Freedom Mobile results are encouraging, but Shaw is still a hold: Cannacord Genuity

While Freedom Mobile is gaining traction, that positive is not enough to recommend investors start buying shares of Shaw Communications (Shaw Communications Stock Quote, Chart, News: TSX:SJR.B, MYSE:SJR), Canaccord Genuity analyst Aravinda Galappatthige says.

This morning, Shaw reported its Q1, 2018 results. The company earned $114.0-million on revenue of $1.25-billion, a topline that was up 2.7 per cent over the same period last year.

“We have created tremendous positive momentum in our wireless business and we are committed to delivering Canadians sustainable and exceptional value and choice,” CEO Brad Shaw said. “On the back of our robust LTE [long-term evolution] advanced network, which is improving with every passing day, we launched our Big Gig data plans and the iPhone 8 and iPhone X to strong early demand. With continued improvements to our network and enhanced line up of smart phone devices, customers are recognizing the value proposition of our Big Gig data plans. It is increasingly clear that Canadians have been waiting for a credible wireless alternative and we are ready to deliver.”

Galappatthige says the results at Freedom are indeed a bright spot, but to him they are overshadowed by disappointing consumer Primary Service Units (PSUs) and revenue.

“On its last conference call, Shaw had indicated to a slowdown in Consumer PSU net adds due to a reduction in promotional offers, but the result was well below expectations. PSU net adds of -17.7k were well below our +2.0k forecast, +25.1k in the prior quarter and -14.0k in FQ1/17,” the analyst explains. “We were particularly surprised by the video result where consumer net adds came in at -18k vs our -7k expectation and worse than last year’s -13.1k. Recall Shaw’s consumer video had turned net positive in H2/17 on the back of the X1 rollout. Internet net adds were 17.7k vs 17k the prior year, a better result but still below our 19k expectation. As a result, Consumer revenue of $935M was well below our $953M forecast and down 1.3%. While the company is no longer reporting segmented Consumer EBITDA, wireline EBITDA of $446M was below our $467M estimate (company-compiled consensus of $454M) and was down 5.9%. We assume the 244 bps y/y wireline margin decline was the result of promotional activity, pressure from increased G&A and X1-related revenues.”

In a research update to clients today, Galappatthige maintained his “Hold” rating but lowered his one-year price target on the stock from $29.00 to $28.00, implying a return of eight per cent at the time of publication.

Galappatthige thinks Shaw will generate EBITDA of $2.05-billion on revenue of $5.05-billion in fiscal 2018. He expects those numbers will improve to EBITDA of $2.11-billion on a topline of $5.28-billion the following year.