Kevin Van Paassen
Cogeco Inc.'s publicly traded cable subsidiary, Cogeco Cable Inc. , offers analogue and digital cable, high-speed Internet, and telephony services to residential and commercial customers. It is the second-largest cable telecommunications company in Ontario, Quebec, and Portugal, with approximately 3.1 million revenue-generating units from almost 2.5 million homes that are passed by its network.
During difficult economic times, people generally look for small comforts and little "pick-me-ups" as they cut back on more expensive luxuries. Cable TV, Internet access, and services such as video on demand are now substitutes for an expensive night out. In this environment, we think that cable companies offer a nice mix of defensiveness and growth, and Cogeco Cable is simply a cheap stock in the right sector.
Today, Cogeco Cable trades at a discount to Rogers Communications Inc. . It carries a price/cash flow multiple of 5.3x, as measured by enterprise value divided by earnings before interest, taxes, depreciation and amortization (EV/EBITDA), compared with seven times for Rogers. This is despite Cogeco's higher consensus projected EBITDA growth rate (5.7 per cent in 2011, compared with 3.6 per cent for Rogers). Importantly, financial results are improving.
Narrowing the valuation discount relative to Rogers remains a two-pronged approach for management. First, there is plenty of room for Cogeco Cable to improve its penetration rates (which measure and compare the number of subscribers relative to homes passed by the company's installed network) relative to its well-known peer.
Currently, Cogeco Cable lags Rogers Communications in several key categories of penetration rate: basic video at 55 per cent, compared to 63 per cent; digital video at 34 per cent, compared to 47 per cent, and Internet at 35 per cent, compared to 45 per cent for Rogers. Increased penetration will come over time as marketing initiatives and service bundling continue to gain traction.
Second, the resolution of Cogeco Cable's difficulties with its Portuguese cable operations, known as Cabovisao, could be a major catalyst for multiple expansion. Cogeco Cable originally bought Cabovisao in 2006 for approximately 465.7 million euros, or roughly $660 million. Although lower cable and Internet penetration rates in Portugal originally presented a growth opportunity, competition from the two largest incumbents has been intense.
However, Cabovisao has finally shown some signs of stabilization. We believe that either fixing these operations, which have already been written off by $399.6 million, or selling them would provide a lift to the stock.
The company pays an annualized dividend of 56 cents per share, which yields approximately 1.6 per cent at current price levels. We think that the stock could move up if Cogeco can narrow the penetration rates relative to Rogers and either turn around or sell Cabovisao.
In any event, we believe that Cogeco Cable is relatively undervalued and that, over time, investors will be rewarded.
Gordon Pape