Shaw Communications restructuring gets thumbs up at Canaccord Genuity

In the midst of a major restructuring, Shaw Communications Inc. (Shaw Communications Stock Quote, Chart, News: TSX:SJR.B) is making headlines with its employee buyout program, one which will see the telecom company shed a full one-quarter of its workforce over the next 18 months.

The move is cause for a forecast increase by Canaccord Genuity analyst Aravinda Galappatthige, who nonetheless maintains his “Hold” rating and 12-month target price of $28.00 per share.

This week, Shaw announced that more employees than expected would be taking up the company’s voluntary buyout program. Offered in late January to about 6,500 of its currently 13,200 staff, a little over half (3,300) have since agreed to the plan which reportedly includes six months of pay plus one month per year of employment.

All part of its larger “Total Business Transformation” aimed at bringing the Calgary-based company into the age of digital and streaming services, the buyout will mean an annual cost savings estimated at $225 million, with the savings fully achieved not until 2020.

Galappatthige applauds Shaw’s greater focus on cost savings while at the same time noting the potential risks in executing the buyout.

“In our view, much depends on execution of the plan as Shaw does have the flexibility of managing the exit of these employees over an 18-month period. The concern could be around near-term operational gaps, impact on employee morale, etc.,” says the analyst in a note to clients on Thursday.

“Shaw’s more concentrated approach to right-sizing its cost structure certainly appears to have been quite different to its peers, who have pursued more elongated stage-by-stage restructuring programmes,” says the analyst.

Galappatthige revises his 2018E-2020E estimates to reflect a $450 million hit in restructuring charges and ~$225 million in opex and capex savings, with full annualized synergies realized by the end of Q2/F20.

“While we see little impact in F2018 as EBITDA gains are expected to be offset by increased interest and cash taxes, ramping cost savings results in an increase to our F2019-F2020 EBITDA, EPS and FCF forecasts,” says the analyst, who says that since the benefits of the employee buyout won’t be realized until mid-2020, his current target price is unchanged at $28.00, representing a 13.8 per cent return at the time of publication.