Shaw Communications Inc. SJRWF

TD ups Target to $34 from $32-Remains Action List Buy

[SunsetGrill]

Recommendation: ACTION LIST BUY
Risk: MEDIUM
12-Month Target Price: C$34.00
Prior: C$32.00
12-Month Dividend (Est.): C$1.19
12-Month Total Return: 56.2%

Event Q1/21 results and unchanged 2021 guidance.
Impact: MIXED

In the Q1/21 results, there were some positives (like wireless sub adds and wireline segment EBITDA margins) and some negatives (like wireless churn/ARPU and Internet sub losses). We discuss these items, as well as what we viewed as good additional commentary and disclosure from management on the conference call, in more detail on page two. The net impact on our forecasts has been minimal, and we note that management reiterated all of its guidance metrics for 2021. Our wireline EBITDA estimates have increased slightly and our wireless estimates have decreased slightly, with consolidated estimates for FY2021 increasing a bit (largely the flow-through of the Q1/21 beat) and FY2022 consolidated estimates remaining largely intact. Our target price increases to $34.00 from $32.00 owing to a roll-forward in our valuation horizon to 2022E from 2021E (see justification on page 5). This is our typical practice once we are 4.5 months into the next fiscal year, and we note that $34.00 is what we estimated as the roll-forward target price in our industry note on December 7 (LINK). TD Investment Conclusion The initial reaction in SJR.B shares (down 2.5% on Wednesday morning) demonstrates to us that some investors do not recognize the attractive risk/reward trade-off with Shaw. This is not a high-multiple stock trading on expectations of hefty subscriber or revenue growth. This is the lowest multiple large-cap name in the sector (see comps in Exhibit 4), despite having the best combination of balance-sheet strength, FCF generation, dividend yield, and share buybacks. The 5.3% dividend yield versus sub-1% bond yields (Exhibit 2) is arguably enough to justify owning SJR.B shares, and then either less aggression from TELUS in wireline and/or a merger with Rogers provides asymmetrical upside potential over 12-18 months. We see a good hedge for investors because incremental market-share gains by TELUS probably just increase the odds of Shaw being a willing seller. The need for greater infrastructure scale for 5G also creates solid industrial logic for consolidation. Our PMV estimate is now $38-$42 per share (up from $36-$40).

Details Our initial take on the quarter was presented in our previous note (LINK); Q1/21 results are shown in Exhibit 3, and we outline the key points below: Management emphasized the balance between profitability and subscriber growth in the cable/Internet business. Internet ARPU grew 5% y/y (to $73), while EBITDA margins exceeded 50% (versus TELUS wireline margins <30%). Additional disclosure was provided on Internet revenue (45% of total consumer wireline), with ~100k more subscribers on high-value plans (750 Mbps to 1.5 Gbps) in Q1/21 versus Q1/20 (~20% of the gross Internet adds in Q1/21 took high-value plans and ~30% of the base migrations were to these high-value plans, such that net contract renewals are now accretive to ARPU). Our estimated breakdown of Consumer Internet revenue is shown in Exhibit 1.

Management remains unsatisfied with Internet share losses to TELUS, which it attributes to a combination of: a) inferior execution (getting better at digital fulfillment, and at using data science for targeted marketing, are key initiatives underway) and b) more aggressive pricing/promotions by TELUS (which shows up in the relative EBITDA margins). However, Shaw estimates that market-share losses are overstated by reported results from both carriers because about half of the Internet sub adds at TELUS are estimated (by Shaw management) to come from FWA (fixed wireless access) and/or Internet-for-good (low-priced Internet services offered for charitable purposes). Shaw aspires to improve Internet adds relative to TELUS going forward, but it will not go back to chasing transient customers (aka promo hoppers). Overall market softness (lack of consumer activity; low immigration; and low number of foreign students) was also a cause of weak cable subscriber results (churn down y/y, but gross adds down a significant 40% y/y). Opex benefitted by about $5 million in promotional costs that did not recur (CFL and golf tournament). Wireline EBITDA was still above consensus (and +2% y/y) with these costs. Wireless competitive intensity has improved versus the Q4/20 call (including recent price increases announced by Bell). Given heavy Shaw Mobile loading(about half from market expansion and half porting from competitors), management accepts the retaliation versus Freedom that escalated churn. There has been a “considerable shift” towards the $25/$45 unlimited Shaw Mobile plans in recent months, with subscribers upgrading from the $0 plans taken by a high proportion subsequent to the launch in summer. That being said, we expect ARPU growth to be negative in 2021 as the mix of Shaw Mobile (with lower ARPU than Freedom) customers in the base increases.