Cogent gets positive rating from Deutsche Bank on bullish growth expectations

Cogent has gotten a positive rating from Deutsche Bank Markets Research based on expectations that the low-cost Ethernet internet service provider will achieve double-digit growth, greater profitability and an increase in shareholder returns in coming years.

Unlike other traditional service providers, the financial research firm said in a research report that Cogent has proven it can make good on these metrics at a time when other service providers are struggling to grow.

“Cogent’s ability to deliver on all three of these fronts is a rarity across Communication Services, where growth is stalling and dividends are increasingly at risk for secularly challenged companies,” said Matt Niknam, director of equity research on telecom services at Deutsche Bank, in a research report. “We view CCOI as a beneficiary of key industry tailwinds (pure play on fiber-based, IP traffic growth), with company specific drivers (cost efficiencies, declining capital intensity) further bolstering free cash flow (FCF).”

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The research firm said that Cogent’s FCF is expanding, adding that it expects revenue growth at a three-year CAGR (2016-2019) of 10% as it grows its two main business lines: NetCentric and Corporate.

In the fourth quarter 2016, Cogent noted growth in both business segments.

Cogent’s NetCentric customer revenues rose sequentially from the third quarter by 1.3% to $45.1 million and increased by 6.1% from the fourth quarter of 2015. As of the end of 2016, Cogent was serving 29,383 NetCentric customers on its network.

Revenue from Cogent’s Corporate customers grew sequentially by 2.9% from the third quarter to $70.5 million and grew by 12.5% from the fourth quarter of last year. The service provider had a total of 32,439 Corporate customer connections on its network as of the end of the year. 

“Our view on growth is framed by CCOI’s penetration opportunity in both its Corporate (60% of revenues, ~20% share in current multi-tenant office buildings) and NetCentric (40% of revenues, ~12% market share) segments,” Niknam said. “We view CCOI as a key beneficiary of demand for fiber-based IP connectivity and bandwidth, both via Enterprises (ie: SaaS, cloud computing, etc.) and Consumers (ie: OTT video).”

Additionally, this growth will convert to FCF as the service provider starts to “moderate” its network expansion in multitenant unit (MTU) buildings where its Corporate customer targets reside. As a result, the research firm said it expects Cogent to “drive declining capital intensity (DBe: 13% in 2016, to 9% by 2019).

“The combination of these factors drive our expectation for a ~30% CAGR in fully-taxed FCF/share from 2016-2019, far exceeding peers,” Niknam said.