EUR 850.00 For Business Accounts Only

Morningstar | Shaw Reports Mixed Quarter to Conclude Fiscal 2018; Maintaining CAD 26 FVE

We saw multiple causes for concern in Shaw Communications' fourth-quarter results, but some metrics in the company's nascent wireless segment provided reason for optimism that management can achieve its vision for that business. With Shaw's wireless endeavor crucial to our long-term outlook, this optimism offsets our other concerns, leaving us to maintain our narrow moat rating and CAD 26 fair value estimate. We see the stock as fairly valued at current levels and find several alternatives more interesting for investors to keep on the radar.

Wireline, which accounts for about 80% of Shaw's revenue and 90% of operating income, was virtually flat versus last year's fourth quarter, as it lost cable and Internet subscribers. We attribute segment operating margin expansion largely to a reduced workforce but also to lower marketing costs, which may have proved harmful. For the year, 45% wireline operating margins were up 1 percentage point from 2017.

On the bright side, Shaw added more wireless subscribers than we expected and achieved higher average revenue per user as well. With the nearly 85,000 subscribers it added in the quarter, Shaw now has over a million postpaid wireless customers, up 35% since last year. At CAD 41, ARPU was up 9% year over year and exceeded CAD 40 for the first quarter ever. We expect ARPU growth to remain in the mid- to high single digits over the next five years, driven by customers choosing higher data plans, which we think largely contributed to this quarter's jump, and less need to be as aggressive with pricing as the network improves. We think the improving network--Shaw began deploying 700 MHz spectrum during the quarter and will continue through 2019--will also lead to even better subscriber growth.

We were a bit disappointed with the quarter's wireless operating margins of under 18%, but we think that is directly attributable to the strong subscriber growth, as the handset sales associated with new subscribers severely weigh on margins. Still, we expected them to exceed 20%, even with major subscriber growth, and we will probably temper our margin forecast a bit.

We saw little to like in Shaw's consumer wireline business; good performance in business wireline is all that saved the company from uglier results in the segment. Consumer cable subscriber loss accelerated, with the firm shedding 34,000 subscribers in the quarter, resulting in a loss of 86,000 for the year. While we expect the TV product to be challenged given secular trends, we thought losses could be slowed and growth would eventually return, given the improved offering it has with Comcast's product. While we won't make conclusions less than 18 months after the national rollout, we see it as a disappointing start.
Also concerning was the loss in consumer Internet subscribers, which we see as a growing market. We have maintained that Canadian cable providers, such as Shaw and Rogers, will be pressured by the fiber-to-the-home rollouts of phone companies BCE and Telus. Telus is a direct wireline competitor of Shaw's and has a good portion of its FTTH initiative complete, so we would not be surprised if it were largely responsible for Shaw's results. Longer term, we still expect Shaw to expand Internet subscribers, and we think it will be helped when it starts pairing wireless and wireline offerings, which it intends to begin doing in 2019. We think the result may be swings between Telus and Shaw on who's winning in a very competitive market in western Canada.