Company Overview: Shaw Communications Inc. (Shaw) is a diversified connectivity provider. The Company operates through three divisions: Consumer, Wireless and Business. Wireless division, through Freedom Mobile, provides wireless voice and data services through its wireless network. Wireless division operates in Ontario, Alberta and British Columbia, offering the alternative for mobile services to the three national wireless incumbent carriers. The Company offers wireless services for voice and data communications through its Wireless division. Its Wireline-Consumer division connects consumers in their homes and on the go with broadband Internet, Shaw Go Wireless Fidelity (WiFi), video (including BlueCurve TV) and traditional home phone services. Wireline-Business division provides business customers with a full suite of connectivity and managed services, including Internet, data, WiFi and phone, which enables them to focus on building their business.

Stocks’ Details

Higher Revenues From Wireless Segment is the Key Catalyst: Incorporated in 1996 & Headquartered in Calgary, Canada, Shaw Communications Inc. (TO: SJR) is a differentiated telecommunications company that offers broadband cable television services, digital phone, Internet, telecommunications services, along with satellite distribution services, primarily in the U.S. and Canada.  After undergoing substantial and transformative changes, the company’s focus has shifted to driving operational competence and implementing strategic significances via offering enhanced customer experience and a more responsive business model.  

In FY19, the company reported revenues of $5.3 billion. The company’s Wireline Segment (~81% of total revenues in fiscal 2019) offers cable telecommunications services comprising Internet, Video, Wi-Fi, Satellite Video, Phone, and data networking. Consumer segment accounted for ~86% of Wireline segment revenues, whereas Business represented ~14%. Wireless Segment accounted for ~19% of total revenues in FY19. This division was formed after Freedom Mobile acquisition. The segment provides wireless customer services for data and voice communications.

Net income came in at $733 million in FY19, as compared to $33 million in FY18. EPS in FY19 stood at $1.41. The company witnessed a stable compound annual growth rate of ~0.5% in its revenue across FY14-FY19. The company saw robust growth in FY19 from the Wireless business. On the heels of higher strategic investments and deployment, the company has managed to create a robust & better-quality network that offer improved customer experience, which is a key positive. In FY19, the company delivered subscriber growth of more than 266,000 (net additions), and ABPU improvement of 6.3% along with service revenue growth of roughly 23%, primarily aided by the launch of Big Gig Unlimited, Absolute Zero, and Prepaid Plans. Notably, since the purchase of Freedom Mobile in 2016, the company’s overall subscriber base has increased by ~65% to more than 1.65 million subscribers at the end of FY19.

Wireless Network Exposure (Source: Company Reports)

Q1FY20 Financial Highlights for the period ended 30 November 2019: Shaw Communications reported first-quarter fiscal 2020 results on January 13, 2020. The company reported earnings of $0.31 per share, down from $0.36 per share reported in the year-ago quarter. Nevertheless, total revenues for the period rose 2.1% and came in at $1.38 billion. The increase in the top line was mainly driven by a 16.9% increase in the Wireless division along with an incremental $30 million contribution from service revenues.

Segment Highlights: Wireline revenues contributed ~77% of total revenues, which decreased 1.5% on a year-over-year basis to $ 1.07 billion. Wireline - Consumer revenues decreased ~2.2% and came in at $924 million. The decrease was due to lower Video, Satellite and Phone revenues, which fully offset growth in Internet revenues. Wireline - Business revenues grew 3.6% and came in at $143 million. The increase was on the back of continuous growth in Internet revenues and better-than-expected demand for the SmartSuite.

Wireless revenues contributed ~23% of total revenues and increased 16.9% on a year-over-year basis to $318 million. Within the Wireless segment, Service revenues contributed ~61.6% of total revenues and soared ~18.1% from the year-ago quarter. The increase was on the back of improved access to Big Gig data plans coupled with higher revenue generating-units (RGUs). Wireless - Equipment revenues accounted for 38.4% of total revenues and came in at $122 million. This marked an increase of ~15.1% on a year over year basis, primarily on the back of a higher number of customers who purchased devices via Freedom Mobile.

Average billing per subscriber unit came in at $43.60, up 4.5% year over year. The increase was boosted by a higher number of customers subscribing to superior service plans.

Q1FY20 Key Highlights (Source: Company Reports)

Operating Highlights: During the quarter, operating, general & administrative expenses came in at $795 million, down ~2.0% on a year over year basis. As a percentage of revenues, operating, general & administrative expenses, came in at 57.5%, down ~2.4 percentage points basis points.  Adjusted EBITDA for the quarter stood at $588 million, an increase of 8.1% from the corresponding prior period.

Segment-wise, Wireline adjusted EBITDA stood at $517 million, up 3.4% on a year over year basis, on the back of lower expenses. Wireline segment adjusted EBITDA margin came in at 48.5% during the first quarter and expanded 230 bps on a year-over-year basis. Wireless adjusted EBITDA stood at $71 million, an increase of 61.4% year over year, owing to lower operating expenses & elevated service revenue.

Adjusted EBITDA Highlights (Source: Company Reports)

Balance Sheet & Cash Flow Details: The company exited the quarter with a cash balance of $132 million, as compared with $1.44 billion as of Aug 31, 2019. Additionally, the undrawn bank credit facility for the period stood at $1.5 billion. At the end of the quarter, the company’s net debt leverage ratio was 2.5x, which came within the management’s guided band of 2.5x-3.0x. During the quarter, the company spend $260 million on capital expenditure. Free cash flow was $183 million, up from $163 million in the year-ago quarter.

Net Debt Leverage Ratio & Cash Details (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 30.74% of the total shareholding. Mackenzie Financial Corporation is the entity holding maximum shares in the company at 5.72%. RBC Global Asset Management Inc. is the second-largest shareholder, with a holding of 5.49%.

Top Ten Shareholders (Source: Thomson Reuters)

Digging into Shaw Communications Inc.’s Recent Updates:

On January 21, 2020, the company announced the launch of LTE Backup for its Business customers. The latest product launch is an easy add-on solution that helps business owners to get acknowledged with tools and systems they rely on.

Key Metrics:  In FY19, the company had a gross margin and EBITDA margin of 40.2% and 38.9%, which is higher than the FY18 figure of 38.6% and 38.6%, respectively, representing decent fundamentals. The company debt-to-equity multiple in FY19 stood at of 0.93x, higher than the debt-to-equity of 0.73x in FY18. Net margins in FY19 stood at 13.8%, as compared to 9.4% in FY18.

Key Metrics (Source: Thomson Reuters) 

Outlook: The company’s wireless business is expected to gain from better post-paid revenue generating units (RGUs) along with higher average revenue per unit (ARPU). Furthermore, the continuous roll out of data-centric plans along with better network and customer experience are key incentives. The company continues to strengthen its foothold across Canada by opening retail locations at Walmart, which is a key positive, going forward.

The ever-increasing need for high-speed internet has aided the cable television industry participants. Further, enhancing broadband ecosystem in international markets coupled with abundance of smart TVs is anticipated to drive growth. Notably, increasing consumer preference for subscription services and digital based services as a substitute of linear pay-TV and rental has forced industry participants to modify their business models. Shaw Communication stands to benefit from this trend. The company is also making investments in the networks for its eventual 5G launch. This is expected to increase the revenue contribution from the wireless section.

For FY20, the company expects adjusted EBITDA to increase in the range of 11% and 12% on a year over year basis following its cost saving initiatives. The management is targeting an annualized cost savings of ~$200 million through Voluntary Departure Program. The company is also planning to incur a capital expenditure of ~$1.1 billion. The company expects free cash flow to be ~$700 million.

On the flip side, the company continues to lose subscribers in the wireline segment, which may hurt revenue growth in the quarters ahead. Furthermore, tough consumer video environment remains a potential headwind.

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology:

Method 1: EV/EBITDA Multiple Approach 

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Method 2: Price to Cash Flow Multiple Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: In Q1FY20, the company’s top line increased on a year over year basis on the back of higher revenues from Wireless division along with an incremental contributed from service revenues. Shaw Communications’ wireless business is profiting from higher post-paid RGUs and an increase in average revenue per unit. As on 10 February, the stock has a market cap of ~$13.03 billion with a PE multiple of ~19.4x and an annual dividend yield of ~4.5%, suggesting a decent opportunity for accumulation. we have valued the stock using two relative valuation methods, i.e., EV/EBITDA and Price to Cash Flow, and for the said purpose, we have considered peers like Telus Corp (TO: T), Rogers Communications Inc (TO: RCIB) and Cogeco Communications Inc (TO: CCA), to name few. Therefore, we have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the current market price of $26.37 per share, down -0.04% on 10 February 2020.

SJR Daily Technical Chart (Source: Thomson Reuters)

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