Description
Fundamentals
· QBR is a Canadian cable/telecom/media company based in Montreal
o QBR's main asset is Videotron
§ Incumbent cable and challenger mobile businesses in Quebec
§ Contributes almost all the company’s value
o Own 68% of TVA
§ Broadcast TV / French language programming
o Other small print and digital assets
· Operating companies are under Quebecor Media Inc. (QMI), which is 81% owned by QBR (the public company) and 19% owned by Caisse de Depot
o CDP has been selling down over time. CDP ownership was 45% until 2012 and 25% until 2015
· Peladeau family controls QBR with super-voting stock
· Videotron demonstrates traditional cable fundamentals
o 2.8m HP growing ~1% annually
o 60% basic video penetration
§ Signs of improving video losses
§ OTT usage and cord cutting generally less pervasive in Quebec than in Anglo-Canada
o 60% HSD penetration of HP with continued growth
§ HSD base growing ~3% annually
· Net adds increasing on YoY basis in both 2015 and 2016
§ HSD ARPU grew 3.5% in 2016
· Good traction for higher priced 120mbps plan
§ Currently deploying Docsis3.1
· Overall, BCE is less focused on Quebec than Ontario/Toronto
o While BCE will ultimately roll FTTP in Quebec, that is still likely in a few years
§ For now, BCE limited to FTTN with speeds maxing out around 50mbps
o BCE more competitive with promotions and discounts against Rogers (Ontario) than against Videotron
· Launched wireless business in Quebec in 2010
o Facilities based operator in Quebec
§ 40mhz of AWS spectrum bought in 2008 auction
o 20-year roaming deal with Rogers
§ Deal struck in 2013
§ QBR roams onto RCI network outside of Quebec and RCI roams onto QBR in Quebec (rural areas)
· Manageable costs as estimated that ~80% of Quebec population doesn’t travel outside Quebec
o Market share in Quebec of ~15%
§ Steady gains of ~2ppt of market share annually
o Gained share through price aggressive strategy relative to three incumbents
§ Videotron mobile ARPU of ~$50 compared to Rogers of $60
§ As Videotron mobile base has grown, strategy is less focused on discount
· Mobile ARPU now increasing MSD
o Improving quality of mobile base
§ Early subs were lower end as network quality was weaker and handset selection was limited
§ Today, network is stronger and secured iPhone in 2014
§ As base migrates to higher-end, mobile ARPU increases
§ Mobile business is focused exclusively on postpaid
o Overall, mobile environment is less competitive in Canada
§ Rogers postpay ARPU increasing 1% annually
§ Industry can generally be described as a fairly cozy oligopoly
o Sub growth coupled with ARPU increases driving mobile revenue growth of ~20%
§ Enhances total company revenue growth
· Total revenue growth of ~4%
o Cable revenue growth of 1-2%
o Mobile revenue growth of ~20%
· Total EBITDA growth of ~5%
o Wireless business should show improving margins with greater scale and higher ARPU
§ Current wireless margin only in high teens
o Cable-only margins in low 50s%
§ Slightly favorable to RCI in high 40s%
· Total capital intensity should fall modestly over the next few yrs
o Current capex/sales in low 20s% and should fall to high teens %
§ Biggest driver is mobile network capex falling
§ Cable capex declining slightly
· QBR owns wireless spectrum outside Quebec that it will ultimately sell
o Spectrum value $500m-1b
o One slug of their spectrum holdings (10mhz of AWS-1 in Toronto) will likely be sold to Rogers in the next year
· Reasonable leverage target of 3-4x drives equity returns
o Current leverage of 3.8x
· At some point, QBR will buy out CDP’s 19% stake in QMI
o Could be facilitated by spectrum monetization
o Would simplify corporate structure and make more efficient
o Holdco discount often cited as reason for QBR’s relatively lower public market valuation
o Current structure makes it inefficient to pay appropriate dividends given leakage to CDP
§ Consequently, QBR dividend yield is relatively low in Canadian cable/telco space, which constrains QBR’s overall valuation
§ If QBR took out CDP, it would pave the way for greater shareholder remuneration
o Could also enhance stock liquidity, which could also help valuation
Risks
· Competition from Bell and Telus
o Risk that Bell starts deploying FTTP in Montreal in 2018
· Quebec discount could persist
o CEO is a separatist
· Regulatory
o CRTC recently ruled that Videotron could no longer zero-rate certain music content on its wireless service
Valuation
· QBR trades at a discount to Canadian and global peers
o At 7.5-8x EBITDA, QBR is at 1x+ discount to peers
o At 14-16x P/E, QBR is at discount to peers with Rogers/Telus/BCE at 16-19x
o QBR grows faster than Canadian peers
§ EPS growing LDD over the next few years
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I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Continued earnings growth, simplifying corporate structure, and implementing better shareholder return policy