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Date: 22/01/2014
Current Price: 25.43$
Recommendation: BUY
Ticker: QBR.B-CA (FactSet)
Target price: 33.57$
Highlights
We issue a buy recommendation with a target price of 33.57$ with a 26.58% upside potential. we believe QBR's is on his way to become a large
player in the telecom industry.
Main price growth drivers: (1) high subscribers growth; (2) high
discount compared to peers; (3) sustainable CAPEX level (depending on spectrum acquisition bid); (4) Stable debt/equity level; (5) sustainable low churn rate; (6) lower competition intensity
Possible National scale exposure in the upcoming years. We like the fact that Wind Mobile is sitting out of the Auction and that QBR's is negotiating with Mobilicity for possibly operating licenses outside of Québec.
Main risks issues are: rise in interest rates, global macro conditions,
arrival of new competition in the industry, political risk (higher taxes), industry demand and supply also have to be taken into consideration.
Change in forecast level of WACC
Change in forecast level of Terminal FCF Growth
0.00%
0.50%
1.00%
1.50%
2.00%
7.00%
45.61
50.06
55.25
61.39
68.76
7.50%
40.49
44.27
48.63
53.71
59.72
8.00%
36.03
39.26
42.96
47.23
52.21
8.22%
34.24
37.27
40.72
44.69
49.29
9.00%
28.61
31.04
33.78
36.89
40.44
9.50%
25.50
27.63
30.02
32.70
35.74
10.00%
22.70
24.59
26.68
29.02
31.64
Valuation DCF Multipliers Estimated price 40.73 26.4 Weights 50% 50% Target Price 33.57$ Source: Team estimatesQuebecor Inc. 52 Week Range
C$18.85-27.40 Average Daily Vol
(3Mo) 176,680.1 Market Value (M) 3,334 Shares Out (M) 123.5 Institutional Holding 67.9% Net debt/EBITDA 2014E 3.27 EV/EBITDA 2013E 6.2 EV/EBITDA 2014E 5.81 Total Debt/EV 61.41% ROE 2014E 11.48%
Source: Yahoo-Finance, Factset
[Communications Services
Industry, Technology Sector]
Quebecor Inc.
10 15 20 25 30 35Quebecor monthly stock prices
Closing Price Current Price Target Price 33.57$ 25.43$
26.58% upside
Business Description
Quebecor Inc is a holding corporation with a 75.4% interest in Quebecor Media Inc. The remaining 24.6% interest in Quebecor Media Inc is held by the Caisse de dépôt et placement du Québec. Quebecor is one of Canada’s largest telecommunications companies, specializing in telecommunications services, news media and broadcasting. Their head office is in Montreal and the company operates mainly in Quebec and Ontario. In 2013, the Company employed more than 16k persons and had more than 370,392 customers for its analog television service.QBR is a leader in the Canadian telecommunications industry. This segment accounts for more than 88% of the company’s total consolidated EBITDA. In addition, during the first quarter of 2013, mobile telephony passed the EBITDA break-even point for the first time. In previous years, QBR has been able to gain market share by strengthening the bundled offering and by improving content (e.g., TVA Sports). The company was also ranked as Quebec’s best retail telecom for the third year, reflecting the company’s commitment to providing the best possible experience of customer service.
In terms of market share, Videotron have been revealed as the true leaders of telecommunications in Quebec. They cover 83% of basic subscriptions to TV cable, a total of 1,839k subscribers. As for the internet, they have 77% penetration with 1,408k clients. Also, the residential line, which use to be Bell dominated, is now 70% in favor of Videotron in just 8 years. Finally, the mobile sector is the only trailing one, with 478k subscribers as of September 30, 2013.
The current strategy of the company can be divided into the following sections:
News Media segment. This segment has been generally declining over the past few years due to consolidation
in the retail industry. For example, in 2008 and 2013, there were major write-offs concerning Quebecor World and Quebecor News Media, which were mainly operating in the printed segments. In response to these changes, Quebecor Inc is now focusing on developing their internet presence through branded websites combined with a shift in marketing strategy toward other media.
Telecommunications segment. Capital investment to upgrade, expand and maintain its network to support
growth in its customer base and demands for increased bandwidth capacity, and mobility telephony infrastructure upgrades. Concerning the wireless data service, the challenge is to respond to the increasing volume demand.
Broadcasting segment. A shift towards more control of content and timing for users. The current strategy
consists of adjusting the current platform in order to respond to new consumer needs (mobile broadcasting, radio for mobile, video on demand). A good example would be the addition of TVA Sports from a multi-year sub-licensing agreement with Rogers. QBR will become the official French-language broadcaster of the NHL in Canada.
Shareholder structure. During 2012, there was a major change in the shareholder structure of QBR. Initiated
by the CDP transaction, the timeline of potential full ownership of QBR Media by Quebecor (2019E) is under way and fully financed by convertible debentures1. Market Share price has risen more than 50% since the initial stage of the share repurchase agreement. Pierre Karl Péladeau owns directly and indirectly all of Quebecor's class A shares. Technically, Pierre Karl Péladeau owns 27.1% of the Quebecor Inc shares and 64.7% of the voting rights (as of September 4, 2013) since the class A shares have 10 votes per share. Thus, this concentration is creating a controlling interest over the management team and the business. Institutional holdings represent 69.20% (top 10: 56.57%) of the entire market value. Insiders represent 0.50%. The remaining balance is held by domestic and foreign investors.
Management. Currently, the management of Quebecor consists of five persons. The new CEO is Robert
Depatie, who has been in charge of the company since March, 2013. Depatie holds a degree in marketing from the University of Western Ontario. He is a former executive of one of the subsidiaries of the company, and has over 11 years experience as CEO of Videotron.
1
500M$ convertible debentures, 6 years, 4.125% per year, right to convert prior to maturity(cash or share). 88% 7% 3% 2%
Figure 2: EBITDA
breakdown LTM
Telecom News Media Broadcasting Others Source: FactSet 62% 20% 11% 7%Figure 1: Revenue
Breakdown LTM
Telecom News Media Broadcasting Others Source: FactsetIndustry Overview and Competitive Positioning
Porter’s 5 forces analysis (Appendix 10)
High barriers to entry. The Canadian government has always
made sure that large local companies had most of the control in Telecommunications with quite strict laws. This gave a big edge to the big three and helped them keep costs high for smaller competition. Before the newly added cap, local companies paid more for roaming fees than the American companies borrowing in that same spectrum. This wasn’t such a big problem for Quebecor since they are mainly based in Quebec. Furthermore, until a short while ago, Quebecor wasn’t expected to try to reach a bigger market in other provinces, simply because they are well established in the province and they offer a wide variety of content for the French-speaking population. As of 2011, 78.1% of the population had French
has their native language, a little over 6 million people according to statistics Canada. The company offers a wide variety of French content. TV Shows like “La voix” or “Occupation Double” generate a lot of views (averaging 2.5m and 1m respectively). There’s no doubt that bundling services need to be offered to enter the market and attract customers, but it’s difficult when the appropriate content is not available.
Bargain power of suppliers. not very high for telecom devices, because there is a wide variety of phones
offered by various big companies. Anyhow, the bargain power of the government regarding the spectrum offering is relatively high.
Bargain power of buyers. low, since there are only a couple big companies in the market, they are able to
keep the prices high. BUT with the new laws introduced within the latest Speech of Throne, there are modifications that make it harder for them to have an oligopoly.
Oligopoly Competition. In a highly competitive market, our main competitors are Bell Media Inc, Rogers
Communications Inc and Telus Communications Inc. The biggest competition for Quebecor lies in the Canadian Telecommunications market. According to the CRTC report of the telecoms market in 2012, the price level of the communications market has increased by 2% compared to an inflation increase of 1.5%.
Threat of substitute. In telecommunications, the biggest substitutes are Skype and Viber for long distance
calls. There’s no doubt that voice-over-IP could also be another alternative. On the other hand, landlines are slowly being replaced by cell phones. There has been a reduction of 2.9% in landlines from 2010 to 2011 as opposed to an increase of 1.5% in the use of the mobile phone as a landline. Substituting for the written media sector is internet media. No more paper newspapers but tablet versions. The telecommunications sub-sector is going from wired phones to wireless phones. Skype and viber are replacing, although not perfectly, long-distance calls. TV substitutes – Apple TV, Netflix, internet will cause the TV sub-sector to continue to decrease. A very important threat of substitute for Quebecor is Bell Fibe. Bell Fibe is a new product offered by Bell which has a wireless connection for the Television. Fibe is the only service offering end-to-end connection via optic fiber directly to your home. This gives a better signal all through the house and can connect the TVs with all the other wireless devices in a house. We thought the final threat would be coming from WIND buying Mobilicity, but rumors are floating that Videotron could be the one picking up the Toronto-based company and their 175,000 subscribers. Ever since investors decided not to help WIND bid for the 700 MHz spectrum, we estimated that Videotron could extend their service past Quebec with this acquisition. They would become the new fourth operator that the government is desperately looking for.
Figure 3: Peers basics statistics for
2013E
EBITDA margin (%) NI margin (%)
QBR's
33.13%
-5.52%
RCI
39.23%
11.56%
BCE
39.60%
10.82%
Industry Cycle. The communications industry increased by 2.3% as of
2012, with a total revenue of $60.7G. The broadcasting industry was up 1.4% in 2012 at $16.8G, while the telecommunications industry was up 2.7% to $43.9G. Overall, the wireless industry showed a growth in revenue of 6.5% rising to $20.4G (The highest growth came from roaming cost). If we look further into the telecoms industry, we realize that the wireless Roaming cost had a CAGR 2008-2012 of 23.5% while
the stock wireless decreased in 2012 by -2.40%. We should also take
into consideration that roaming cost has been capped to $50 per subscriber, which will affect future wireless growth (the Roaming cost
represents only 7.7% of the total industry revenue). The Internet segment was up 5.2% to $12.2G while the Telephony segment was
down -6% to $11.3G. For further information regarding industry data, please refer to Appendix 9.
Competitive Advantage. There are many aspects that can explain
QBR's edge compared to their peers. One of them is the centralized
customer service they offer. Quebecor, like many other companies,
offer multiple services, but unlike the others, they offer eight weeks of extensive training for all new employees, so that they are able to answer all questions concerning all the products. This results in greatly improved customer service. 99% of the time, when a Quebecor customer calls customer service, his call is answered within 30 seconds (according to QBR's CFO).
''
Not surprisingly, Videotron was ranked the most respected telecommunications provider in Québec for the seventh consecutive year by Les Affaires magazine, based on a Léger Marketing survey''2. Also, this customer will not be transferred to different departments, but will have all of his problems directly solved through this one person who responds. Another of Quebecor’s strong competitive advantages consists of their bundlingeffect. Over the years they have been gaining a lot of three- and four-services customers (high margin ) and losing one- and two-services customers (low margin customers). Those customers result
in a high profit margin as opposed to the 1 & 2 services bundling, which now represent less than 20% of their sales. Quebecor has also put a lot of effort into diversifying and upgrading their TV content over the years. They now own new specialized channels such as TVA
Sports and their own movie distribution program (Illico illimité). TVA
is the single most-watched TV channel in the province of Québec with a share of viewers up to 32% . This gives them leverage to produce strong and good content on other platforms, for example, by providing extra material for Occupation Double or Loft Story on the internet for those who are also using the Quebecor wireless connexion. To demonstrate the impact of QBR's bundling
effect, it has been evaluated that 76% of new customers subscribing to the wireless service of Videotron were already existing customers of the company. Furthermore, 26% of new customers are taking more than
one service. This gives a noticeable advantage to customers in terms of prices and in terms of costs for Videotron. In the end, the numbers definitely say it all. Less than 30% are single service, while 13% are Quad and 45 to 50% have triple services. It shows what an advantage the bundling effect is. In the meantime, QBR is
currently negotiating with Apple in order to reach a deal to offer the Iphone to their customer base, which
could attract even more customers.
2 Vidéotron press release, January 8, 2013.
4.70% 6.20% 4.10% -4.80% -6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00% 8.00%
Communications Industry
2008-2012 Revenue CAGR
Industry Revenue … Source: CRTC 1.40% 2.70% 5.20% -6.00% -8.00% -6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00%Industry Revenue growth
2012
Source of demand. Quebecor has a very specific
niche market by offering French services in the province of Quebec. This French-language
barrier might limit growth, but it is also a protection against outsiders (Netflix). Most of
the population of Québec speak only very little English and Quebecor has learned how to leverage this to their advantage. First, their Illico Illimité service makes a huge variety of movies in French available to any customer. This is also a way of protecting themselves against the threat of Netflix or even the United States TV channels. As for the wireless segment of the company, they are able to offer very competitive products because of their new entry in the market. Their
prices are lower than their competitors which increases the demand for their products. The level of
subscription to a telephonic service industry including bundling went up 16.9% from 2008 to 20123. The amount of money generated from the Telecommunications sector went from 40.2 billion in 2008 to 43.9 billion in 2012, which shows an increase of 2.2% over those years. For further information regarding the industry sector, please refer to Appendix 9.
Forecast demand for product. Telecommunications and Broadcasting are growing sub-sectors of the industry.
Written media will decrease and slowly be replaced by internet media. We expect Videotron's demand to
grow significantly. The increasing demand is mostly due to the very competitive prices that Quebecor are able to offer with their bundling effect (TV Cable CAGR = 21% 2003-LTM, Internet CAGR = 14% 2003-LTM).
This also has an effect on the entry barrier for competitors. In the most recent example, T-mobile, an American company who wanted to enter the Canadian telecommunication market, decided otherwise after observing the bundling advantages our Canadian companies had. They have also expanded the horizon of their Broadcasting services, which makes them more competitive not only against Canadian broadcasting companies but also against the US TV channels and Netflix.
Regulation. The two-year contract cell phone plan is possibly a good opportunity to acquire more customers
because QBR has been stealing market share in the mobile industry since inception. Management doesn’t consider these changes as new threats since quality retention(3&4 services) is strong and growing.
Throne Speech. Canada is one of the developed countries with the highest monthly invoices for wireless
phones. The Canadian government wants to make competition grow . It estimates that this would make prices go down 20%. As stated in the 2013 Speech from the Throne, the government is planning to reduce costs for
families by encouraging some bundling for entire families, and by improving the telecommunication network
for families living in a more rural environment4.
Forecast supply 700 MHz.QBR's mobility segment is a major weakness in their network quality compared to
their peers. Their competitors have had more time to invest in their infrastructure since they have been in the
business longer. In fact, the difference in network quality explains QBR’s more affordable price. This brings us to the importance of the 700 MHz Spectrum auction for QBR in order to improve their network quality. First, it will be the most powerful spectrum on the market, giving the strongest signal to the wireless carrier owning it. Furthermore, it is much easier to deploy and can reach a wide range of territory with each antenna. Videotron is among the 14 bidders for this auction and it would definitely reinforce their wireless telephone services. Management does not intend to issue new debt or equity in order to acquire additional spectrum.
3 QBR's compay report, 2013
4 http://www.speech.gc.ca/fra/discours-integral
QBR's estimated growth
2013E
2014E
Wireless ARPU growth
20% 20%*
Wireless Subscribers growth
10% 8%*
Telephony ARPU growth
-0.50%
-0.50%
Telephony Subscribers growth
2%
2%
Internet ARPU growth
4%
4%
Internet Subscribers growth
2%
2%
Cable TV ARPU growth
2%
2%
Cable TV Subscribers growth
1%
1%
Investment Summary
Good entry point. We issue a BUY recommendations for QBR with a
target price of 33.57$ and a 26.58% upside potential from current price level. QBR's has strong position on domestic market and they have been consistently adjusting and satisfying customer's demand by diversifying their services offering.
Good market prospects. We believe the company is well positioned in a growing market and that the
business model is evolving to adapt to current industry trend. As a matter of fact, the company is aiming at upgrading his wireless segment while maintaining tight cost control concerning the News Media segment. Therefore, we forecast a wireless customer base growth up to 855k by 2018E(please refer to appendix 2 and Financial Analysis section for more information). We believe QBR's competitive pricing strategy and favorable bundling effect will keep adding more customers in the upcoming years. When analyzing the current industry, we believe the competitive intensity is favorable for growth since there is less company bidding in the 700mhz
auction (Wind exit the auction). Plus, QBR could initiate expansion measure to gain national exposure for his
wireless division (Ongoing negotiation with Mobilicity).
Source: Team Estimates, National Telcos data
As a matter of fact, QBR's churn rate is the lowest compare to his peers. Mainly due to his superior client
services, QBR was ranked the most respected telecommunications provider in Québec for the seventh
consecutive year by Les Affaires magazine, based on a Léger Marketing survey. Plus, the company is subject to the french speaking barrier that act as a protection against outsiders, which limit growth but also reduce risk.
Valuation methods. We derived our target price by combining DCF valuation and multiple pricing with equal
weights. We believe the company will experience significant EBITDA growth mainly due to customer base
growth. Concerning our Multipliers approach, we believe that the peer group was appropriately chosen (S&P
500 Telecom for US exposure and ''BCE,RCI,T'' for national exposure).
Financial position. We like the fact that there are no significant debt repayment upcoming. We then believe
the company will experience higher than usual CAPEX expense, mainly related to Wireless infrastructure acquisition (and possible company acquisition). Plus, we believe that the share repurchase from CDP from 45.3% to 24.6% of QMI(holding by CDP) will add significant value in the upcoming years to our analysis.
Investment risks. Besides the influence of Global macro (GDP, possible lower demand, taxes) we would like to
highlights our main preoccupation concerning the upcoming rising interest rates environment. Since Telecoms companies are negatively correlated with interest rates, we could expect sell-off on telecoms stock if interest rates were to raise. On the other hand, mainly high-yield dividend paying companies would to subject to this correction (which is not the case for QBR's). We identify main risks in the investment risks section.
Valuation DCF Multipliers
Estimated price 40.72 26.40
Weights 50% 50%
Target Price 33.57$
Valuation
We have considered two approaches to valuing QBR – the Discounted Cash Flow (DCF) model and comparable company multiple pricing.DCF Valuation. We used the Discounted Cash Flow Model:
Free Cash Flow to the Firm (FCFF), as we believe that this method is suitable since we forecast significant capital structure change in future years. According to our DCF analysis, we expect the target price of $40.72 to be reached (For complete calculation, please refer to appendix 5). The model is sensitive mostly to the following factors.
Sales. The anticipated growth in sales is based on historical industry growth according to different segments. We
analyzed all available CRTC growth rates and CAGR to identify
current industry trends. Then, taking all factors into account,
we established our own forecast (adding a premium on the wireless revenue segment mainly due to the strong historical growth and strong customer retention compared to peers). For the extended analysis and data, please refer to Appendix 2 of the detailed income statement.
Capex. Due to the forthcoming spectrum acquisition and the possible acquisition of Mobilicity (which we did
not add in our forecast), future capital expenditures will be significant. These assumptions are all based on feasible information and are currently ongoing. Those expenditures (mostly 2014E), will average 800M$ per year(2013E-2018E).
WACC. The cost of equity was calculated using the CAPM model. We
used the 10-year government bond risk-free rate of 3.19% and a beta of 0.75 (which was regressed against the S&P500/TSX index). The market risk premium is equal to 9.37% (based on the historical 8-year period). The after-tax cost of debt was calculated at 5.56% considering a 25% tax bracket for 2013E. Cost of debt was estimated using LT interest / LT debt 2013E. The value we obtained was a 8.22% WACC. For more details about the components of WACC and its assumptions please refer to Appendix 6.
Multiples. Having previously chosen the appropriate peer group as the
benchmark (S&P 500 Telecom Service and ''BCE,RCI,T''), we conducted multipliers pricing using both benchmark P/S, EV/EBITDA and P/CF all based on QBR's historical median discount (2008-2012). Then we analyzed the average current discount obtained from our 2013E-2014E forecasts. However, we didn't take P/CF and P/S into consideration since we believe the EV/EBITDA is more appropriate considering his neutral effect regarding peers capitals structure. In any case, there was a long-term discount observed on QBR's market price relative to its peer group in the past. The median historical discount amounted to 7.47% for EV/EBITDA (compared to S&P 500 Telecom services), and also 6.41% for EV/EBITDA (compared to BCE,RCI,T).
Our 2013E-2014E concerning the EV/EBITDA was currently trading at
9.27% above its median historical discount when compared to the S&P
500 Telecom service and 8.38% under its median historical discount when compared to local peers (BCE,RCI,T). We believe an EV/EBITDA of
2013E: 6.2, 2014E: 5.81 is undervalued compared to national peers (2013E: 7.2, 2014E: 6.9).
We treat both EV/EBITDA equally in our valuation, and we assigned equal weights for the years under consideration. The price we obtained in such a combination equals $26.40, giving $33.56 when combined with
the DCF using a 50-50 weighting procedure. For complete analysis, please refer to appendix 8. Sum of PV of Unlevered FCF 3,294,406
PV of Terminal Value 8,163,139 Enterprise Value 11,457,544
+ Cash and Equivalents 350,000
- Debt 5,125,500
Minority Interest (24,6% Caisse) 1,643,783 Equity Value 5,038,261 Oustanding Shares 123,700
DCF Value per share $ 40.73
Components of WACC
Risk free rate 3.19%
Beta 0.75
Market Risk Premium 9.37%
Cost of debt 5.56%
Source: Team estimates, market data EV/EBITDA 2013E 2014E Canadian Telcos BCE Inc 7.4 7.1 Rogers Com 7.2 6.9 TELUS 7.5 7.1 QBR's 6.2 5.81 Shaw 5.3 5.2 Median 7.2 6.9
Source: FactSet, Team estimates
EV/EBITDA Valuation Price Ponderation Vo QBR's vs S&P 500 Telecom Service $ 24.06 50% Vo QBR's vs BCE, RCI, T $ 28.74 50% Vo QBR's $ 26.40 Source: Team Estimates, FactSet
Financial Analysis
ARPU.
W
e expect the ARPU to increase due to increases in the price and quality bundling. We believe that there is a chance that QBR will be ableto secure more wireless subscriptions nationally by purchasing Mobilicity. However, we did not include such acquisition in our 2014E. Moreover, QBR's continued focus on the ARPU is expected to result in slower short-term growth but should drive longer-short-term growth of revenue and EBITDA5. In any case, as of Q3, the wireless average monthly ARPU was
$41.55 (+0.5%). Compared to their peers (as of Q2, BCE: $56.85, T: $61.12, RCI: $59.1), “the lower ARPU compared with the incumbents is
a result of Vidéotron’s lack of higher data ARPU from smartphone customers; however, the company is striking a balance between customer growth and price discounting,” says Desjardins securities analyst Maher Yaghi.
Regarding the wireless segment, since roaming costs are now limited to
$50 per month, we expect future growth to be mainly driven by customer acquisition rather than ARPU increase (For further details
concerning industry data and roaming cost margins, please refer to Appendix 9). However, we forecast the wireless ARPU in 2014E to be:
$42.20, 2015E: $44.73, 2016E: $47.41. In any case, we maintain the view
that slower growth in other segments will maintain sustainable overall ARPU growth (Please refer to Appendix 2 for a complete analysis of ARPU growth and subscriber growth).
Earnings. The year 2012 was a record in terms of revenues and EBITDA for
the telecommunications segment. The realised EBITDA CAGR in the years
2003-2013 was 16% and revenue CAGR for the same period was 12%.
These impressive results were mainly driven by the enormous growth in the mobility division, which passed the EBITDA breakeven point in Q1
2013. Concerning the other business segments, EPS is not stable over time since QBR is experiencing several write-offs from their News Media division (Q3 write-off: -$305.8M, LTM NI: -198M). We are expecting
steady growth of earnings in the longer term starting from 2014E, CAGR
2014E-2018E: 8.61%.
Medium- and long-term margin levels. Although historically QBR margin
levels were volatile as it was operating in different industries (from printing to telecommunications), we will focus on the telecommunications margin in our analysis since we believe that future growth depends on it (historically 2009-LTM). Gross margin and EBIT margin have been declining since 2009 (Gross:24.80% to 18.46%, EBIT: 24.62% to 18.46%). However, the EBITDA margin managed to sustain
and stabilize during the same period (33.73% to 32.25%) due to good
management and tight cost control. As mentioned above, the NI margin is subject to several write-offs, so we will focus on the EBITDA margin. We expect the EBITDA margin to be 33.13% in 2013E and to grow sustainably through every year of the forecast to the level of approximately 35.69% in 2018E, which should lead to a
2013E EBITDA of $1439.55M to a 2018E EBITDA of $1950.25M
5 Scotia bank capital investment report 0.00% 10.00% 20.00% 30.00% 40.00% 2010 2011 2012
Lower ROE compared to
peers
MEDIAN PEER ROE -5.54% 9.46% 24.46% 39.46% 54.46% 69.46% 84.46% 99.46% 0 1000 2000 3000 4000 5000
6000
Stable margins (Millions)
Revenue EBITDA Margin
NI Margin -2000 -1500 -1000 -500 0 500 1000 1500 2000
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E
Cash Flow Pattern
CFO CFI CFF
Dupont Analysis. In the historical period analyzed, QBR'S ROE
declined (2009 ROE 26.87%, 2012 ROE 14.34%). Previously, the main drivers of such levels were a decline of 39.22% of NI (2009-2012), compared to a decline of only 21.88% of total Shareholder's equity. When analyzing basic DuPont ROE, we realized that Asset turnover and Equity Leverage remains stable over time, only the net margin is responsible for the decrease in the ROE level. Our analysis indicates impaired ROE forecasts (2013E: -17.18%, 2014E: 11.48%, 2015E: 10.37%) mainly due to negative net income for 2013E and higher equity growth compared to NI growth. However, we evaluate the expected ROE to be less attractive than the historical performance of the company. We forecast ROE to be 10.44% in 2018E.
Cash generation ability. In the historical period analyzed
(2010-2012), QBR presented positive CFO and negative CFI due to a high level of CAPEX. Moreover, QBR's cash conversion cycle has been volatile over the years (2010: -17.50, 2011: 8.53, 2012: 19.99). We believe that CCC will continue to be volatile over the coming years (2013E: -0.25 to 2018E: 28.16) mainly due to a decrease of outstanding sales (higher receivable turnover) and a stable days payable outstanding. We also forecast the 2014E CAPEX to be relatively higher than usual since QBR is bidding in the forthcoming spectrum auction and also because we know that the company might be interested to acquire Mobilicity. We know
QBR has national wireless interest and we also know that the
CRTC wants a more competitive wireless market.
The company liquidity ratios have remained historically stable (current ratio 2010: 1.01, 2011:0.89, 2012:0.91). We expect the future level of liquidity ratios to increase slightly (2013E: 0.91, 2018E: 1.23). In any case, we believe that QBR's Cash ratio will decrease in 2014E due to Spectrum acquisition (CFO's refer to the fact that the company is planning to use liquid assets in order to finance the Spectrum auction). For more financial ratios, please see Appendix 4.
In previous years, the company financed its resources mainly from debt (long-term debt 2010: 3601M, 2012: 5025M) while equity decreased (2010: 1412M, 2012: 914M). In the period of the forecast, we predict the ratio of Net Debt/EBITDA to decrease over the years (2013E: 3.34, 2018E: 3.27). We believe in the ability of management to deleverage the company by sustaining EBITDA growth and by financing through external sources (common equity 2013E: 820M, 2018E: 1749M). We believe that QBR's financing structure will convert
back to their historical Debt/Equity level (2010: 257%, 2011: 266%, 2012: 554%). We forecast the Total
Debt/Equity level will decrease from 2013E: 629% to 2018E: 319% to reach historical equilibrium. Moreover, QBR is not facing any significant Debt maturity repayments over the next few years.
ROE -17.18%|10.44% ROA -2.64%|2.35% SALES/ASSETS 0.48|0.56 NI/SALES -5.54%|4.17% ASSET/EQUITY 6.51|4.44 Dupont Analysis Legend 2013E|2018E 0 500 1000 1500
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E
Relation of CAPEX to CFO
Investment Risks
MARKET RISK: The arrival of new competition - CRTC
The CRTC currently wants a more competitive telecoms market. The CRTC has been actively pressuring the big telecommunications companies into increasing competition. To achieve that goal, they have been encouraging the arrival of new companies. The CRTC has been introducing new laws to facilitate the insertion of new competitors and will continue to follow this path in the immediate future. This could mean that the major companies will have to adapt their strategies. The current companies need to adapt to this new environment where the government wants the users of telecom services to pay less for the same service. They have already started doing so by implementing the $50 cap associated with wireless roaming costs.
MARKET RISK: The auction of new spectrum
Quebecor Inc. must purchase a large part of the spectrum to be able to stay in the competition. Acquiring spectrum would largely improve the service offered by Vidéotron. The problem is that the undetermined
value that will have to be paid may affect the operating activities of the company or the shareholder structure.
ECONOMIC RISK: Global macro - Rising Interest Rates
Since telecom stocks are negatively correlated with interest rates, if interest rates were to rise, there would be a sell-off for higher yield companies and into bonds. This sell-off would drive down telecoms’ share price. Another effect would be that borrowing would become more expensive. In fact, telecom companies have a heavy debt load due to infrastructure and pension plans, and expensive debt will squeeze future profits even further.
ECONOMIC RISK: Global macro - Slower growth in the Canadian economy
The demand for Quebecor’s products depends largely on Canadian income. QBR's products, being mostly in the entertainment industry, are largely consumed when the population is in a period of surplus. Therefore it is very important for the major companies in the entertainment and telecommunications industries to have a growing economy.
ECONOMIC RISK: Saturation of market – lower demand
The telecommunications market has been growing over the past few years. Since 2009, the number of wireless phones has grown by 25.5%. The expansion possible for the number of wireless phones sold is directly correlated with the number of people in a given population. Consequently, the market will, at some point, be saturated.
POLITICAL RISK: Higher taxes for companies in Canada
Canadian companies are already subject to high taxes on their products. Taxes for corporations that operate in the province of Quebec are higher than elsewhere in the country. This means that Quebecor, which operates in Québec, has to be aware of this disadvantage, and to be careful that taxes may be increased from the Federal point of view. If this event was to occur, then they would be even more penalized because of the Quebec taxes.
Team disclosure:
We assign a BUY recommendation when a security is expected to deliver a return of 15% or greater over the next year. A SELL rating is assign when the security is expected to deliver a negative return over the next year, while a HOLD return implies flat returns over the next year.
Appendix 1: Statement of financial position
Balance Sheet
(in millions of dollar) 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E
Assets
Cash & ST Investments 248 146.7 228.7 350 160 451.92 474.516 498.24 474.52
Short-Term Receivables 594.9 632.4 589.3 550 605.00 373.03 413.33 455.27 547.20
Inventories 245.2 283.6 255.5 222 407 468.05 538.26 619.00 711.85
Other Current Assets 133 31.3 38 38 38 38 38 38 38
Total Current Assets 1,221 1,094 1,112 1,160 1,210 1,331 1,464 1,611 1,772
Net Property, Plant & Equipment 2,851 3,211 3,406 3,474 3,544 3,614 3,687 3,760 3,836
Total Investments and Advances 29 35 36 36 36 36 36 36 36
Intangible Assets & Goodwill 4,590 4,620 4,362 4,248 4,545 4,264 4,171 4,064 3,943
Deferred Tax Assets 9 20.6 23.9 132 24 24 24 24 24
Other Assets 93.8 57.9 69 66 66 66 66 66 66
Total Assets 8,793 9,039 9,008 9,116 9,225 9,336 9,448 9,561 9,676
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt 36.5 118.7 37 37 37 37 37 37 37
Accounts Payable 813 559 579 650 666.25 682.91 699.98 717.48 735.42
Income Tax Payable 33.6 2.7 33.9 33.9 33.9 33.9 33.9 33.9 33.9
Other Current Liabilities 275.1 547 575.7 552 568 584 600 617 634
Total Current Liabilities 1,158 1,227 1,225 1,273 1,305 1,337 1,371 1,405 1,440
Long-Term Debt 3,601.0 3,688.0 5,025.0 5,125.5 5,228.0 5,332.6 5,132.5 5,435.0 5,543.7
Provision for Risks & Charges 66.1 249.6 261.9 110 110 110 110 110 80
Deferred Tax Liabilities 582.5 592.5 594.7 844.3 601.5 326.53 412.05 79.84 30.27
Other Liabilities 543.5 410.5 356.1 363.22 370.49 377.90 385.45 393.16 401.03
Total Liabilities 5,951 6,168 7,463 7,716 7,615 7,484 7,411 7,423 7,495
Common Equity 1,412 1,426 914 820 1,114 1,314 1,445 1,590 1,749
Total Shareholders' Equity 1,412 1,426 914 820 1,114 1,314 1,445 1,590 1,749
Accumulated Minority Interest 1,430 1,444 631 580 496 538 591 650 715
Total Equity 2,842 2,871 1,545 1,400 1,610 1,852 2,037 2,138 2,181
Appendix 2: Income statement
Income Statement (in $) 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E
Telecom Segments Wireless Subscribers 136,100 290,600 402,600 483,120 579,744 666,706 733,376 806,714 855,117 Subscriber Growth 53.17% 27.82% 20.00% 20.00% 15.00% 10.00% 10.00% 6.00% Monthly ARPU $32.57 $32.32 $35.52 $39.07 $42.20 $44.73 $47.41 $49.78 $52.27 ARPU Growth -0.79% 9.01% 10.00% 8.00% 6.00% 6.00% 5.00% 5.00% Wireless Sub-total $53,200,000.00 $112,700,000.0 0 $171,600,000.0 0 $226,512,000.0 0 $293,559,552.0 0 $357,849,093.8 9 $417,252,043.4 7 $481,926,110.2 1 $536,383,760.6 7 Telephony Subscribers 1,114,300 1,205,300 1,264,900 1,290,198 1,316,002 1,342,322 1,369,168 1,382,860 1,396,689 Subscriber Growth 7.55% 4.71% 2.00% 2.00% 2.00% 2.00% 1.00% 1.00% Monthly ARPU $30.65 $30.16 $29.97 $29.82 $29.67 $29.67 $29.67 $29.67 $29.67 ARPU Growth -1.64% -0.63% -0.50% -0.50% 0.00% 0.00% 0.00% 0.00% Telephony Sub-total $409,900,000.0 0 $436,200,000.0 0 $454,900,000.0 0 $461,678,010.0 0 $468,557,012.3 5 $477,928,152.6 0 $487,486,715.6 5 $492,361,582.8 0 $497,285,198.6 3 Internet Subscribers 1,252,100 1,338,100 1,394,800 1,422,696 1,451,150 1,480,173 1,509,776 1,539,972 1,570,771 Subscriber Growth 6.43% 4.07% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% Monthly ARPU 42.88 43.48 46.15 48.00 49.92 51.92 53.99 56.15 58.40 ARPU Growth 1.38% 5.79% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% Internet Sub-total $644,300,000.0 0 $698,200,000.0 0 $772,500,000.0 0 $819,468,000.0 0 $869,291,654.4 0 $922,144,586.9 9 $978,210,977.8 8 $1,037,686,205. 33 $1,100,777,526. 62 Cable TV Subscribers 1,811,600 1,861,500 1,855,000 1,873,550 1,892,286 1,911,208 1,920,764 1,930,368 1,940,020 Subscriber Growth 2.68% -0.35% 1.00% 1.00% 1.00% 0.50% 0.50% 0.50% Monthly ARPU $43.73 $45.33 $48.52 $49.49 $50.48 $51.49 $52.26 $53.04 $53.84 ARPU Growth 3.54% 6.57% 2.00% 2.00% 2.00% 1.50% 1.50% 1.50% Cable TV Sub-total $950,600,000 $1,012,600,000 $1,080,000,000 $1,151,886,233 $1,228,557,310 $1,310,331,715 $1,397,549,133 $1,490,571,859 $1,589,786,300 OTHERS $151,200,000 $171,300,000 $119,000,000 $82,667,834 $57,428,326 $39,894,751 $27,714,392 $19,252,847 $13,374,715 Telecom Revenues $2,209,000,000 $2,431,000,000 $2,598,000,000 $2,659,544,243 $2,917,393,855 $3,108,148,299 $3,308,213,262 $3,521,798,604 $3,737,607,501 News Media $1,034,800,000 $1,018,400,000 $960,000,000 $904,948,940 $853,054,774 $804,136,472 $758,023,383 $714,554,642 $673,578,610 Broadcasting $448,200,000 $445,500,000 $461,100,000 $477,246,263 $493,957,916 $511,254,759 $529,157,283 $547,686,696 $566,864,951
Leisure and Entertainment $302,500,000 $312,900,000 $292,500,000 $273,430,010 $255,603,317 $238,938,863 $223,360,874 $208,798,516 $195,185,573 Interactive Technologies and Communications $98,000,000 $120,900,000 $145,500,000 $175,105,459 $210,734,858 $253,613,911 $305,217,734 $367,321,590 $442,061,963 Head Office and Intersegments -$92,400,000 -$121,800,000 -$142,400,000 -$145,248,000 -$148,152,960 -$151,116,019 -$154,138,340 -$157,221,106 -$160,365,529 Revenues $4,000,100,000 $4,206,900,000 $4,314,700,000 $4,345,026,914 $4,582,591,760 $4,764,976,285 $4,969,834,196 $5,202,938,941 $5,454,933,070 Cost of Goods Sold (COGS) $2,668,000,000 $2,865,000,000 $2,948,000,000 $2,905,479,389 $3,022,746,632 $3,115,982,820 $3,226,233,736 $3,357,160,120 $3,504,679,902 Gross Income $930,100,000 $829,500,000 $803,300,000 $1,439,547,525 $1,559,845,128 $1,648,993,465 $1,743,600,460 $1,845,778,821 $1,950,253,168
EBITDA $1,332,100,000 $1,341,900,000 $1,366,700,000 $1,439,547,525 $1,559,845,128 $1,648,993,465 $1,743,600,460 $1,845,778,821 $1,950,253,168
EBITDA Margin 33.30% 31.90% 31.68% 33.13% 34.04% 34.61% 35.08% 35.48% 35.75%
Depreciation & Amortization Expense $422,400,000 $512,200,000 $600,300,000 $686,000,000 $720,300,000 $756,315,000 $794,130,750 $833,837,288 $875,529,152
EBIT $909,700,000 $829,700,000 $766,400,000 $753,547,525 $839,545,128 $892,678,465 $949,469,710 $1,011,941,534 $1,074,724,016 Interest $282,700,000 $327,000,000 33350000000% $380,000,000 $414,200,000 $451,478,000 $492,111,020 $536,401,012 $584,677,103 Unusual Expense $4,200,000 -$17,800,000 $114,000,000 $675,000,000 $0 $0 $0 $0 $0 EBT $622,800,000 $520,500,000 $318,900,000 -$301,452,475 $425,345,128 $441,200,465 $457,358,690 $475,540,522 $490,046,913 Income Taxes $156,400,000 $141,400,000 $100,100,000 -$75,363,119 $110,589,733 $119,124,126 $123,486,846 $128,395,941 $132,312,667 Tax Rate 25.11% 27.17% 31.39% 25.00% 26.00% 27.00% 27.00% 27.00% 27.00%
Minority Interest Expense $236,500,000 $182,000,000 $99,800,000 $60,900,000 $130,000,000 $130,000,000 $130,000,000 $130,000,000 $130,000,000
Net Income $230,100,000 $201,000,000 $167,700,000 -$240,552,475 $184,755,395 $192,076,340 $203,871,843 $217,144,581 $227,734,247
Net Income $230,100,000 $201,000,000 $167,700,000 -$240,552,475 $184,755,395 $192,076,340 $203,871,843 $217,144,581 $227,734,247
Total Shares 130 128.8 132.2 123.7 142.7 138.5 136.8 134 132.2
Appendix 3: Statement of cash flows
Statement of cash flow
(in millions of dollar)
2010
2011
2012
2013E
2014E
2015E
2016E
2017E
2018E
Operating Activities
Net Income / Starting Line
230.1
201.0
167.7
-240.6
184.8
192.1
203.9
217.1
227.7
Depreciation, Depletion & Amortization
402.2
512.2
600.3
686.0
720.3
756.3
794.1
833.8
875.5
Deferred Taxes & Investment Tax Credit
100.0
159.1
43.1
100.7
100.7
100.7
100.7
100.7
100.7
Other Funds
222.4
146.2
186.2
184.9
184.9
184.9
184.9
184.9
184.9
Funds from Operations
954.7
1,018.5
997.3
731.1
1,190.7
1,234.1
1,283.7
1,336.6
1,388.9
Changes in Working Capital
-109.5
-152.2
125.3
-113.0
-223.8
187.6
-93.4
-105.2
-166.8
Net Operating Cash Flow
845.2
866.3
1,122.6
618.1
967.0
1,421.6
1,190.2
1,231.5
1,222.1
Investing Activities
Capital Expenditures From Fixed Assets
-707.1
-781.0
-710.6
-670.0
-1,246.0
-792.0
-831.6
-873.2
-916.8
Capital Expenditures from Others
-113.9
-91.6
-94.9
-100.1
-100.1
-100.1
-100.1
-100.1
-100.1
Net Assets from Acquisitions
-3.1
-55.7
-1,002.0
-4.0
-36.0
-4.0
-4.0
-4.0
-4.0
Sale of Fixed Assets & Businesses
0.0
12.0
8.4
136.7
10.0
12.0
8.0
10.0
12.0
Purchase/Sale of Investments
30.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Other Funds
54.7
3.2
17.2
25.0
25.0
25.0
25.0
25.0
25.0
Net Investing Cash Flow
-739.4
-913.1
-1,781.9
-612.4
-1,347.1
-859.1
-902.7
-942.3
-983.9
Financing Activities
Cash Dividends Paid
-12.9
-12.8
-12.6
-12.4
-12.5
-12.7
-12.8
-12.8
-12.9
Change in Capital Stock
0.0
-30.2
-34.7
83.2
12.6
36.7
-31.5
-128.1
-197.9
Issuance/Reduction of Debt, Net
-74.8
199.1
873.4
6.5
396.5
304.6
-68.7
447.0
267.7
Other Funds
-74.4
-205.7
-84.5
-121.5
-121.5
-121.5
-121.5
-121.5
-121.5
Net Financing Cash Flow
-162.1
-49.6
741.6
-44.2
275.1
207.1
-234.5
184.7
-64.6
Exchange Rate Effect
-1.0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Miscellaneous Funds
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Net Change in Cash
-57.3
-96.3
82.3
-38.5
-105.0
769.6
53.1
473.8
173.5
Appendix 4: Key Financial Ratios
Key Financial Ratios 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E
Profitability Ratios
ROE (%) 17.82% 14.16% 14.34% -17.18% 11.48% 10.37% 10.01% 10.15% 10.44%
ROA (%) 2.68% 2.25% 1.86% -2.64% 2.00% 2.06% 2.16% 2.27% 2.35%
ROS (%) 22.74% 19.72% 17.76% 17.34% 18.32% 18.73% 19.10% 19.45% 19.70%
Return on Invested Capital (%) 4.60% 3.97% 3.03% -3.69% 2.70% 2.67% 2.84% 2.87% 2.95%
Cash Flow Return on Invest Capital (%) 16.90% 16.90% 20.31% 10.40% 15.74% 21.89% 18.00% 18.11% 17.07%
Gross Margin (%) 23.17% 19.72% 18.46% 33.13% 34.04% 34.61% 35.08% 35.48% 35.75%
Operating Margin (%) 22.75% 19.72% 18.46% 16.83% 25.98% 25.90% 25.83% 25.69% 25.46%
Pretax Margin (%) 15.57% 12.47% 8.45% -6.94% 9.28% 9.26% 9.20% 9.14% 8.98%
Net Profin Margin (%) 5.75% 4.78% 3.85% -5.54% 4.03% 4.03% 4.10% 4.17% 4.17%
EPS (recurring) 1.78 1.46 1.88 EPS (basic) 1.79 1.57 1.33 -1.98 1.29 1.28 1.39 1.51 1.61 EPS (diluted) 1.76 1.56 1.28 Liquidity Ratios Current Ratio 1.01 0.89 0.91 0.91 0.93 1.00 1.07 1.15 1.23 Quick Ratio 0.80 0.66 0.70 0.74 0.62 0.65 0.68 0.71 0.74 Cash Ratio 0.21 0.12 0.19 0.27 0.12 0.34 0.35 0.35 0.33 Efficiency Ratios
Total Asset Turnover (ATO) 0.45 0.47 0.48 0.48 0.50 0.51 0.53 0.54 0.56
Fixed Asset Turnover 1.40 1.31 1.27 1.25 1.29 1.32 1.35 1.38 1.42
Working Capital Turnover 63.59 -31.56 -38.24 -38.45 -48.33 -739.26 53.31 25.34 16.47
Receivable Turnover 7.17 6.86 7.12 7.63 7.94 9.74 12.64 11.98 10.88
Days of Sales Outstanding 50.92 53.25 51.23 47.85 46.00 37.46 28.88 30.47 33.54
Inventory Turnover 14.59 12.77 13.16 12.17 9.61 7.12 6.41 5.80 5.27
Days of Inventory on Hand 25.04 28.58 27.73 29.99 37.98 51.25 56.92 62.91 69.30
Payables Turnover 3.91 4.98 6.19 4.67 4.87 4.71 4.77 4.85 4.95
Days of Payables Outstanding 93.46 73.30 58.97 78.10 74.89 77.50 76.56 75.25 73.70
Cash Conversion Cycles (Days) -17.50 8.52 19.99 -0.25 9.09 11.21 9.24 18.13 29.14
Credit Analysis Net Debt/EBITDA (x) 2.58 2.73 3.44 3.34 3.27 2.98 2.69 2.69 2.62 Net Debt/(EBITDA-Capex) (x) 6.90 7.80 8.08 3.31 4.94 3.05 2.75 2.75 2.67 Total Debt/EBITDA (x) 2.77 2.84 3.61 2.43 2.31 2.23 2.04 2.04 1.97 LT Debt/EBITDA (x) 2.74 2.75 3.58 2.41 2.29 2.22 2.02 2.03 1.96 LT Debt/Equity (%) 255.00% 258.60% 550.10% 625.06% 469.30% 405.83% 355.09% 341.84% 316.98% LT Debt/Total Capital (%) 71.31% 70.48% 84.09% 85.67% 81.96% 79.79% 77.59% 76.96% 75.63% LT Debt/Total Assets (%) 40.95% 40.81% 55.79% 56.22% 56.67% 57.12% 54.33% 56.84% 57.29%
Total Debt/Total Assets (%) 41.36% 42.12% 56.20% 56.63% 57.07% 57.52% 54.72% 57.23% 57.68%
Net Debt/Total Equity (%) 240.10% 256.60% 529.10% 586.89% 458.26% 374.25% 324.82% 312.83% 291.96%
Total Debt/Total Equity (%) 257.60% 266.90% 554.20% 629.57% 472.62% 408.64% 357.65% 344.16% 319.09%
Net Debt/Total Capital (%) 67.13% 69.94% 80.89% 80.44% 80.03% 73.58% 70.98% 70.43% 69.66%
Total Debt/Total Capital (%) 72.04% 72.75% 84.71% 86.29% 82.54% 80.34% 78.15% 77.49% 76.14%
Net Debt/FFO (x) 3.55 3.59 4.85 6.58 4.29 3.98 3.66 3.72 3.68
LT Debt/FFO (x) 3.77 3.62 5.04 7.01 4.39 4.32 4.00 4.07 3.99
FCF/Total Debt (x) 0.04 0.02 0.08 0.09 142.27 137.45 152.51 154.26 161.44
Appendix 5: DCF Analysis
DCF ANALYSIS
Terminal Growth Rate 1%
WACC 8.22%
2014 2015 2016 2017 2018 Term
Operating Income (EBIT) $839,545 $892,678 $949,470 $1,011,942 $1,074,724
- Income tax expense $110,590 $119,124 $123,487 $128,396 $132,313
Net operating profit after tax $728,955 $773,554 $825,983 $883,546 $942,411
+ Depreciation and amortization $720,300 $756,315 $794,131 $833,837 $875,529
- Capital expenditures -$700,000 -$792,000 -$831,600 -$873,180 -$916,839
+ Working capital changes -223.75 187.58 -93.43 -105.18 -166.84
Unlevered Free Cash Flow (FCFF) 749,032 $ 738,057 $ 788,420 $ 844,098 $ 900,935 $ 909,944 $
Sum of PV of Unlevered FCF 3,294,406 Multiple (From appendix 8) Price Ponderation
PV of Terminal Value 8,163,139 Vo QBR's vs S&P 500 Telecom Service $ 24.06 50%
Enterprise Value 11,457,544 Vo QBR's vs BCE, RCI, T $ 28.74 50%
+ Cash and Equivalents 350,000 Vo QBR's $ 26.40
- Debt 5,125,500
Minority Interest (24,6% Caisse) 1,643,783
Equity Value 5,038,261
Oustanding Shares 123,700
DCF Value per share $ 40.72
Appendix 5.1: Sensitivity Analysis
Change in forecast level of WACCChange in forecast level of Terminal FCF Growth
0.00%
0.50%
1.00%
1.50%
2.00%
7.00%
45.61
50.06
55.25
61.39
68.76
7.50%
40.49
44.27
48.63
53.71
59.72
8.00%
36.03
39.26
42.96
47.23
52.21
8.22%
34.24
37.27
40.72
44.69
49.29
9.00%
28.61
31.04
33.78
36.89
40.44
9.50%
25.50
27.63
30.02
32.70
35.74
10.00%
22.70
24.59
26.68
29.02
31.64
Appendix 6: WACC Analysis
WACC
Marginal tax rate 30.0%
Risk free rate 3.19%
Market risk premium 9.37%
Beta 0.75
Cost of equity 10.2%
Credit rating BBB
Credit spread over risk free rate 3.6%
Cost of debt 7.4%
After tax cost of debt 5.6%
Normalized Debt/Capital 42.9%
Weighted average cost of equity 6.6%
Weighted average cost of debt 2.3%
WACC 8.22%
Weighted Cost of Capital
Risk free rate 10-YEAR canadian government bond (3.19%)
Beta QBR's changes in price minus Rf changes in price regressed against S&P 500/TSX changes in prices minus Rf changes in price. Then, we took out all the stock splits from the regression and we obtained a beta of 0.75
Market Risk Premium monthly % change of the S&P/TSX minus the monthly % change of the Rf(10yr) on a 8 years time period
Cost of Debt Valued at 5.56% after tax. This factor was estimated using company data from financial statement (Q3) and from FactSet (Market Value of Debt). We calculated the cost of debt using the Interest paid 2013E on the Market Value of Debt for 2013E. Marginal tax rate The historical median effective tax rate was 27.11% (2010-2012). We fixed an estimated 25% for our 2013E.
Capital Structure During years 2013E-2018E, we belive QBR's will incur new debt and equity in order to finance upcoming acquisition. The target capital structure, based on historical DEBT/EQUITY, will gradually convert back to historical equilibrium (about 300% debt/equity). We used the Normalized Debt/Capital of 42.9% in our calculation.
Appendix 7: EBITDA Margin by Segment
Industry Segments Telecommunication News Media Broadcasting Leisure and Entertainment Interactive Technologies and Communications
Head office and
Intersegments Total
(in millions of CAN$) 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012
Revenues $2,430.70 $2,635.10 $1,018.40 $960.00 $445.50 $461.10 $312.90 $292.50 $120.90 $145.50 $121.80 $142.40 $4,206.60 $4,351.80
COGS 1,331.90 1,410.10 868.30 844.90 395.00 423.00 286.30 279.40 113.00 135.70 114.00 139.90 2,864.90 2,948.20
EBITDA 1,098.80 1,225.00 150.1 115.1 50.5 38.1 26.6 13.1 7.9 9.8 7.8 2.5 1,341.70 1,403.60
EBITDA margin 45.21% 46.49% 14.74% 11.99% 11.34% 8.26% 8.50% 4.48% 6.53% 6.74% 6.40% 1.76% 31.90% 32.25%
Industry Segments Telecommunication News Media Broadcasting Leisure and Entertainment Interactive Technologies and Communications
Head office and
Intersegments Total
(in millions of CAN$) 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E
Revenues $2,659.54 $2,917.39 $904.95 $853.05 $477.25 $493.96 $273.43 $255.60 $175.11 $210.73 -$145.25 -$148.15 $4,345.03 $4,582.59
COGS 1,388.02 1,522.59 796.36 750.69 437.83 453.16 265.23 247.94 163.30 196.53 -145.25 -148.15 2,905.48 3,022.75
EBITDA 1,271.53 1,394.81 108.59 102.37 39.42 40.80 8.20 7.67 11.80 14.20 0.00 0.00 1,439.55 1,559.85
EBITDA margin 47.81% 47.81% 12.0% 12.0% 8.26% 8.26% 3% 3% 6.74% 6.74% 0
Industry Segments Telecommunication News Media Broadcasting Leisure and Entertainment Interactive Technologies and Communications
Head office and
Intersegments Total
(in millions of CAN$) 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E
Revenues $3,108.15 $3,308.21 $804.14 $758.02 $511.25 $529.16 $238.94 $223.36 $253.61 $305.22 -$151.12 -$154.14 $4,764.98 $4,969.83
COGS 1,622.14 1,726.56 707.64 667.06 469.03 485.45 231.77 216.66 236.52 284.65 -151.12 -154.14 3,115.98 3,226.23
EBITDA 1,486.01 1,581.66 96.50 90.96 42.23 43.71 7.17 6.70 17.09 20.57 0 0 1,648.99 1,743.60
EBITDA margin 47.81% 47.81% 12.0% 12.00% 8.26% 8.26% 3% 3% 6.74% 6.74%
Industry Segments Telecommunication News Media Broadcasting Leisure and Entertainment Interactive Technologies and
Communications Head office and Intersegments Total
(in millions of CAN$) 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E
Revenues $3,521.80 $3,737.61 $714.55 $673.58 $547.69 $566.86 $208.80 $195.19 $367.32 $442.06 -$157.22 -$160.37 $5,202.94 $5,454.93
COGS 1,838.03 1,950.66 628.81 592.75 502.45 520.04 202.53 189.33 342.56 412.27 -157.22 -160.37 3,357.16 3,504.68
EBITDA 1,683.77 1,786.95 85.75 80.83 45.24 46.82 6.26 5.86 24.76 29.79 0 0 1,845.78 1,950.25
Appendix 8: Multiples
Benchmark S&P 500 Telecom
Service
Benchmark BCE, Rogers, Telus
Share Price (10JAN) $ 26.52 Share Price (10JAN) $ 26.52
Share out 2013E 123,700,000.00 Share out 2013E 123,700,000
EBITDA 2013E $ 1,439.55 EBITDA 2013E $ 1,439.55
P/S 2008 2009 2010 2011 2012 2013E P/S 2008 2009 2010 2011 2012 2013E
Benchmark P/S 1.02 1.06 1.27 1.29 1.38 1.63 Benchmark P/S 1.48 1.37 1.54 1.74 1.83 1.90
QBR's P/S 0.34 0.47 0.61 0.53 0.59 0.76 QBR's P/S 0.34 0.47 0.61 0.53 0.59 0.76
Discount 66.67% 55.66% 51.97% 58.91% 57.25% 53.68% Discount 77.08% 65.78% 60.39% 69.60% 67.82% 60.26%
MEDIAN of historical discount 57.25% Stock is historically trading at a 57.25% discount MEDIAN of historical discount 67.82% Stock is historically trading at a 67.82% discount
Current discount 53.68% Currently trading at 53.68% discount Current discount 60.26% Currently trading at 60.26% discount
Discount spread 3.57% Overvalued Discount spread 7.56% Overvalued
EV/EBITDA 2008 2009 2010 2011 2012 2013E 2014E EV/EBITDA 2008 2009 2010 2011 2012 2013E 2014E
Benchmark EV/EBITDA 5.04 5.43 5.89 6.22 7.23 6.06 5.77 Benchmark EV/EBITDA 5.71 5.29 5.82 6.78 6.95 7.13 7
QBR's EV/EBITDA 5.97 5.11 5.45 5.45 5.61 6.2 5.81 QBR's EV/EBITDA 5.97 5.11 5.45 5.45 5.61 6.2 5.81
Discount -18.45% 5.89% 7.47% 12.38% 22.41% -2.89% -0.72% Discount -4.49% 3.46% 6.41% 19.66% 19.24% 12.60% 16.98%
MEDIAN of historical discount 7.47% Stock is historically trading at 7.47% discount MEDIAN of historical discount 6.41% Stock is historically trading at 6.41% discount
Current Discount -1.80% Currently trading at 1.80% Premium Current Discount 14.79% Currently trading at 14.79% discount
Discount spread 9.27% Overvalued Discount spread -8.38% Undervalued
P/CF 2008 2009 2010 2011 2012 2013E P/CF 2008 2009 2010 2011 2012 2013E
Benchmark P/CF 3.75 3.55 4.27 4.4 4.77 6.77 Benchmark P/CF 4.93 4.56 5.64 6.59 6.48 6.97
QBR's P/CF 1.63 1.9 2.89 2.59 2.28 5.31 QBR's P/CF 1.63 1.9 2.89 2.59 2.28 5.31
Discount 56.53% 46.48% 32.32% 41.14% 52.20% 21.60% Discount 66.96% 58.36% 48.76% 60.68% 64.83% 23.82%
MEDIAN of historical discount 46.48% Stock is historically trading at 46.48% discount MEDIAN of historical discount 60.68% Stock is historically trading at 60.68% discount
Current Discount 21.60% Currently trading at 21.60% discount Current Discount 23.82% Currently trading at 23.82% discount
Discount spread 24.88% Overvalued Discount spread 36.86% Overvalued
QBR's vs S&P 500 Telecom Service Price Ponderation QBR's vs BCE, RCI, T Price Ponderation
Vo P/S 25.57 0% Vo P/S 24.52 0%
Vo EV/EBITDA 24.06 100% Vo EV/EBITDA 28.74 100%
Vo P/CF 19.92 0% Vo P/CF 16.74 0%
Vo $ 24.06 Vo $ 28.74
Valuation Price Ponderation
Vo QBR's vs S&P 500 Telecom Service $ 24.06 50%
Vo QBR's vs BCE, RCI, T $ 28.74 50%
Appendix 9: Communications Industry Overview 2011-2012
Wireless (46%) Revenue 20.4G, up 6.5% Revenue CAGR 6.20% Volume 27.9M, up 1.8% Volume CAGR 6.00% ARPU 60.70$ Industry EBIDTA 40.10% 2011 2012 CAGR Stock Wireless 9855.5M$ 9510.90M$ -2.40% Roaming cost (7.7% total) 1356.2M$ 1583.6M$Roaming growth 16.20% 16.80% Data 5066.4M$ 6257.9M$ Data growth 30.40% 23.50% Telephony (25.74%) Revenue 11.3G$, down -6% Revenue CAGR -4.80% volume -0.027 volume CAGR -0.016
Consumer volume CAGR
Vidéotron 1.70%
RCI -1.40%
Shaw -1.50%
Cogeco -0.40%
BCE 3.90%
Internet and Data (28.26%)
Revenue 12.20G$, up 5.2% Revenue CAGR 4.10% COMMUNICATIONS INDUSTRY 60.7G$, up 2.3% CAGR: 2.9% BROADCASTING 16.8G$(27.68%) , up 1.4% CAGR: 4.7
