Shaw Communications Inc. (TSX: SJR.B) is one of Canada’s leading diversified communications company. Shaw Communications operates through two operating segments, including the Wireless and Wireline. The company’s Wireless division, through Freedom Mobile, offers wireless voice and LTE data services through its growing and improving wireless network. The company’s Wireline division comprises of 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.

Shaw Communications Segment Highlights (Source: Company Reports)

Investment Thesis: 

• Wireless business to drive growth: Shaw Communications continues to expand its Wireless business, which we believe would be the key growth driver for the company in the long run. Shaw Communications established itself as a disruptive competitor in the Wireless space through its Freedom Mobile offering. Shaw Communications innovative pricing and packaging combined with an enhanced network experience, is witnessing strong customer growth. In 2019, despite tough competition, the company’s Freedom Mobile posted its strongest customer growth in its history. The company’s Wireless segment’s revenues crossed CAD 1 billion and remains on track to grow further in coming years. In 2019, Shaw Communications launched its wireless services in 19 new communities. The company currently covers about half of the Canadian population, living primarily in urban areas. The company acquired a 600 MHz spectrum in 2019 and enhanced customer experience through improved in-building service. During the recently concluded quarter, Shaw Communications reported net additions of about 51,000 RGUs, reflecting strong growth in the post-paid segment. The company’s smart pricing and packaging for its offerings like the Big Gig data centric and Absolute Zero drove much of this growth. We expect Shaw Communications to continue to report strong growth in the Wireless segment as the company expands its footprints in other parts of Canada. 

• Resilient Business: The most crucial aspect for any business amid the current scenario is liquidity strength. Shaw Communications’ offerings fall under the purview of “critical and essential services,” implying that the company will remain resilient to the current crisis. Investors should note that the company has rolled back its guidance for 2020 citing uncertainty surrounding the economy on account of COVID-19 outbreak. However, the company continues to expect its adjusted EBITDA to grow in 2020. Further, free cash flow is likely to be in line with its previous guidance. The company earlier stated that it expects to generate free cash flow of about CAD 700 million in 2020. The company has a strong balance sheet and ample amount of liquidity is likely to find its growth measures and smoothly sail through the current crisis. Notably, Shaw Communications has no debt maturities until 2023. The company has a strong liquidity position of CAD 1.5 billion, including CAD 47 million in cash at the end of the second quarter and CAD 1.45 billion under its credit facility.

Shaw Communications’ Debt Maturity Profile   

• Dividend play: Shaw Communications has maintained its dividends over the past several years despite continued investments in strategic initiatives, including its Wireless business. The company’s current dividend stands at CAD 1.185, with a dividend yield of 5.13%. The company paid CAD 606 million in the form of dividends to its shareholders in FY19. Despite disruptions from the COVID-19 spread, Shaw Communications expects to generate a significant amount of free cash flows, which will help the company to sustain the dividend payout.

Shaw Communications Dividend Profile (Source: Company Reports)

Risks: Shaw Communications, similar to 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.

Q2FY19 Financial Highlights: Shaw communications posted revenues of CAD 1.36 billion in the second quarter of fiscal 2020. The reported revenue implies a y-o-y growth of 3.17%. The y-o-y growth in revenues was led by continued strong performance in the Wireless division. The company posted adjusted EBITDA of CAD 600 million in the second quarter, up 9.5% y-o-y. The y-o-y growth in EBITDA was led by improved performance across both the business segments. Increased services revenues in the Wireless segment and improved underlying performance in the Wireline segment drove the second quarter EBITDA. Adjusted EBITDA margin expanded 230 basis points to 44.0%. Shaw Communications posted net income of CAD 167 million in the second-quarter, up 8.4% y-o-y reflecting higher revenues and margins. Funds flow from continuing operations stood at CAD 496 million, up 12% y-o-y, while free cash flow came in at CAD 191 million, up 20.1% y-o-y.  The growth in free cash flow reflects lower interest on the debt, higher adjusted EBITDA, and lower cash taxes.

Key Financial Highlights (Source: Company Reports)

Key Performance Indicators (Source: Company Reports)

Q2FY20 Segment Performance:

Stellar Wireless Performance: The Wireless revenues increased 22.8% y-o-y to CAD 302 million, reflecting stellar growth in both services and equipment sales. Wireless service revenues increased 19.6% y-o-y to CAD 201 million, driven by growth in subscriber base and increased penetration of its Big Gig data plans. Meanwhile, equipment revenues jumped 29.5% y-o-y to CAD 101 million, reflecting the success of company’s Absolute Zero offering.

During Q2FY20, the Wireless division added 51,059 RGUs, higher than 47,783 RGUs added in the second quarter of FY19.  The net additions reflected 54,289 post-paid additions, which was partially offset by prepaid losses of 3,230. Increased demand of the Big Gig data centric and Absolute Zero pricing and packaging options drove growth in post-paid subscribers. However, increased competitive activity took a toll on prepaid subscriber base and led to higher churn rate.

The Wireless segment’s adjusted EBITDA jumped 58.8% y-o-y to CAD 81 million, reflecting increased subscribers and higher ARPU.  Meanwhile, adjusted EBITDA margin expanded 610 basis points to 26.8%, driven by higher services revenues.

The Wireless segment saw improvement in both ABPU (average billing per subscriber unit) and ARPU (average revenue per subscriber unit per month). During the second quarter, ABPU increased by 6.8% y-o-y to CAD 43.84. Meanwhile, ARPU increased by 3.1% to CAD 38.45. The y-o-y increase in ARPU came on the back of an increase in the number of customers subscribing to higher service plans. Post-paid churn rate was 1.57% in the second quarter, as compared to 1.36% in the second quarter of fiscal 2019. The increase in churn rate was due to the aggressive competitive and promotional environment.

Business Segment Supports Wireline Division: The Wireline revenues decreased 0.7% y-o-y to CAD 1.06 billion as growth in the business segment was more than offset by declines in the consumer segment. The consumer segment’s revenues declined 1.5% y-o-y to CAD 919 million, reflecting lower subscribers and revenues in the video, satellite and phone. However, internet revenues continued to increase. Business segment’s revenues increased by 4.3% to CAD 144 million, led by higher internet revenues. Besides, increased demand for SmartSuite of business products further supported revenue growth in the second quarter.

Despite lower sales, adjusted EBITDA increased 4.4% to CAD 519 million. Meanwhile, adjusted EBITDA margin expanded 240 basis points to 48.8%.

Wireline RGUs decreased by 50,505 in the second quarter, as compared to a 44,630 RGU loss in the comparable prior-year period. The consumer internet RGUs remained strong and increased 6,072. However, video, phone, and satellite saw an aggregate decline of 56,068 RGUs.

Recent Updates:

• On April 14, Shaw Communications announced temporary layoff of about 10% of its workforce, primarily working in the retail and sales roles.

• On April 9, the company announced a monthly dividend CAD 09875 per share.

Top 10 Shareholders:

The top 10 shareholders have been highlighted in the table, which together forms around 30.93% of the total shareholding. RBC Global Asset Management Inc. is the entity holding maximum shares in the company at 5.55%. Mackenzie Financial Corporation is the second-largest shareholder, with a holding of 4.84%

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: 

In FY19, the company had a gross margin and EBITDA margin of 40.3% and 40.4%, which is higher than the FY18 figure of 39.6% and 39.7%, respectively. The company debt-to-equity multiple in FY19 stood at of 0.89x, higher than the debt-to-equity of 0.77x in FY18. Net margins in FY19 stood at 13.7%, well above FY18 number.

Key Metrics (Source: Thomson Reuters)

Key Valuation Metrics:

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology (Illustrative): 

EV/EBITDA Multiple Approach

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

Stock Recommendation: As on April 17, the stock has a market cap of ~CAD 11.88 billion with a PE (TTM) multiple of ~17.26x. Shaw Communication looks an ideal income stock, thanks to the company’s stable cash flows. Further, the company maintained its dividend payout despite increased investments in growth, which is encouraging. The stock currently offers a lucrative dividend yield of 5.13%. We believe that expected acceleration in sales growth from higher Wireless revenues is going to drive the EBITDA and free cash flows in the future. We have valued the stock using relative valuation methods, i.e., EV/EBITDA and for the said purpose, we have considered peers like Cogeco Communications (TSX: CCA), Rogers Communications Inc (TSX: RCI.B), Telus Corp (TSX: T) and BCE Inc (TSX: BCE) to name a few.  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 closing market price of CAD 23.11 per share on April 17, 2020.

SJR.B One-Year Daily Price Chart (Source: Thomson Reuters)

Disclaimer

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