Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Quebecor QBR.B posted an annual revenue decline of 1.4% in the first quarter, primarily from lower wireline and media revenue. Adjusted EBITDA declined 2% in the period, as firmwide margins dipped only slightly to about 41%
Why it matters: As Quebecor continues to become a major wireless carrier across Canada, it must closely balance new customer additions and price. In its wireline business, competition remains fierce in Quebec, especially as competitor BCE has upgraded its network.
Quebecor added 54,000 wireless customers in the quarter, well above its fair share. By comparison, Rogers posted 57,000 wireless net adds and BCE saw a net decline of nearly 1,000. Quebecor’s average revenue per customer declined 4.5% from a year ago.Now operating in a more competitive wireline environment, Quebecor posted a net loss of 4,000 internet subscribers, and average revenue per subscriber declined 3%.
The bottom line: Our C$37 fair value estimate for narrow-moat Quebecor is intact. Its healthy wireless additions hint at success as it rolls out its low-cost services. As Quebecor builds out its network, we think it will need to raise prices to insulate profitability.
We forecast telecom segment adjusted EBITDA margins will decline to 46% by 2029 from 50% in the first quarter. It will have to choose which is more critical: profitability or driving customer additions via a low-cost wireless service. We don’t think Quebecor can accomplish both.
Long view: Per the Canadian Radio-television and Telecommunications Commission, Quebecor has seven years to operate as a virtual network operator before it will be required to manage its own network, implying a finished network buildout by 2029.
Quebecor aims to quickly scale its wireless customer base to secure its long-term future by undercutting competitors on price. We don’t think this will last forever, and Quebecor will have a challenging journey as it transitions to its own network.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
