DBRS Confirms Rogers Communications Inc. at BBB, Stable Trend

DBRS has today confirmed Rogers Communications Inc.’s (Rogers or the Company) Issuer Rating and Senior Unsecured Notes rating at BBB with Stable trends. The ratings continue to be supported by the Company’s position as a leading wireless carrier and cable operator in Canada. The ratings also reflect the intensifying competitive landscape in both the wireless and cable segments, where it is becoming more challenging to grow subscribers while maintaining revenue per user. DBRS’ confirmation acknowledges mounting pressure on operating metrics and top-line growth in recent periods, balanced by the fact that key credit metrics remain reasonable for the current rating category.

In 2012, Rogers’ wireless segment revenue increased by 2% to $7.3 billion. Revenue growth has slowed from mid-single digit increases in recent years, primarily due to falling average revenue per user (ARPU) in contrast to industry trends and a deceleration of net wireless additions. Adjusted operating profit margins declined slightly over the period, primarily due to increased equipment subsidies associated with higher rates of smartphone adoption. In the cable segment, revenue remained relatively flat at $3.3 billion for the year as a moderate increase from Internet revenue was offset by the Company’s declining television subscriber base, likely attributable to the roll out and expansion of competitor offerings. Margins within the segment improved modestly, in part due to lower equipment costs as a result of fewer gross digital cable additions.

Rogers’ financial profile remained stable and consistent with the current rating category over the past year, based on the Company’s cash generating capacity and relatively steady credit metrics. However, DBRS notes that management continues to focus on increasing dividends and repurchasing shares. The Company increased total debt by approximately $850 million to $10.9 billion, resulting in net debt-to-EBITDA of 2.28 times (x) compared to 2.18x a year earlier. Interest coverage ratios have remained relatively stable despite moderate increases in debt largely as a result of declining interest rates. The higher debt balance over the last couple years has, however, contributed to lower cash flow after dividends as a percentage of debt, particularly when combined with higher capex, cash taxes and dividends.

Going forward, DBRS expects it may be increasingly challenging for Rogers to grow its subscriber base in the wireless and cable segments while maintaining current ARPU levels. Taking this into account, DBRS forecasts that revenue will increase modestly to the $12.5 billion to $12.7 billion range in 2012. Within the wireless segment, top-line growth should be driven by a moderate increase in wireless subscribers. The cable segment’s revenue is expected to remain flat as nominal price increases are expected to be offset by plateauing subscriber levels. DBRS expects EBITDA margins in 2012 to decline slightly as the Company experiences ARPU and handset cost pressures within its wireless segment. This should result in consolidated adjusted operating profits in the $4.8 billion to $4.9 billion range in 2012. DBRS believes Rogers will have to maintain its focus on preserving market share to rejuvenate subscriber growth while concentrating on efficiency and scalable benefits to adapt to the decreasing price environment.

In terms of financial profile, DBRS expects Rogers to remain fairly stable on the strength of its cash generating capacity. Cash flow from operations may decline to the $3.3 billion to $3.5 billion range in 2013 due to an increase in cash taxes (given that Rogers had utilized nearly all of its tax loss carry-forwards in 2012). Capex requirements are expected to increase modestly to the $2.1 billion to $2.3 billion range as the Company invests in wireless capacity upgrades and the construction of its new LTE network. Dividends policy is expected to remain consistent and result in a steady increase in cash outflow from the prior year. As such, DBRS forecasts that the Company will generate $300 million to $500 million of positive free cash flow before changes in working capital in 2012. DBRS believes Rogers may use free cash flow and some incremental debt to undertake further share repurchases, increase dividends and acquire spectrum later this year, while attempting to maintain credit metrics within a range consistent with the current rating category.

Despite the resilience of the credit, it should be noted that material deterioration in credit metrics, particularly free cash flow after dividends as a percentage of debt and gross debt-to EBITDA, resulting from significantly weaker than expected operating performance and/or meaningfully more aggressive than expected financial management could result in pressure on the ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.

The applicable methodologies are Rating the Communications Industry, Rating the Newspaper and Magazine Publishing Industry, Rating the Radio Broadcast Industry and Rating the Television Broadcasting Industry, which can be found on our website under Methodologies.