Shaw Communications Inc. (TSX: SJR.B) is one of Canada’s leading diversified communications company. The group operates through two operating segments: 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.

Revenue Mix

Source: Kalkine Group, Annual Report

Investment Rationale

• Decent Fourth Quarter 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. Further, the company expects continued positive adjusted EBITDA growth, capital investment of approximately CAD 1.0 billion, and free cash flow of approximately CAD 800 million in fiscal 2021.

• An Income Play: Shaw Communications’ shares are offering a lucrative dividend yield of 5.3%., which is relatively higher given the lower interest rate environment. Further, the group has track record of consistent dividend payment over the past 20-years. Also, dividend yield of Shaw Communication is outperforming the benchmark TSX Composite Index dividend yield of 3.6%.

Dividend Payment History: Source: Refinitiv (Thomson Reuters)

• Wireline business delivered another year of consistent and stable performance: In 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 to 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; however, 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 the group maintain its high-quality network performance in fiscal 2020, but it also introduced even faster Internet speeds to its customers with the launch of Shaw Fibre+ Gig Internet to over 99% of its Wireless customer in western Canada.

• 5G Play: Shaw's investing billions of dollars in 5G technology. Initial 5G capabilities have begun to emerge in Canada, and additional capability will slowly roll out over the next three to five years. As with all new technologies, the introduction will start in urban centers and roll out gradually to all markets over a couple of years. Shaw has committed billions of dollars to 5G technology. For Shaw Communications, the 5G journey is just beginning. The cable operator was thrust into the wireless world when it purchased Wind Mobile in 2016. In the last decade, Software Defined Networking (SDN) Technology that emerged as a technology of choice among many enterprise networks was aimed at making networks more flexible, cost-effective, and capable of integration. It helped improve network performance by decoupling the network control and forwarding functions, thereby enabling network controls to be programmable. SDN communicates with applications via an Application Programming Interface (API) and allows users to control virtual resources through control planes, instead of physical infrastructures such as routers and switches. It can virtualize a whole network, as compared to conventional networks.

• Offering a Lucrative Free Cash Flow Yield of 6.9%: Free Cash Flow Yield measures the amount of cash flow that an investor is entitled to. It is mechanically like thinking about the dividend or earnings yield of a stock. In the case of Shaw Communication, the free cash flow yield stood at 6.9%, which is decent, given the lower interest rate environment. A higher free cash flow yield is better because the company is generating more cash and has more money to pay out dividends, pay down debt, and re-invest into the company. Also, Free cash flow yield offers investors or stockholders a better measure of a company's fundamental performance than the widely-used P/E ratio, because money in the bank is what every business strives to achieve. Investors are interested in how much cash the company is generating, as these numbers show the true performance of the company. More importantly, it is more difficult to hide financial misdeeds and management adjustments in the cash flow statement.

• Solid Margin Profile: The group has maintained a decent margin profile over a period of time which is visible from the figures below. Barring a blip in 2018, the company's margin profile remained strong.

Source: Refinitiv (Thomson Reuters), Kalkine Group

• Risk Associated with 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.

Fourth Quarter 2020 Highlights

Source: Company Filing

• Consolidated revenue was comparable year-over-year at CAD 1.35 billion, reported improvement over sequential quarter basis and at par with the same period of the previous financial year.

• Wireless revenue of CAD 294 million for the fourth quarter of fiscal 2020 increased CAD 14 million, or 5.0%, over the fourth quarter of fiscal 2019. The increase was driven mainly by higher service revenues which contributed an incremental CAD 27 million to consolidated revenue primarily due to higher postpaid RGUs and a 6.6% and 4.2% year-over-year increase in ABPU to CAD 44.81 and ARPU to CAD 39.65, respectively, reflecting the increased number of Wireless customers subscribing to higher service plans, partially offset by lower roaming revenue in the quarter due to less travel and roaming outside of the Company’s wireless home network resulting from the impact of the COVID-19 pandemic.

• Equipment revenue decreased CAD 13 million, or 13.5%, over the previous year due to lower subscriber activations.

• Consumer division revenue decreased CAD 13 million, or 1.4%, to CAD 917 million as growth in Internet revenue was offset by declines in Video, Satellite, and Phone subscribers and revenue.

• Business division revenue of CAD 140 million was essentially flat in comparison to the fourth quarter of fiscal 2019 as impacted Business customers temporarily reduced, suspended, or cancelled their accounts due to the challenging economic environment facing businesses stemming from the COVID-19 pandemic.

• Adjusted EBITDA for the fourth quarter of CAD 594 million increased CAD 60 million, or 11.2%, from CAD 534 million in the comparable prior year quarter.

• Wireless adjusted EBITDA of CAD 84 million for the fourth quarter of fiscal 2020 improved by CAD 33 million, or 64.7%, over the fourth quarter of fiscal 2019, driven by impact of the adoption of IFRS 16 which contributed CAD 20 million, or 39.2%, to the increase while the remaining increase was mainly due to postpaid RGU growth, an increase in margins due to lower equipment sales and lower acquisition related costs, and continued ARPU growth of 4.2% in the quarter.

• Wireline adjusted EBITDA for the fourth quarter of fiscal 2020 of CAD 510 million increased 5.6%, or CAD 27 million, from CAD 483 million in the fourth quarter of fiscal 2019. The increase primarily reflects the impact of the adoption of IFRS 16 which contributed CAD 20 million, or 4.1%, to the increase as well as the impact of the CAD 10 million charge related to CRTC regulatory matters in the fourth quarter of fiscal 2019.

• Free cash flow for the quarter stood at CAD 152 million compared to CAD 42 million in the comparable prior year quarter. The increase was largely due to higher adjusted EBITDA and lower capital expenditures and interest costs.

FY20: Highlights

• Consolidated revenue of CAD 5.41 billion for fiscal 2020 improved 1.3% over CAD 5.34 billion for 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

The top 10 shareholders have been highlighted in the table, which together forms around 32.78% of the total shareholding. RBC Global Asset Management Inc. is the entity holding maximum shares in the company at 6.46%. Mackenzie Financial Corporation is the second-largest shareholder, with a holding of 4.45%. Also four out of top-10 shareholders have increased in their stake over the past six month, with Royer (Jeffrey C) and TD Asset Management Inc. among the top who have increased their stake by 15.55M and 3.07M respectively. Institutional Ownership in the company stood at 68.55% and strategic ownership stood at 6.85%.

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: The group closes the fourth quarter and financial year 2020 on a positive note. Fiscal 2020 included another exciting milestone for the company, Wireless business with the launch of Shaw Mobile in Alberta and British Columbia, complementing the company’s existing Freedom Mobile brand. Shaw Mobile is a new wireless service that leverages the company LTE and Fibre+ networks, along with Canada’s largest WiFi network, to provide Shaw Internet customers with an innovative wireless experience that offers customers unprecedented savings. The introduction of Shaw Mobile will enable the company to acquire new customers by leveraging bundling opportunities. The company’s new ‘Brighter Together’ advertising campaign highlights customers’ ability to customize their mobile data allotment with two rate plans – By The Gig and Unlimited Data – and is the best example yet of how facilities-based providers can compete and innovate to deliver true wireless affordability.

Further, the company achieved free cash flow growth of almost 40% in fiscal 2020. Moreover, during the same period, they have returned approximately CAD 750 million to the shareholders as part of our enhanced return of capital initiatives, consisting of regular monthly dividends and share repurchases under their normal course issuer bid (NCIB) program.

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

Therefore, based on the above rationale, and valuation, we have given a ‘Buy’ recommendation at the closing price of CAD 22.5 on November 06, 2020.

1-Year Daily Price Chart (as on November 09, 2020). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at November 9, 2020 price as well.

---

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.