Even with its underperformance in consumer cable, the healthy wireless subscription numbers are enough for rating and target price changes for Shaw Communications (Shaw Stock Quote, Chart, News: TSX:SJR.B, NYSE:SJR), says Aravinda Galappatthige, analyst with Canaccord Genuity, who on Friday upgraded his recommendation from “Hold” to “Buy” with a new target of C$28.50.
On Thursday, Shaw announced its Freedom Mobile subscription numbers for the quarter ended February 28, reporting 93,500 new contract customers, a double of expectations which stood in the 45,000 – 50,000 range and much higher than its more recent 30,000 per quarter.
Galappatthige says that the new numbers should re-set wireless sub loading expectations by between ten and 20 per cent per quarter going forward. At the same time, management commentary concerning lowering numbers of cable subscriptions was less than appealing.
“Despite wireless strength, cable subscriber figures were notably soft and management did not raise expectations around H2, essentially conceding that X1 related expectations needed to be revised,” says the analyst in a client update. “With TELUS’ fibre-to-the-home rollout surpassing the 50 per cent mark and Shaw pulling back on promotional activity, one has to anticipate a period of softness in terms of consumer cable subs.’
“Given the further opportunities in front of Freedom, such as greater traction in BYOD, more traction in the West (majority of adds are still in the GTA), deployment of 700 MHz spectrum, etc., we expect continued momentum over the medium term,” he says. “While there may be vacillations in EBITDA and FCF expectations, Freedom’s subscriber and service revenue growth trajectory (due to ARPU expansion) is becoming clearer. Furthermore, we are also factoring in an increasingly supportive regulatory framework for the regional wireless players.”
Galappatthige’s revised forecast has Shaw making EBITDA of $2,092 million in 2018 (up from $2,065 million) and $2,199 million in 2019 (up from $2,182 million).
His valuation is now based on a blended multiple of 8.5x 2019E EV/EBITDA (previously 8.4x). The target of $28.50 per share (was $28.00) represents a 12.4 per cent return on investment as of publication date.
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