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

• 5G Play: Shaw is 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. 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.

• Offering a Lucrative Free Cash Flow Yield of 5.4%: Free Cash Flow Yield measures the amount of cash flow that an investor will be entitled to. It is mechanically similar to thinking about the dividend or earnings yield of a stock. In case of Shaw Communication, the free cash flow yield stood at 5.4%, which is decent given the lower interest rate environment. A higher free cash flow yield is better because it reflects that 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. More importantly, it is more difficult to hide financial misdeeds and management adjustments in the cash flow statement.

• Decent Margin Profile: The group has maintained a decent margin profile over a period of time which is visible from the figures below. The group has maintained an EBITDA margin above 35% over the last eight quarters and Net margin above 10% at the same time.

Source: Refinitiv (Thomson Reuters), Kalkine Group

• Outperformed industry on key parameters: In the latest quarterly result, the group delivered better that industry median results in terms of RoE, Net Margin, Operating Margin and EBITDA Margin.

Source: Refinitiv (Thomson Reuters), Kalkine Group

• Ample liquidity: The group continues to maintain strong and flexible balance sheet with approximately CAD 650 million of cash on its balance sheet, and remains comfortably in compliance with the covenants of its fully committed and substantially undrawn CAD 1.5 billion credit facility. At the end of the third quarter, net debt leverage was 2.4x compared to its target leverage range of 2.5x to 3.0x. 

• A Dividend Play Shaw Communications shares are offering a lucrative dividend yield of 4.8%, which is lucrative given the lower interest rate environment. Further, the group has a track record of consistent dividend payment over the past ten years. Also, the dividend yield of Shaw Communication is outperforming the benchmark TSX Composite Index dividend yield of 3.6%.

• Risk Associated to Investment: Continuation of lower demand from the equipment segment on account of tepid macro scenario might dampen the company’s top-line. The group might face pressure on its revenue as roaming revenue is likely to be on the lower side as most of the people are staying indoors. 

3QFY20 Financial Highlights

Source: Company Filing

• The company reported solid third-quarter financial performance amidst the COVID-19 pandemic reflects the critical nature of robust connectivity infrastructure and overall business resiliency during a period of significant economic uncertainty.
• During the quarter, Wireless and wireline subscriber acquisition activity was muted. Wireless postpaid net additions increased by approximately 2,200 in the third quarter, and postpaid churn was a record low 0.96%, on account of reduced customer activity. While wireless subscriber activity was significantly lower, the company continued to grow ABPU and ARPU by 5.7% and 2.6%, respectively, year-over-year.
• In the third quarter, Shaw Business revenue of approximately CAD 140 million was in line with the prior year and decreased approximately 2.8% compared to the second quarter of fiscal 2020 as impacted customers temporarily suspended or cancelled their accounts due to the challenging economic environment due to COVID-19.
• Wireless service revenue for the three-month period increased by 17.0% to CAD 206 million over the comparable period in fiscal 2019 due to the increased subscriber base and growing penetration of Big Gig data plans. Third-quarter ABPU grew by approximately 5.7% year-over-year to CAD 44.27 and ARPU increased 2.6% to CAD 38.94 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 Freedom network.
• Wireless equipment revenue for the three-month period decreased 37.0% year-over-year to approximately CAD 46 million, reflecting lower subscriber sales and activity.
• Third-quarter Wireless adjusted EBITDA of CAD 101 million increased 90.6% year-over-year, or approximately 56.6% when removing the CAD 18 million impacts resulting from the adoption of IFRS 16. The accelerated growth in Wireless adjusted EBITDA in the quarter was primarily due to lower subscriber activations and therefore, lower acquisition-related costs. While the financial performance of the Wireless segment was strong in the third quarter, showcasing the operating leverage in the business, the company’s strategy remains to scale the wireless business and continue to grow the subscriber base.
• The group’s operational performance has been solid and continued to have significant financial flexibility and liquidity through its balance sheet strength and available credit, including approximately CAD 650 million of cash on hand. At the end of the quarter, net debt leverage was 2.4x compared to its target leverage range of 2.5x to 3.0x.
• The group’s consolidate Free cash flow for the quarter of approximately CAD 221 million compared to CAD 174 million in the prior year. The increase was largely due to higher adjusted EBITDA and lower capital expenditures and interest.
• Net income for the third quarter of fiscal 2020 of CAD 184 million compared to CAD 227 million in the third quarter of fiscal 2019. The decrease of CAD 43 million was primarily due to a CAD 11 million increase in current income tax expense and a CAD 99 million increase in deferred income tax expense, while the adoption of IFRS 16 did not have a significant impact on net income.

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 months, with Royer (Jeffrey C) and TD Asset Management Inc. among the top shareholders 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: Despite lower consumer spending, the company reported an ARPU growth of 2.6% on y-o-y basis, which is encouraging. The financial performance of the Wireless segment remains robust in the current quarter, indicating operational efficiency in the business, which is impressive. Meanwhile, the group focuses on scaling the wireless business and would continue to grow its subscriber base in the coming days through several customer-friendly plans. The company has enhanced its footprints across new locations and offered high-speed internet services, which is likely to drive the demand for the group’s offerings. Further, the work from home concept is a key positive for increasing the ARPU in the next quarter.

Moreover, the company has solid fundamentals, with Lucrative Free Cash Flow Yield of 5.4%, and a dividend yield of 4.8%, with a track record of consistent dividend payment. Also, the company has maintained a positive spread between ROCE and Weighted Average Cost of Capital, which implies the financial prudence of the company while project selection.

Further, its shares are trading above the crucial long-term support level of 200-day, which implies that stock is hovering in a long-term bullish zone. Further, 14-day and 9-day RSIs, the leading momentum indicators are hovering in the neutral zone and mostly tilted towards the overbought zone.

Therefore, based on the above rationale, and valuation, we have given a Buy recommendation at the closing price of CAD 24.46 on October 02, 2020, with lower double-digit upside potential.

1-Year Daily Price Chart (as on October 02, 2020). Source: Refinitiv (Thomson Reuters)

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Disclaimer

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