Exemple Projet - Quebecor PDF

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Exemple de projet de valorisation pour la compagnie Quebecor...

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CFA Institute Research Challenge Hosted in

Local Challenge CFA Society Montreal HEC Montréal

January 24, 2014

Quebecor Inc.

Quebecor Inc. (TSX: QBR.B) Communications Sector, Telecommunications Industry Initiating Coverage with a BUY rating and a target price of $30.50

Recommendation: BUY 12-month Target Price: $30.50 Implied 12-month Total Return: 23.5%

Executive Summary 

With the stock price down 11% from its 52-week high, we strongly believe there is an attractive buying opportunity implying a potential 12-month return of ~23%. Quebecor Inc., through the 75.4% ownership of Quebecor Media Inc. (“QMI”), is one of Canada’s largest media conglomerates. With operations in telecommunications, publishing, broadcasting and retailing, Quebecor has set itself as a dominant player in the communications sector, particularly in the province of Quebec.



Justification of target price: Our target price stems from a Sum-of-theParts methodology which is based on a 6.5x Videotron’s core cable 2014E EBITDA, a DCF for wireless opportunity and a 4.0x News Media 2014E EBITDA. To further verify our valuation of Videotron, we perform a DCF of core cable assets to derive the segment’s intrinsic value. We apply a holdco discount of 10% and obtain a valuation of $30.50 per share.



Our investment thesis is articulated around three main pillars: 1) Quebecor has excellent operations; 2) wireless EBITDA and consolidated FCF will significantly improve over the next years; 3) discount to peers and recent correction present a good entry point.



Near term catalysts provide more upside than downside: 1) acceleration of FCF (cash flows from operations growing faster than Capex); 2) deleveraging from 3.7x net debt/EBITDA in 2012 to 2.8x in 2015E; 3) full equity ownership of its main subsidiary QMI (repurchase of Caisse’s remaining stake); 4) shareholder-friendly policies through higher payout ratio/share repurchase.



The Canadian telecom industry is led by three dominant players (BCE, Rogers, Telus). We believe competition will intensify in coming years and that telecommunication service providers will see an increase in their retention expenses and their costs of acquiring new customers. However, we are confident that Quebecor will not be as impacted due to its: 1) high brand recognition in its local market; 2) price leadership; 3) good bundling capabilities (low churn rate); 4) excellent customer service.



QBR’s risks are mainly comprised of: 1) BCE (main competitor) eating away market share; 2) maturity and competitiveness in the industry which is attacking margins and lowering subscriber growth; 3) new foreign wireless entrants.

Trading Performance (LTM) $29

10.0

Share Price

6.0 $23 4.0 $20 $17 Jan-13

2.0

Apr-13

Jul-13

Volume (in millions)

8.0

$26

0.0 Jan-14

Oct-13

Company Statistics Stock Price: $24.79 (as of Jan. 23, 2014) Shares Outstanding Basic: 123.51 mm Diluted: 123.96 mm Market Cap: $3.06B High – Low (52 weeks): $20.12 - $27.40

Valuation Metrics P/E 2013E: 16.0x 2014E: 11.9x 2015E: 10.2x

EV/EBITDA 2013E: 5.9x 2014E: 5.7x 2015E: 5.4x

This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. Valuation Summary (Price per share) Comparables EV/EBITDA 2014E (5.5x to 7x)

Financial Summary 2012A

2013E

2014E

2015E

2016E

$4 351.8

$4 467.8

$4 614.1

$4 771.5

$4 944.2

3.5%

2.7%

3.3%

3.4%

3.6%

EBITDA

$1 403.6

$1 447.8

$1 521.0

$1 593.8

$1 669.9

Margin

32.3%

32.4%

33.0%

33.4%

33.8%

4.6%

3.2%

5.1%

4.8%

4.8%

$1.59

$1.54

$2.08

$2.43

$2.68 10.4%

Current Price: $24.79

Revenues $22

Comparables P/E 2014E (13x to 16x)

$40

$27

YoY Growth

$33

YoY Growth

Adj. EPS YoY Growth

Sum-of-the-Parts

2016E Dividend Story

$22

$39

$22

0.1%

-2.8%

34.8%

16.4%

FCF per share

$1.95

$0.72

$2.40

$2.54

$2.87

Book value per share

$9.92

$9.61

$12.09

$15.02

$18.30

$48

Target Price: $30.50

1

January 24, 2014

Quebecor Inc.

Business Overview Figure 1: 2013E revenues 6%

4%

10%

60%

20%

Telecommunication

News Media

Broadcasting

Leisure and Entertainment

Interactive Tech. & Comm.

Source: Team estimates, Company data

Figure 2: Corporate structure Quebecor Inc.

Caisse

75.4%

24.6%

Quebecor Media

Telecommunications

News Media

Videotron Ltd.

Sun Media

Quebecor Media Printing

SuperClub Vidéotron

Interactive tech & com.

Quebecor Media Network

Nurun Leisure and Ent. Broadcasting

Quebecor Inc. (“Quebecor”, “the Company” or “QBR”), through the 75.4% ownership of Quebecor Media Inc., is one of Canada’s largest media conglomerates. Established in 1965 by Pierre Péladeau and headquartered in Montreal, Quebecor primarily operates in Canada. The Company has activities in cable distribution, telecommunications, newspaper publishing, production and distribution of printing products, television broadcasting, book and video retailing and music recording. The Company consolidates its operations under the following five business segments: Telecommunications, News Media, Broadcasting, Leisure & Entertainment and Interactive Technologies & Communications; with Telecommunications being the most important segment representing more than 60% of 2013E revenues and more than 89% of 2013E EBITDA (see Figure 1). The Company offers telecommunication services to residential and corporate customers through its Videotron subsidiary. In fact, Videotron provides a complete 4-services bundle to its customers comprising cable television, cable internet, cable telephony and, since 2010, a 4G mobile telephony solution. Videotron also offers video rental services through a franchise concept called Le SuperClub Vidéotron . As of December 2012, Le SuperClub Vidéotron had 205 locations in the province of Quebec with the majority of them offering Videotron’s suite of telecommunication services, thus representing a great synergetic and cost-effective distribution network for the Company. For the News Media segment, Quebecor has newspaper publishing operations around Canada which it conducts through its Sun Media subsidiary. With a 23.3% average market share in Canada in 2012, the Company is the second largest newspaper publisher in Canada in terms of weekly paid circulation. More precisely, the News Media segment published 36 paid-circulation dailies, 6 free commuter dailies and 229 community weekly newspapers, magazines and other specialty publications. The Broadcasting segment of QBR is represented by the 51.45% equity ownership of the TVA Group (publicly-traded entity), the largest private French-language television network in North America. The Leisure and Entertainment segment is controlled through the 100% ownership of the Archambault Group. Its activities consist primarily of retailing CDs, DVDs, books and games via the Archambault chain stores and also cover music recording and video production. Finally, through its Nurun subsidiary, Quebecor provides interactive technology and communication services like ecommerce solutions and online marketing programs in North America (see Figure 2).

Archambault Group 51.5%

TVA Group CEC Publishing TVA Publications Sogides Group

Source: Company data

Figure 3: Ownership summary Class B Ownership Holder Name

% Outstanding

Beutel Goodman & Co.

22.7%

Letko Brosseau & Associates

9.9%

FMR LLC.

9.9%

Jarislowsky Fraser Ltd.

8.0%

Other Shareholders

49% 100%

Total S/O (in mm)

84.39

Quebecor’s current strategy can be described using the following 4 pillars:  Mobile penetration – the main objective is to benefit from the low mobile penetration in the province of Quebec (67% vs 79% for the rest of Canada) to become a reputable player in the industry with the usage of the latest technology (4G network).  Bundling efforts – strategic goal emphasizing the importance of the low churn rate obtained with clients that have 3 or 4 Videotron services and the higher overall average revenue per user (ARPU) resulting from that same strategy.  Convergence of content and platforms – Quebecor wants to leverage its strong presence in the media and its complementary services (TVA Group’s exclusive programs, video-ondemand) to lower the churn rate and insist consumers to converge to its Videotron platforms.  Customer service emphasis – the Company wants to maintain its highly enviable customer service reputation. Management still wants to enhance the customer service experience by training its representatives to promote advanced products and services. QBR’s shareholder structure is comprised of two classes of shares: Class A shares are multiple voting shares carrying 10 votes per share and Class B shares are subordinate voting shares carrying 1 vote per share. As illustrated in Figure 3, the Péladeau family owns approximately 90% of the Class A shares and therefore controls ~74% of the voting interest. Class B shares are majorly owned by institutional investors like Beutel Goodman & Co. (22.7%) and Letko Brosseau & Associates (9.9%).

Class A Ownership Holder Name Les Placements Peladeau

% Outstanding 87.6%

Holding Peladeau Inc.

1.7%

Caisse de dépôt et placement

1.6%

Other Shareholders

9.1%

Total S/O (in mm)

39.12

100%

Sources: Bloomberg, SEDI

The Company’s management is composed of highly experienced professionals. Current CEO Robert Dépatie joined the company more than 13 years ago as Vice-President of marketing and customer service but has recently replaced Pierre Karl Péladeau as head of Quebecor. Mr. Dépatie has been a very important part of Videotron’s emphasis on customer service. After being named CEO of Videotron in 2003, the Company received the prize of Most Admired Telecommunications Company in Quebec on multiple occasions (source: Leger Marketing Survey). He also led the development of the division’s 4G network throughout Que bec in 2010. Under its leadership, Videotron saw its revenues grow from $700 mm in 2003 to more than $2.5B in 2012 while EBITDA grew from $100 mm to $1.1B during the same period.

2

January 24, 2014

Quebecor Inc.

Industry Overview and Competitive Positioning Figure 4: Canadian telecom industry market share (2012) 9%

As a media conglomerate, Quebecor operates in many spheres of the communications sector. However, as previously mentioned, most of its revenues and EBITDA come from its Telecommunications segment. That being said, the industry overview will focus on the analysis of the telecommunications industry.

6% 35%

25%

Rogers

Quebecor

Others

The Canadian telecommunications industry is dominated by three major players: Rogers, BCE and Telus. Between themselves, these three companies generate more than 85% of the total $43.9B revenues of the industry (see Figure 4) . That prevailing structure can easily be explained by the very high barriers to entry resulting from the massive investments needed to penetrate the industry. The necessary scale to become a competitive player is difficult to obtain and thus most of the small players like Wind Mobile and Mobilicity are currently in precarious positions. Adding to those colossal investments, new entrants are faced with high cost of acquisition (COA). In fact, because of the deep-rooted players, acquiring new customers requires more marketing efforts and potential discounts, which results in a higher COA. However, Quebecor’s wellestablished cable network (television, internet, telephone) and consumer base in Quebec were sufficient to help the Company grow its wireless network since 2010.

25% Bell

A Competitive Industry Led by Three Dominant Players

Telus

Source: 2013 CRTC Report

Particularity of the Quebec Market Figure 5: Wireless revenues from basic voice 3.6% 0.2% -1.5% -3.5% -4.7% $10,482

2008

$10,324

2009

$10,344

$9,856

2010

Basic Voice

2011

$9,511

2012

Figure 6: Wireless revenues from data usage 35.2%

23.1%

23.3%

$7,991 $6,492 $5,139

$4,169 $3,431

2009 Data

Even with a penetration rate of approximately 80% in Canada, there is still room for growth in wireless adoption. Compared to other developed economies where the same rate is often above 100% (namely UK, Germany, Australia), we can clearly observe a lagging market in Canada. The fact is, the penetration rate will be important for future revenue growth while smartphone penetration will be even more important as data usage increasingly contributes to wireless ARPU. As denoted, wireless revenues have grown 6.2% on a CAGR basis from 2008 to 2012 mostly resulting from increased data usage. Indeed, as illustrated in Figures 5 & 6 , during that period, revenues from data grew 23.5% while revenues from basic voice declined 2.4% on a CAGR basis.

2010

2011 Annual Growth

Source: 2013 CRTC Report

However, smartphone penetration has already reached important levels. In fact, Rogers, Telus and BCE had rat es above the 73% mark as of Q3/13. The 75% threshold is important to consider because it historically represents the inflection point in growth for new technologies ; this means that, after this point, growth is slowing considerably. In recent years, other revenue generating services like television and wired telephony were growing slowly (1.9% and -0.5% respectively in 2012), explaining why wireless becomes evidently more important for telecommunications service providers (TSP).

Over-The-Top Services Threatening Incumbents; Caveat for the Quebec Market

26.3%

2008

Growth Mostly Stemming from Wireless

Annual Growth

Source: 2013 CRTC Report

21.5%

The vast majority of Quebecor’s operations take place in the province of Quebec. That said, Quebec has a particular market in which the majority of the population is French-speaking. That creates an important cultural barrier that has to be address ed when content providers want to penetrate this market. There are also some important differences in terms of consumption habits; as mentioned, mobile penetration is lagging compared to other provinces, smartphone penetration is also inferior and average wireless ARPU is significantly lower ($51.95 vs $61.47 for the rest of Canada) which combined offer more room for growth.

2012

Many over-the-top (OTT) services are starting to threaten TSPs. An OTT service refers to the delivery of video and audio content over the Internet without a television provider being involved in the control or distribution of the content. The most popular OTT providers are Netflix and Hulu. In fact, by offering a flexible and cheap alternative to traditional TV, this type of service has attracted a lot of customers in the United States and is now a relevant threat for Canadian TSPs. However, since OTT providers are not delivering a lot of original content for the moment, media providers are still able to offer value-added channels to their customers. Other alternative services will also have to be considered in the near future: streaming-media boxes like the Apple TV or the Google Chromecast as well as Smart TV features offered in most televisions, namely in Samsung and LG products. These services, combined with OTT, are most likely going to create a cordshaving effect for most telecommunications providers. Nonetheless, there is a certain caveat to address associated with the Quebec market. Since OTT and alternative services provide content mostly in English, we believe that QBR will not be as impacted as its Canadian counterparts (see Figure 7).

3

January 24, 2014

Quebecor Inc. Intensification of Competition; QBR Less Impacted Due to Positioning Since the three previously stated players hold significant control over the Canadian market, the Canadian Radio-television and Telecommunications Commission (CRTC), which is Canada’s regulatory authority in this sector, is putting a lot of effort in maintaining adequate competition. We have witnessed some of those actions in recent years; in 2012, foreign ownership requirements were removed from the Telecommunications Act, thus opening the Canadian market for major international players.

Figure 7: Percentage of Netflix subscribers per province (2012)

26% 24%

23%

19%

18%

Also, in June 2013, wireless contracts were reduced from 3-year to 2-year agreements. Another example of increased competition stems from the recent decision of the three major TSPs to offer unlimited local calls; initially started by Rogers, the initiative was quickly followed by BCE and Telus. That being said, even if we believe competition will intensify in coming years causing an increase in cost of acquisition and higher retention spending, we are confident that Quebecor will not be as impacted due to its niche market, Quebec.

6%

Bundling and Cost-Cutting are Crucial for Industry Players With the information previously exposed, it is easy to observe why bundling is such a crucial strategy for industry players. Bundling consists in offering certain advantages (i.e. discounts, enhanced services) to customers who possess more than one service with the same company. With competition increasing and overall ARPU likely to grow slowly, bundling will help Canadian TSPs retain their customers. We observe that many strategic considerations could pressure margins in the upcoming years, therefore it will be essential for incumbents to establish cost-cutting measures.

Source: 2013 CRTC Report

Quebecor’s Competitive Positioning Figure 8: Videotron’s customer base mix of products 100%

Strong brand recognition in Quebec: Quebecor is a well-positioned player in its market. In fact, with Videotron having very strong brand recognition in Quebec, Quebecor possesses an enviable position. Indeed, the Company is currently the biggest pay television provider in the province and is quickly gaining market share in wireless with its enhanced network.

13%

90% 80% 70%

44%