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.

Investment Rationale:

• An Income Play: Over the years, the company has paid a constant dividend to its shareholders, which indicates a stable cash flow and income generation capabilities of the group. The group paid a total dividend of CAD 152 million during Q1FY21, higher than CAD 116 million, a year ago. Moreover, the stock of SJR.B carries an attractive dividend yield of ~5.267%, which is significantly higher than the TSX Composite yield of ~3.32%. A higher yielding stock amid low interest rate environment tends to remain in the investors’ limelight who has long term horizon.

10-years Dividend History (Source: Refinitiv, Thomson Reuters)

• Deployment of 5G: With its extensive Fibre+ network, the company’s assets was built with one of the most advanced hybrid fibre-coaxial networks in North America, and is capable of accommodating customers’ changing technological needs, which is impressive. The company is likely to launch its 5G services in the current fiscal year. Notably, the group completed several successful 5G trials, which includes using the 600 MHz spectrum band. The company reported its first 5G call in April 2020 and successful tests with commercially available handsets in June 2020, which is encouraging. Furthermore, 600 MHz radio and antenna designs were implemented at new and existing sites in preparation for a 5G service. We believe, with the introduction of 5G, the company would be able to cater to the growing customer-base for 5G services. This augurs well for a higher monthly recurring revenue as more and more people are likely to shift to 5G.

• Higher margin than Industry median: Despite the ongoing slowdown in the overall economy, the company has reported a significantly higher EBITDA margin (44.4% versus the industry median of 26.2%) and operating margin (21.2% versus the industry median of 16.5%) during Q1FY21, which is commendable and indicates strong operating performance. Moreover, Q1FY21 net margin also stood higher at 11.9%, as compared to 11.1% of the industry median.

Source: Refinitiv (Thomson Reuters)

• Sequentially improved performance: On a sequential basis, the group reported impressive growth in its revenue, gross profit, Adjusted EBITDA and free cash flow. During Q1FY21, revenue and gross profit stood at CAD 1,370 million and CAD 607 million, respectively, as compared to CAD 1,349 million and CAD 594 million in Q4FY20. The increase was supported by an increase in total wireless consumer and the total business consumers, partially offset by a slide in total consumer segment. Free cash flow during the period stood at CAD 607 million, higher than CAD 152 million in Q4FY20, which is a key positive and indicates operational efficiency.

                                 

                                  

Source: Company Reports

• Positive Management Guidance: The management is confident to report a higher FY21 EBITDA over FY20. The company expects its free cash flow to be approximately CAD 800 million, while capital investments are expected at about CAD 1 billion. The operating performance of the company remains resilient during FY20, as it provides facilities-based networks critical and essential services. The upcoming performance is backed up by strong free cash flows generation, ample liquidity and a strong balance sheet. Moreover, the future offerings of the group would be supported by the Company’s migration of its core network to the Cloud-Based Infrastructure Software platform, which is the newest generation of cloud core architecture offered from NOKIA. Going forward, the corporation would seek to leverage its coaxial cable (which transports both power and multi-gigabit data speeds) within its Fibre+ network for the rapid and flexible deployment of small cells. The above mechanism would likely to help densification efforts in preparation for 5G also.

• Introduction of next-generation Fibre+ WiFi Pod for better coverage: The company announced the latest launch of a faster, further-reaching Fibre+ WiFi Pod within Western Canadian geography. The above service offers Shaw Fibre+ Internet to its customers, along with consistent WiFi coverage, while the service provider worked on reducing WiFi dead spots as well, which is a key positive. The company claims that with the introduction of these services, the users would be able to experience better in-home WiFi coverage. As several consumers are opting for work from home concept, the ultrafast connectivity would likely to gain popularity among the consumers, which would further support the company’s performance. Notably, SRJ.B invested more than CAD 32 billion over the last eight years to build, upgrade and expand its Fast LTE and Fibre+ networks and services. 

• Risks Associated with the investment: Due to the current environment affected by the pandemic, consumer behaviour remains under the scanner which could result to a material impact on the company’s revenue, through down warding of service plans, acceleration of cord-cutting and reduced ability to pay bills. Moreover, the company primarily caters to the small and medium-sized market, whose consumption pattern remains volatile. Also, continuation of travel ban might affect the company’s revenue.

Q1FY21 Financial Highlights:

• The group announced its quarterly results, wherein the company posted revenue of CAD 1,370 million, at par with CAD 1,383 million in the previous corresponding period (pcp). The marginal decline in revenue was due to a 1.4% y-o-y decrease in the Consumer division (CAD 911 million vs CAD 924 million) as the growth in internet revenue was offset by lower video, satellite and phone users. The Wireless segment reported income of CAD 317 million, at par with CAD 318 million in pcp, supported by higher service revenue.
• Adjusted EBITDA stood at CAD 607 million, higher than CAD 588 million in Q1FY20, supported by higher Adjusted EBITDA margin from Wireline segment (CAD 532 million versus CAD 517 million in pcp), while Wireless adjusted EBITDA stood at CAD 75 million, higher than CAD 71 million in pcp.

Source: Company Reports

• Operating income stood at CAD 290 million, slightly higher than CAD 285 million in pcp, supported by a lower operating, general and administrative expenses (CAD 763 million, versus CAD 795 million in pcp).
• Net income stood at CAD 163 million, at par with CAD 162 million in pcp.
• The group reported total Capital expenditures of CAD 234 million, as compared to CAD 260 million a year ago. The quarter was marked by a lower Wireline capital spending of approximately CAD 44 million due to a decline in the success-based capital, capitalized labor coupled with a slide in the new housing development. On the other hand, wireless spending was higher by ~CAD 18 million on y-o-y basis, due to ongoing network expansion, spectrum deployment combined with higher IT-related spending related to support Shaw Mobile launch and digital initiatives.

                   

Source: Company Reports

• The company reported cash and cash equivalents of CAD 571 million, while total assets were reported at CAD 16,010 million.         

               

Income Statement Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 31.66% of the total shareholding. RBC Global Asset Management Inc. and Mackenzie Financial Corporation hold the maximum interests in the company at 6.15% and 4.29%, respectively.

(Source: Refinitiv, Thomson Reuters)

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

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation:

In the recent past, the group made prudent and strategic capital investments and would continue to expand and improve its facilities-based wireless network to meet the evolving needs of its customers. The corporation believes that its facilities-based networks offer critical and essential services to the consumers and hence is immune to the economic cycle. As the overall economy gradually revives, we expect upgradation of the service plans by the consumers which would result in improved Average Revenue per Unit (ARPU) and would support the company’s top-line and cash flows.

Free cash flow for Q1FY21 stood at CAD 225 million, significantly higher than CAD 183 million, a year ago. The increase was aided by higher adjusted EBITDA. We expect the momentum to continue in the remaining quarters of FY21. Moreover, the deployment of 5G services would likely to attract new mobile enthusiast, and with the next-generation Fibre+ WiFi Pod, the company is likely to deliver seamless connectivity to its users, which augurs well for higher business prospects in the foreseeable future.

Moreover, the stock has a solid track record of dividend distribution and offering a lucrative yield amid a low interest rate environment. Further, the group has maintained a solid margin profile over the past several quarters, which is visible in the below chart.

Source: Refinitiv (Thomson Reuters)

We have valued the stock using EV to EBITDA-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like BCE Inc, Rogers Communications Inc, Telus Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 22.50 on January 15, 2021.

SJR.B Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

*Recommendation is valid at January 18, 2021 price as well.

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Disclaimer

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