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'Too cheap to ignore' Cogeco shares stuck in neutral

Cogeco Cable Inc. president and CEO Louis Audet

J.P. Moczulski

Cogeco Cable Inc. looks cheap relative to its peers in the Canadian communications industry. The issue is how much patience investors will need to cash in on that value.

While shares of Telus Corp. have surged 50 per cent over the past year, and those of Quebecor Inc. have bounced 20 per cent, Cogeco Cable's stock has inched ahead only a modest 5 per cent.

About three-quarters of the analysts following the stock say the Montreal-based cable TV company is a buy. But management's insistence on a controversial European growth strategy is holding back the share price and could do so for a long time.

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The company primarily serves rural areas in Ontario and Quebec where competition is less fierce than urban centres such as Toronto. It has managed to add cable television, Internet and phone customers at an impressive clip, while at the same time raising its margins.

Dvai Ghose, of Canaccord Genuity Corp., who considers the stock "too cheap to ignore," raised his price target to $50, from $48, following quarterly results last month. Cogeco Cable is growing faster than its rivals, he noted. The company increased its number of cable subscribers in Canada by 8.9 per cent year-over-year, compared with 7.9 per cent for Quebecor's Vidéotron and 3.2 per cent for Rogers Communications Inc.

Mr. Ghose calculates that the shares are trading at 5.4 times forward earnings before interest, taxes, depreciation and amortization (EBITDA). That compares with an average of 6.1 for the cable industry and a 5.9 multiple for the telecom sector.

Maher Yaghi, of Desjardins Securities, also rates the shares of Cogeco Cable a "buy" and has a price target on them of $44.60. He says that Cogeco has further room to add subscribers and raise prices, which should translate into " decent revenue growth in the high single-digit range."

Rogers, Its Biggest Fan

Among Cogeco's fans is its top competitor, Rogers Communications , which many speculate is positioning itself to acquire the Quebec firm.

Rogers, the nation's largest cable operator, spent $75-million last November to increase its stakes in both Cogeco Cable and parent Cogeco Inc. Rogers, which insists it has "no current intention" of buying additional shares, now owns 32.5 per cent of the subordinate voting shares and about 22 per cent of the equity of Cogeco Cable. Its stake in the parent company has climbed to almost 40 per cent of the subordinate voting shares and about 35.5 per cent of the equity.

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But Cogeco's future remains firmly in the hands of the Audet family, which founded the company more than half-a-century ago and continues to own the majority of voting shares. Louis Audet, president and chief executive officer, has repeatedly said that Europe's cable market, which is less-developed than North America's, offers enticing growth opportunities. In June, 2006, Cogeco purchased the Portuguese cable firm Cabovisao-Televisao por Cabo SA for $660-million, paying about 12½ times EBITDA.

European Strategy

Investors never liked the deal, or talk of further acquisitions. About a year after the purchase, Mr. Audet suggested he might spend up to €1-billion ($1.35-billion) on further expansion into Eastern Europe, leaving investors uncertain about the company's long-term focus.

The acquisition of Cabovisao-Televisao por Cabo added to Cogeco's debt, ate into cash flow and took the Canadian company into unfamiliar and very competitive markets. The sovereign debt crisis that has hammered Portugal's economy brought additional headwinds. Last quarter, results from Europe dragged on Cogeco's Canadian successes. Even though Cogeco managed to add nearly 12 per cent more customers in Portugal year-over-year, EBITDA from the region tumbled nearly 60 per cent in response to fierce competition.

Mr. Audet described lower margins in Portugal as a "transitory phenomenon," and on the company's quarterly conference call last month his tone lacked any hint of a retreat. "The Portuguese market remains a very competitive market, but one in which we are increasingly skillful at retaining our customers and growing our customer base," he said.

Portugal remains a small part of Cogeco's overall business, accounting for $43-million of last quarter's consolidated $332-million of revenue.

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It's unclear, though, if the controlling Audet family still harbors additional overseas expansion plans. Mr. Yaghi thinks investors will be spared another disruptive acquisition, at least for now.

But RBC Dominion Securities' Jonathan Allen, who rates Cogeco Cable's stock "sector perform" with a price target of $46, says the possibility of another acquisition adds risk for investors and helps justify the discount on the shares.

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