EUR 850.00 For Business Accounts Only

Morningstar | Few Surprises in Fiscal 2Q Keep Shaw Tracking Our Long-Term View; Maintaining CAD 26 FVE

Our long-term expectation is for narrow-moat Shaw to continue making strides in its emerging wireless business while managing secular and competitive headwinds in wireline. The fiscal second quarter featured no eye-popping metrics and was consistent with that view. With Shaw now halfway through its fiscal year, we are making minor adjustments to our full-year forecast, but results are largely tracking our 2019 projections and we are maintaining our CAD 26 fair value estimate, leaving the shares fairly valued, in our view.

Wireless continues to be Shaw's growth driver. Year-over-year wireless service revenue grew more than 25% for the fourth straight quarter, while the firm added 65,000 postpaid subscribers and saw average billings per user jump 7.5% from the same quarter last year. However, results support our view that last year's huge gains (94,000 postpaid additions after offering the iPhone for the first time) don't represent a norm. We expect an improving network (the firm intends to have its 700 MHz spectrum completely deployed by the end of 2020) will allow Shaw to continue increasing ABPU by mid- to high-single-digit rates annually while maintaining net postpaid additions at close to 300,000 each year. However, we expect Shaw's ABPU, which was CAD 41.34 this quarter, to significantly lag major industry peers (around CAD 60), as we believe the firm still needs to price aggressively to gain market share.

Wireless margin expansion and greatly reduced wireless equipment revenue versus last year's second quarter were the biggest factors in Shaw's consolidated headline results; revenue was down 1% year over year while adjusted EBITDA margin expanded over 500 basis points, growing 14%. The dramatic drop in equipment revenue (down 40%) led to a 6% drop in overall wireless revenue but was unsurprising, given last year's iPhone introduction. However, since equipment revenue is generally unprofitable, the shift in wireless revenue led to higher margins.

The firm's wireless adjusted EBITDA margin exceeded 20% for the first time since last year's third quarter, and we expect Shaw will be able to maintain margins above 20% as ABPU continues climbing and equipment sales stay at normalized levels.

For the sixth straight quarter, wireline revenue was virtually flat (up 0.5% year over year), but margins continued expanding (up 300 basis points year over year) due to the firm's voluntary departure program, which has led to lower costs. We expect the quarter's subscriber trends to continue over our five-year forecast. The firm added 10,000 Internet subscribers (contributing to 0.6% year-over-year growth in Shaw's Internet subscriber base) while continuing to shed video and phone customers (subscribers down 5% and 4%, respectively). We expect subscriber growth to remain challenged, as Shaw's biggest wireline competitor, Telus, has significantly enhanced the quality of its network with its fiber-to-the-premises build-out, and in general fewer customers choose video and phone services in favor of other options. We project total wireline subscriber growth to be under 1% annually throughout our forecast, with the Internet subscriber base growing slightly above 1% each year while video and voice subscribers continue contracting at a low-single-digit clip. We project wireline margins to continue expanding, as technological initiatives lead to lower-cost installations, but we expect the expansion to slow as the voluntary departure program ends.