Neutral on Rogers Communications

We are upgrading our recommendation on Rogers Communications Inc. (RCI - Analyst Report) to Neutral as we believe that the significant expansion of 4G LTE network and an attractive dividend yield of around 4% will support the stock price in the near future. Massive demand for mobile data and growing activation of latest smartphones will pave the way for Rogers’ future growth.

Meanwhile, the Canadian Wireless market has become increasingly competitive exerting huge pressure on the company’s ARPU and margins. Incumbent competitors, such as BCE Inc. (BCE - Analyst Report) and Telus Corp. (TU - Analyst Report), have already launched iPhone 4. These two entities partnered to launch their CDMA based wireless networks with HSPA technology enabling them to access a wider selection of wireless devices, and compete for HSPA roaming revenue, which are expected to increase with time as HSPA becomes more widely deployed.

The Cable segment has also started facing the brunt of the aggressive rollout of IPTV by its competitor. Moreover, the Media segment is facing continued softness of the advertisement market. We believe Rogers should continue to generate current rate of free cash flow and profitability in the future reporting quarters. Management’s decision to diversify in the mobile banking segment will open up a new revenue stream for the company.

Rogers is trying to establish its foothold in the mobile-banking vertical. The company has decided to apply to government for introducing a bank under the Canadian Bank Act. However, Rogers announced that if granted permission, Rogers will primarily focus on credit, payment, and charge-card services and has no immediate plan to convert the bank as a full-service deposit taking and lending financial institution.