CIBC’s Bob Bek names his two current ‘best buys’–both from the communications services sector. One, a diversified media company; the other, a telecommunications services provider.
Canadian telecommunications and media are currently in a state of flux, meaning investors have a chance to profit from the churn, suggests CIBC World Markets analyst Robert ‘Bob’ Bek.
Mr. Bek, who lives in Toronto, joined CIBC in 1993, where he currently serves as a managing director. Holding an MBA in finance from the University of Toronto and a chartered financial analyst designation, he is responsible for covering telecommunications stocks at the bank.
He considers both long-troubled media conglomerate Corus Entertainment Inc. (TSX—CJR.B) and the country’s No. 2 wireless (and Internet) provider Telus Corp. (TSX—T; NYSE—TU) to be “out-performers”, CIBC’s top recommendation.
A turnaround story to be told
Mr. Bek favours Corus Entertainment as a turnaround story, one investors have not yet warmed up to even though there is a “reasonable view of a FCF (free cash flow) tail to this mature business”.
Prior to the release of Corus’s second-quarter fiscal 2021 (period ended Feb. 28) on April 9, he said: “Sentiment should further improve as evidence of operating stability and recovery is booked, backstopped by Corus’s material FCF strength.
“While we still expect revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) to decline versus results a year ago, both should show meaningful sequential improvement over the past few COVID-19-impacted quarters.”
For example, Mr. Bek forecasts a second-quarter five per cent drop year-over-year in revenue, to $357.2 million, but that is still considerably more appealing than the 10 per cent year-over-year drop in the fiscal first quarter. (He also predicts a three per cent fall in FCF, to $63.2 million.) With regards to signs of operational health, Mr. Bek says: “In the key TV segment, we expect stability in subscriber revenue year-over-year on the back of the continued success of StackTV and Nick+ gains.”
StackTV is a suite of Corus linear networks and on-demand programming available to stream (for a price) to Amazon Prime subscribers. Corus CEO Doug Murphy said last June that the service had reached 200,000 subscribers. Nick+ is a package of Nickelodeon children’s programming also first offered on Amazon Prime. As of mid-February, Nick+ was added as an option to Bell Fibe TV and other services.
The company, spun off from Shaw Communications Inc. in 1999, owns the Global TV network, a portfolio of nearly 40 radio stations across the country, numerous specialty TV channels such as the Food Network, History, W Network, and Showcase.
Although Corus Entertainment had lopingly declined since a high range of about $25 a share in 2014, like most companies, its stock plummeted to a nadir during the initial COVID crash in March 2020, reaching $2.15 a share. (For context, share prices fell from close to $8 in May 2019 to about $5 at the beginning of February.)
The stock has nearly tripled since then, but as Mr. Bek points out: “The current trading multiples, at around five times fiscal 2022 estimated EBITDA, appear to suggest greater structural risk assumptions and post-COVID-19 pessimism than we believe is reasonable. The FCF yield on fiscal 2022 is an estimated 23 per cent, while the dividend yield of 4.2 per cent is a kicker.”
$1.3 billion was a head-turner
As for Telus, the analyst only warmed up to the stock recently, at the end of March. A major, $1.3-billion share offering announced March 25 turned his head. The offering is designed to support an opportunistic, accelerated infrastructure investment plan.
“The company intends to use $500 million to $750 million for additional capital spending in 2021, and $750 million to $1 billion in 2022,” says Mr. Bek. “We view the company’s decision to bring forward capital expenditures as a strong move to advance reach, improve efficiencies, and to take advantage of material potential changes in the competitive dynamic in the West.”
Not least of those changes is Rogers Communications Inc.’s plan to take over Shaw. On April 7, Shaw withdrew from a wireless spectrum auction, indicating the opportunities (and threats) ahead.
The analyst elaborates: “Telus remains the leader in the western market in attracting broadband subscribers, which is underpinned by advanced fibre coverage, bundling, and a robust customer-acquisition mechanism. Advancing its new fibre initiatives should see coverage closer to 90 per cent within two years. We also note the acceleration of government funding for areas currently under-served with high-speed broadband connection.”
Finally, Mr. Bek applauds the company’s non-traditional assets, such as its Telus Health medical tracker, as further engines for incremental growth.
“We encourage investors to use recent weakness in the shares as an entry point.”
This is an edited version of an article that was originally published for subscribers in the April 23, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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