Frank Mersch Rogers Communications (B) RCI.B-T COMMENT Jun 15, 2018

Likes it. Bought in a bit higher than it is today. Nothing wrong with the business, drop is just the culmination of many factors. Cheap valuation. Capital intensive. Lots of debt from Shaw and MLSE, plus tariff uncertainty. Over time, will be a great hold as you collect your nice dividend.

At these levels, this whole area is a buy. At washed-out levels.

The immigration slowdown has weighed on all telcos, but there will be growing demand for bandwidth, services and data. Also, Rogers and Telus will monetize their towers by selling interest in them and giving cash flow to investors. Will this money reduce debt? This is a positive idea. Rogers has a low PE vs. peers, but also carries a lot of debt. Long term, fundamentals for the telcos are good, but you have to wait. Meanwhile, collect the dividend.

No issue with defaulting on bonds from any of the big 3 telcos. For the equity side: not a lot of growth, price competition, CRTC always making new rules. 

Balance sheets have been a struggle for all the telcos; got caught when rates went up after spending so much. Less population growth was unexpected. Competition more intense. Dirt cheap at 7x PE for 2026, but no growth until then. There is MLSE upside.

All stocks stumble at times, and you want to buy them when they're cheap. Probably the darkness before the dawn for this name.

He still likes it and would buy more. High immigration is a tailwind since there are more customers for telecom. Cost cutting is going on and new technology is being implemented. There is lots of free cash flow and along with lower interest rates this will help to pay down debt. It has a decent and sustainable dividend.

Whole telecom space has been challenged, partly because of increased competition. No outlets to grow outside Canada. Profitability will be flat for some time. People own these names for the income. Rogers' purchase of Shaw gives it an edge on cost-cutting. Telus is the best operator. Rogers has the lowest dividend yield of the group.

Steer clear of the space. Even with an income stock you do want some growth, as it helps offset valuation risk elsewhere in the business.

Maybe tide is turning on competitive intensity in telecom sector, but not overwhelmingly obvious that's so. MLSE provides interesting optionality; hard to value sports franchises, but they are rather like collectibles such as race horses or art. In the meantime, he's taking the more conservative approach and focusing on dividend growth.

His preference is Telus.