions

Cogeco Communications is the eighth largest cable operator in North America. It is a leading communications company, providing internet, video, and telephony services to its residential and business customers. It is a subsidiary of Cogeco Inc. which owns a 32% stake in the company. The company operates as Cogeco Connexion in Canada, and Atlantic Broadband in 11 US states. 

The cable company operates through two segments Canadian broadband services (58% of LTM adjusted EBITDA) and American broadband services (42%). The company owns extensive two-way broadband fiber networks, 16 data centers, and spectrum licenses of significant capacity which has helped the company to retain a leading position. It serves more than 1,200 communities across Canada and the US. The company has a presence in Canada (60% of revenues), the USA (39%), and European (1%) markets.

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Revenue Growth & Market Exposure

With more than six decades of existence, today, Cogeco Connexion is the second largest cable operator in Ontario and Quebec while Atlantic Broadband is the ninth largest cable provider in the US. They cater to more than 2.7 million households and 340,000 businesses providing Internet, video service, and telephony services to customers.

Given the company’s strong presence in North American markets and superior internet speeds and video services, it has developed sticky customer relationships. Cogeco is in a good position to cross-sell its services to existing customers and attract new customers. It is targeting growth through value-added services such as high internet speeds, superior video platform, new intelligent in-home Wi-Fi features, and the IPTV platform. 

The cable operator has planned to prioritize capital expenditure towards the acquisition of cable networks in the US, followed by maintenance and expansion of existing cable networks and wireless services in Canada. The company has a sound track record of successful integrations having acquired five broadband businesses in the U.S. since 2012.

Cogeco Communications is well placed to benefit from organic growth opportunities in non-metropolitan U.S. markets. It sold Cogeco Peer 1 to focus on its primary business and pursue organic investment and acquisition opportunities more aggressively. Cogeco Connexion completed the acquisition of DERYtelecom, the third largest cable operator in Quebec at the end of FY2020. The company continues to invest in upgrading and expanding its fiber-coaxial cable network and has committed to invest $450 million a year.

The company incurred higher Capex during the year due to increased equipment purchases and network extensions in Florida and Canada. The company is focusing on growth through acquisitions of broadband businesses, launching IPTV service in Canada, pursuing the Florida expansion, and extending coverage of internet service and network in underserved communities.

Cogeco expects to realize mid to high single-digit revenue and adjusted EBITDA growth in FY2021. It also estimates to incur 20% of revenues as capital expenses in the coming year.

Dividend

Cogeco Communications is a Canadian Dividend Aristocrat and a Dividend Achiever and ranks amongst the industry’s best dividend stocks with a current dividend yield of 2.3%. The company has consistently increased its dividend in the past, maintaining a dividend CAGR of ~16% over the previous decade.

The company last raised its dividend by more than 10% in 2019 and sports a reasonable payout ratio of 28% indicating enough room for future growth. It expects to maintain its payout ratio in the 24% range for FY2021. Cogeco Communications repurchased shares totaling $165 million in FY2020. The company has also renewed its NCIB to repurchase up to 1,809,000 shares over a one year period.

The business has strong organic growth opportunities in large non-metropolitan markets. Its expansion in Florida also provides opportunities for higher growth and stable cash flows. The company is in a good position to benefit from the increasing demand for internet services as people choose to stay more at home.

It is already delivering 1Gig Internet speeds in 75% of the Canadian footprint and over 90% of the U.S. footprint. Cogeco Communications is also well-positioned to partner with the Canadian government to expand connectivity in underserved and unserved areas. 

The company expects to realize low-double-digit FCF growth in FY2021. Strong free cash flow generation and industry-leading EBITDA margin should help Cogeco Communication maintain its streak of annual dividend hikes in the future. A long dividend-growth streak and reasonable payout ratio make Cogeco Communications a good dividend company.

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Competition

The company operates in a highly competitive industry that is prone to disruption from new technologies. BCE is Cogeco Communications’ largest competitor offering a full range of voice, Internet, and video services to residential and business customers in the provinces of Quebec and Ontario, while Telus competes in parts of Quebec.

Both of these integrated telecom players are in the process of deploying IP television services that will compete with the services offered by Cogeco Connexion. Shaw Communications’ Shaw Direct, competes for video customers throughout Cogeco’s Canadian footprint.

BCE, Shaw Communications, Telus, Rogers Communications, and Videotron are also promoting their wireless technology within Cogeco’s network footprint. In the US, the company faces intense competition from the likes of AT&T, Verizon, and Frontier Communications, Comcast, etc. Cogeco is well-positioned to act as a consolidator of regional cable operators.

Bottom Line

As one of the leading communications companies, Cogeco should benefit from the increasing demand for data and communication services. Cogeco Communications has attractive residential and business organic growth opportunities across all service categories.

Though increasing competition is an ever-present risk, its large footprint, competitive products and services, increased investment in futuristic Wi-fi and TV, strong cable operations in Canada and expansion opportunities in the US solidify Cogeco Communications’ position for future growth. 

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