DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and Senior Unsecured Notes rating of Rogers Communications Inc. (Rogers or the Company) to BBB (high) from BBB. DBRS Morningstar also changed the trends to Stable from Positive. On February 22, 2019, DBRS Morningstar confirmed Rogers’ ratings at BBB and changed the trend to Positive from Stable, reflecting sustainable operating improvement combined with deleveraging over the course of 2017 and 2018. At that time, DBRS Morningstar stated that if Rogers could continue to maintain its financial operating performance in-line with the industry, while sustaining its leverage (excluding spectrum auction activity), DBRS Morningstar would consider upgrading the rating to BBB (high). The upgrades reflect Rogers’ operating and financial execution in 2019. The ratings are supported by the Company’s role as a leading wireless and cable TV operator in Canada, increasing revenue diversification and solid free cash-generating capacity. The ratings also consider intensifying competition, evolving consumer habits that negatively affect the cable TV and telephony businesses, as well as risks associated with regulatory change. The Stable trend reflects the Company’s steady operating outlook amid a rapidly changing competitive environment, improvement in its cash generation, and ability to maintain a sustainable level of leverage for the rating.
Rogers’ 2019 operating income was modestly below our forecast, primarily as a result of the introduction of new wireless pricing and equipment plans during the year that are expected to provide a long-term benefit to the Company and have been eagerly embraced by consumers. Long term, these plans should ultimately translate into lower wireless churn rates, drive improved subscriber satisfaction, and suggest Rogers is executing well against its strategic plan.
In terms of Rogers’ financial profile, the Company remained stable on a comparable year-over-year (YOY) basis. DBRS Morningstar notes that financial leverage (gross debt-to-DBRS Morningstar EBITDA) was 3.10 times (x) in 2019; however, it was elevated due to debt-financed spectrum auction activity. As expected, free-cash-flow (FCF) after dividends but before working capital also increased materially to $841 million (+34.8% YOY), providing the Company with increased financial flexibility.
Going forward, DBRS Morningstar expects Rogers’ operating income to grow steadily over the near to medium term in the low- to mid-single-digit range as subscribers embrace wireless unlimited data plans that should both stimulate higher cellular data usage (i.e., positive long-term revenue benefit) and concurrently reduce costs associated churn, retention, and ‘bill shock’ complaints. The introduction of several wireless industry initiatives (including unlimited plans and device financing options), combined with increased self-serve functionality and the imminent launch of 5G in 2020, should also bolster the Company’s ability to deliver on its key priorities and should drive long-term revenue and EBITDA growth despite the intense competitive environment.
DBRS Morningstar expects Rogers’ leverage to decline modestly through the current 5G network buildout capital cycle as the Company continues to improve its cash-generating ability and reduces financial leverage primarily as a result of EBITDA growth rather than debt reduction. The Company is expected to apply FCF primarily toward dividends and share repurchase activity. However, DBRS Morningstar believes the Company will maintain financial flexibility for successive spectrum auctions in 2020, 2021, and 2022, while financial leverage declines toward 2.5x through EBITDA growth.
All figures are in Canadian dollars unless otherwise noted.
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