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Morningstar | Shaw's 3Q Results Show the Firm Making Strides in Wireless but Still Facing Wireline Challenges

Shaw's fiscal third-quarter earnings fell modestly below revenue and EBITDA consensus, while its EPS beat was due to tax benefits, following the sale of its Corus position. Overall, revenue was up almost 3% year over year, and, after adjusting for one-time items, EBITDA margin was flat. More important than those results, in our view, are the trends we see in Shaw's businesses. We've expected Shaw to make progress in wireless as its network improves, and it seems the firm is successfully executing its vision and affecting the industry. However, we've posited Telus' fiber to the home buildout is creating a much stronger wireline competitor for Shaw, and Shaw's lackluster wireline results lend credence to that belief. Overall, our view of the firm is unchanged following the quarter, and we plan to raise our CAD 26 fair value estimate by CAD 1, primarily just reflecting the time value of money. We currently see narrow-moat Shaw as fairly valued.

We think Shaw deserves credit for its wireless execution. The firm added another 61,000 postpaid subscribers in the quarter, leaving it with 210,000 new customers year to date and on track to meet our full-year projection of roughly 275,000. Also in line with our expectations was the year-over-year growth in average billings per user (6%) and adjusted EBITDA margin expansion (120 basis points). We expect both metrics to maintain those trajectories as Shaw's network quality improves and it gains scale, allowing EBITDA margin to eventually rise well beyond the current 20% range, which is relatively low. Most impressive, postpaid churn declined another 18 basis points in the quarter, to 1.18%, as it trends toward the level of larger competitors--around 1%. With continued 700 MHz deployment and a long runway to further network buildout, including with the recent 600 MHz spectrum won at auction, we expect the wireless story to stay on track and for Shaw to make further inroads versus the big three Canadian wireless incumbents.

The wireline continues to struggle. Segment revenue grew 1% year over year, with strength in business customers making up for flat consumer revenue. The firm faces secular headwinds to its video and phone services, but they are continuing to drop at a greater rate than we've expected. Cable subscribers dropped 7% year over year, satellite subscribers declined over 5%, and consumer phone subscribers fell 10%, all about a percentage point worse than earlier quarters this year. We had expected a video boost from Shaw's agreement to use Comcast's cable technology, and we've expected phone losses to moderate, but this quarter doesn't offer any signs of those occurrences. Internet growth picked up modestly but was still only 1%, about what we project for the year. Given Telus' newfound ability to compete with similar levels of quality, we don't think things will get much better. We continue to project 1% wireline revenue growth throughout our five-year forecast.