'Initial catalyst of sale to private investors is good enough for the stock': Valentini on Rogers

Key Concepts

• Rogers Communications: Telecom giant, top pick, trading at a discount, improving wireless market, free cash flow improvement, monetization of sports assets (MLSE, Blue Jays).
• COGO Communications (CCA): Smaller cable company, attractive dividend yield, low payout ratio, high free cash flow yield, undervalued, rural capex projects ending, US market competition overhang.
• Thomson Reuters: Global leader in software and workflow solutions for legal and tax professionals, stock hammered recently, strong moat, scale, innovation, potential AI winner.
• Wireless Market Improvement: Six months of advertised pricing improvement, leading to gradual ARPO and revenue growth.
• Free Cash Flow (FCF): Key metric for debt reduction and equity value transfer.
• Capital Expenditures (Capex): Guidance reduction signals future FCF improvement.
• Monetization of Sports Assets: Sale of stake in MLSE and Blue Jays to private investors as an initial catalyst.
• Dividend Growth: Delayed for Rogers due to debt from Shaw acquisition and sports team investments.
• Valuation Multiples: Dramatic decrease for Thomson Reuters, presenting an investment opportunity.
• Generative AI (GenAI): Market concern impacting information services and software companies, but potentially misunderstood for Thomson Reuters.
• Moat: Competitive advantage that protects a company's market share and profitability.

Rogers Communications: A Top Pick at a Discount

Vince Valentini, Managing Director of Equity Research at TD Cowan, identifies Rogers Communications as a top pick, believing the stock is trading at a discount due to excessive negative sentiment. He argues that "too much bad news has been priced into the stock."

Key Drivers for Rogers:

• Improving Wireless Market: Valentini highlights six consecutive months of improvement in advertised pricing across all four major wireless carriers. This trend is expected to gradually lead to better Average Revenue Per User (ARPO) and increased wireless revenue for Rogers throughout the next year.
• Enhanced Free Cash Flow: Rogers is taking steps to improve its free cash flow. This includes a reduction in capital expenditure (capex) guidance for the current year, with expectations of further decreases next year. Increased free cash flow will enable faster debt repayment, thereby transferring more enterprise value to equity holders.
• Monetization of Sports Assets: A significant catalyst for Rogers is the upcoming move to monetize a portion of its stakes in MLSE (Maple Leaf Sports & Entertainment) and the Toronto Blue Jays. This will involve a sale to new private investors. Valentini anticipates this as an initial step, with a potential IPO or public listing of the sports business possibly occurring in 2027, but the immediate sale to private investors is considered sufficient for a stock catalyst.

Dividend Outlook: Valentini does not foresee an imminent dividend increase for Rogers. The company has significant debt from the acquisition of Shaw Cable and ongoing investments in sports teams. He estimates it will take "a good two or three years" for Rogers to generate enough cash to raise its dividend.

COGO Communications (CCA): An Undervalued Cable Opportunity

Valentini also recommends COGO Communications (CCA) as a smaller cable company that deserves attention.

Key Strengths of COGO Communications:

• Attractive Dividend Yield: COGO offers a dividend yield of 6%, which is higher than BCE's.
• Low Payout Ratio: The company's payout ratio is exceptionally low, in the 30% to 40% range, indicating significant capacity for future dividend increases.
• High Free Cash Flow Yield: COGO trades at the third-highest free cash flow yield among all stocks on the TSX, significantly outperforming its telecom peers.
• Projected FCF Growth: Free cash flow is expected to increase materially in the next fiscal year as several rural capex projects in Ontario conclude.
• Undervaluation: Valentini believes the stock is "close to 50% undervalued."

Addressing US Market Concerns: Valentini acknowledges that competition in the US market is a concern, contributing to the high free cash flow yield. However, he argues that investors are overemphasizing this issue. COGO does not own the entire US business; it has a minority partner in Lease, and the US subsidiary carries substantial debt. When the equity value of COGO's US holdings is extracted, it represents only 13% of the target market capitalization. The "vast majority of the value of this company is still their Canadian cable operations," which are performing well.

Thomson Reuters: A Global Leader Facing Market Mispricing

Thomson Reuters is presented as a premier Canadian company and a global leader in sophisticated technology.

Company Profile and Market Position: Thomson Reuters is the leading provider of software and workflow solutions to the legal and tax communities worldwide.

Recent Stock Performance and Valuation: The stock has been "hammered recently," falling from nearly $300 to around $190 since mid-July. This has led to a dramatic decrease in its valuation multiples, making it a top pick. Previously, the stock was considered too expensive for a recommendation.

Market Concerns and Valentini's Perspective: The market has broadly penalized information services and software companies, fearing that Generative AI (GenAI) and new startup competitors will disrupt their businesses. Valentini disagrees, arguing that Thomson Reuters possesses a "really good moat" around its services, characterized by tremendous scale and continuous product innovation. He believes the company can "stay one step ahead of those smaller upstart players." As the market begins to differentiate between "winners and losers in this sort of AI race," Valentini predicts that Thomson Reuters will be recognized as an "AI winner" and its stock will "rerate back to closer to where it was a few months ago" by next year.

Conclusion

Vince Valentini's analysis presents a compelling case for three Canadian companies: Rogers Communications, COGO Communications, and Thomson Reuters. Rogers is highlighted as a top pick due to its improving wireless market, focus on free cash flow generation, and upcoming monetization of sports assets, all while trading at a discount. COGO Communications is identified as an undervalued opportunity with a strong dividend and significant free cash flow potential, despite concerns about its US operations. Finally, Thomson Reuters is seen as a global leader whose stock has been unfairly punished by market fears surrounding AI, with Valentini believing its strong competitive advantages will lead to a re-rating.