TSX Commentary

Cogeco Cable Inc. (CCA) – $ 36.95 – Q1/10 Portugal Finally Looking Better
Sector Perform, Above Average Risk, Price Target: $41.00 (Prev. $35.00)
RBC CM believes investors should take another look at the stock: (1) Canadian cable results remain robust, margins are improving, and the company is able to pass through regular rate increases; (2) CCA shares trade at a discount to peers, which should narrow; (3) in the analyst’s view, a potential takeover, while unlikely near-term, could add substantial upside. RBC CM has raised its target from $35 to $41. CCA reported consolidated EBITDA of $123MM (+5.9% yr/yr), ahead of RBC CM’s $115MM estimate due to better Canadian cable margins. Canadian cable EBITDA was $112MM vs. $104MM expected as margins rose from 40.0% to 42.5% this quarter. A big highlight this quarter (aside from better Canada margins) was an improving
subscriber trend in Portugal. According to CCA, the improving trend is due to a confluence of retention activities, new services, and potentially a better operating environment. CCA raised 2010 guidance for revenue, EBITDA, EPS and FCF due to a combination of better subscriber growth, Internet ARPU, and deferred taxes. $505MM EBITDA expected vs. previous guidance of $481MM.

Veritas Commentary: Cogeco Cable (CCA)
Sell, Intrinsic Value Estimate: $35.00
Cogeco Cable Inc. (Cogeco or the Company) reported robust operating results for its Q1-F10 and increased its revenue, EBITDA and free cash flow guidance for F10. That the Canadian operation is performing well and should continue to do so in the medium term is an accepted fact, but it is Portugal that has surprised. Apparently lower prices are contributing to: 1. A return to stability in the basic cable customer base; and 2. Increased penetration of HSD, Digital TV and Telephony services. Stability in Portugal directly contributed to the increased guidance of 150,000 RGU additions for F10 compared to an earlier estimate of 125,000 RGUs. EBITDA margin in Canada increased to 42.5 % for the quarter while Portugal exhibited stability at 19.2%. Cogeco has raised its consolidated EBITDA estimate and consolidated EBITDA margin expectation for the year to $505 million (previously $481 million) and 39.1% (previously 38.5%), respectively. Revenue, EBITDA and EBITDA margin growth in Canada hold the key to Cogeco’s valuation. All Canadian cable operators have enjoyed an environment of robust growth and growing free cash flows. That era is about to end for two reasons: 1. The market for all products is maturing, and 2. The ILECs (original telco’s such as Telus) are getting ready to invade the entertainment space. Cogeco needs to turn around its negative free cash flow operation in Portugal and refinance $404 million of debt by 2011 while simultaneously defending its territory against an incursion by the ILECs. These are significant challenges to overcome in the short to medium term. While Veritas has increased its valuation to $35.00 – its best case estimate –it maintains a sell rating on CCA.