Shaw Communications Inc. (TSX: SJR.B) is one of Canada’s leading diversified communications company. Shaw Communications operates through two segments, Wireless and Wireline. The company’s Wireless division, through Freedom Mobile, offers wireless voice and LTE data services through its growth and improving the wireless network. The company’s Wireline division comprises Consumer and Business services segments. The Consumer segment provides broadband internet, Shaw Go WiFi, video (including BlueCurve TV) to residential customers. Besides, it also offers traditional home phone services. The Business segment provides internet, WiFi, data, digital phone, and video services to small and mid-sized businesses.

Revenue Mix

Source: Company

Investment Rationale

• Three Consecutive Years of Revenue Growth and EBITDA Expansion: The company reported three consecutive years of revenue growth with FY20 revenue was 1.3% higher against the year, and FY19 income was 2.9% higher than the FY18 reported revenue. The group's adjusted EBITDA for the FY20 jumped by 11% on a YoY basis, and FY19 adjusted EBITDA was approximately 4.7% higher against the full-year FY18 adjusted EBITDA. Further, the company's adjusted EBITDA margin for the FY20 was 44.2%, which was 9.7% higher on YoY basis, and FY19 Adjusted EBIDTA margin was at 40.3%, which was 4.7% higher on a YoY basis. In FY18, the group's revenue increased by 7.3% to CAD 5,239 million from CAD 4,882 million reported in the same period of the corresponding financial period. This reflects the resiliency of the business.

Source: Company Filing

• A Solid Income Play Amid Low-Interest Rate: Shaw Communications shares are offering a lucrative dividend yield of ~5.4%, which is decent amid a low-interest-rate environment. Further, the group has a track record of consistent dividend payment over the past 20-years, which is commendable. Also, the dividend yield of Shaw Communication is outperforming the benchmark TSX Composite Index dividend yield of 3.6%.

Dividend Payment History: Source: Refinitiv (Thomson Reuters)

• Strengthening Free Cash Flow Profile: The company achieved a 38.8% growth in the free cash flow for the equity investors to CAD 747 million in FY20 against CAD 538 million reported in the same period of the corresponding financial year. Moreover, the company has consistently bolstered its free cash flow profile, which reflects the company’s focus on prudent investing which can generate a higher free cash flow. Free cash flows its crucial for a company’s expansion, debt coverage and dividend payout. Also, the higher the free cash flow, the greater margin of safety for the shareholders. The company’s free cash flow for the firm has also bolstered by 36% to CAD 1,280 million against CAD 942 million reported a year before. Further, the company is offering a lucrative free cash flow yield of 6.9%.

• Actively Trialing 5G Technology: Shaw has been actively trialling 5G technology, starting with pre-commercial trials in the 3.5 GHz and 28 GHz spectrum bands in 2018. In fiscal 2020, the group continued conducting 5G trials in two key areas: (i) 600 MHz spectrum band and (ii) backhaul over DOCSIS and ethernet passive optical networks (EPON). Unlike Shaw’s previous 5G trials, the 600 MHz spectrum band trial was conducted using commercially available 5G network equipment and end-user devices. This trial, carried out in collaboration with NOKIA, successfully demonstrated 5G operation from the core network to the end-user device and paved the way for future 5G commercial deployments, which are expected to provide lower latency, improved device connectivity, and higher speeds compared to LTE.

• Solid Q4FY20 Performance: Despite the intense wireless competitive environment, the launch of Shaw Mobile resonated with western Canadians, contributing to strong fourth-quarter Wireless net additions of approximately 60,000. Sustained wireless momentum with fourth-quarter service revenue growth of 14.7% and ABPU and ARPU growth of 6.6% and 4.2%, respectively, drove the company’s performance.  Further, the company expects continued positive adjusted EBITDA growth, a capital investment of approximately CAD 1.0 billion, and free cash flow of approximately CAD 800 million in fiscal 2021.

• Wireline business delivered another year of consistent and stable performance: In the FY20, the group’s Wireline business delivered another year of consistent and stable performance, including margin improvement in the face of COVID-19 adversity. As customers moved their offices and classrooms home, the group’s extensive Fibre+ network was the true workhorse maintaining these critical connections without interruption. In the second half of fiscal 2020, the company experienced a dramatic increase in data traffic by up to 50% and extended peak hours of usage. Years of network-related investments, including Shaw’s industry-leading Mid-Split program, had them well prepared to handle the surge in demand. In fact, not only did they maintain their high-quality network performance in fiscal 2020, they also introduced even faster Internet speeds to their customers with the launch of Shaw Fibre+ Gig Internet to over 99% of their Wireless customer footprint in western Canada. 

• Risk Associated to Investment: Shaw Communications, like most of its peers, continues to lose subscribers in the Wireline segment, which could impact revenues. Moreover, heightened competitive activity is leading to a higher churn rate in the Wireless business, mainly in the prepaid segment. Further, moderation in the ARPU and ABPU, could hurt the revenue growth rate for the company.

FY20: Highlights

• Consolidated revenue of CAD 5.41 billion for fiscal 2020 improved 1.3% over CAD 5.34 billion recorded in fiscal 2019.
• Adjusted EBITDA of CAD 2.39 billion for the twelve-month period improved 11.0% compared to CAD 2.15 billion for fiscal 2019. The improvement was primarily due to the Wireless division contributing CAD 337 million over the twelve-month period as compared to CAD 199 million in fiscal 2019, while the Wireline division contributed CAD 2,054 million over the twelvemonth period as compared to CAD 1,955 million in fiscal 2019.
• Net income was CAD 688 million in 2020 compared to CAD  733 million in 2019. The year-over-year changes are summarized in the table below:

Source: Annual Report FY20

Top-10 Shareholders   
Top 10 shareholders have been highlighted in the table, which together forms around 29.22% of the total shareholding. RBC Global Asset Management Inc. is the entity holding maximum shares in the company at 5.35%. RBC Wealth Management, International is the second-largest shareholder, with a holding of 3.75%. Institutional ownership in the company stood at 67.24%, and strategic ownership stood at 5.12%.

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: All forecasted figures have been taken from Thomson Reuters.

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: Stock Recommendation: The company exited 2020 with a strong balance sheet and free cash flow growth. Moreover, the company reported three consecutive years of revenue growth, EBIDTA expansion and bolstered free cash flow position. Further, the company has a consistent track record of dividend payment over the past 20-years and yielding high on the stock exchange; this single fundamental point is enough to keep the SJR shares in the investor’s limelight.

Also, the company has maintained a positive spread between ROCE and Weighted Average Cost of Capital, which implies the financial prudence of the company during project selection.

In FY20, the company’s Wireless division delivered solid, high-quality subscriber growth while continuing to improve operating margins and lower churn. Over 19 million Canadians, or approximately 50% of the Canadian population, reside within their current wireless network service area. The company’s Wireless division’s customer base continues to grow, with over 1.8 million customers, including over 160,000 net new customers added in fiscal 2020.

Moreover, the company’s strong balance sheet enables them to continue making critical investments and their focus on ‘brighter together’ growth opportunities would drive further efficiencies and contribute to strong and sustainable free cash flow growth and capital return initiatives.

Further, in fiscal 2020, in collaboration with NOKIA, Shaw conducted field testing on 5G backhaul over DOCSIS and EPON. The test results successfully demonstrated that 5G backhaul traffic could be reliably transported over existing DOCSIS and EPON technologies, which offers the prospect of significantly reducing the time and cost to deploy our 5G networks.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a Buy recommendation at the closing price of CAD 22.15 on February 26, 2021.

1-Year Daily Price Chart (as on February 26^th, 2021). Source: Refinitiv (Thomson Reuters).

*Recommendation is valid at March 1, 2021 price as well.

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