RBC Capital Markets upgraded Quebecor (QBR-B.TO) to an “outperform” rating Wednesday, citing a “more attractive risk-reward set-up” with the company’s acquisition of the Freedom Mobile brand now more established.
In a note to investors, analyst Drew McReynolds raised QBR’s price target to $39 from $37, based on “an increase to medium-term wireless and Internet ARPU [average revenue per user] trajectories on the assumption of a more disciplined pricing environment beginning in 2025.”
Quebecor shares were up 3.4 per cent at $32.20 as at 10:30 a.m. ET Wednesday.
“Following a period of downward estimate revisions since the [Freedom] acquisition and what we believe are now lowered growth expectations for both inside and outside Quebec, we see the risk-reward set-up as more attractive,” McReynolds wrote.
Quebecor added Freedom Mobile to its stable to help resolve competition concerns about Rogers’ (RCI-B.TO) merger with Shaw Communications, and has been using its expanded market reach since then to put pressure on Rogers, BCE (BCE.TO) and Telus (T.TO), the established national wireless providers. Quebecor’s aggressive campaigns have helped it gain market share, but its lower-priced plans have limited ARPU and can translate to lower earnings potential.
Scotia analyst Maher Yaghi recently argued that Quebecor is unlikely to slow its strategy, with all telecoms pressured as a consequence, but in the weeks since observed that the Freedom brand had scaled back an offer that might have triggered another all-out industry price war.
Although McReynolds forecasts “a more disciplined pricing environment” in 2025, he still expects Quebecor’s “growth versus profitability balance to remain a work-in-progress.” Nonetheless, the 2025 context could mean “renewed growth” and potential multiple expansion from the present-day forward 12-months valuation of 6.2x (using the ratio of enterprise value to earnings before interest, taxes, depreciation, and amortization), McReynolds writes.
“In the absence of renewed growth and/or multiple expansion and even with rising capex, we still see some (albeit less) upside potential in the shares on the back of equity reflation driven by [free cash flow] generation and outright debt repayment given the relatively low dividend payout ratio.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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