QUEBECOR INC -CL B QBR.B
August 03, 2017 - 9:49am EST by
obvious617
2017 2018
Price: 43.15 EPS 2.9 3.29
Shares Out. (in M): 122 P/E 16.2 14.3
Market Cap (in $M): 4,139 P/FCF 0 0
Net Debt (in $M): 4,387 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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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

·

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

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    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

    ·

    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

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