TSX Commentary

Shaw Communications Inc. (SJR.B) – $20.66 – Q1/10 Wireless and Dividends
Sector Perform, Average Risk
Shaw reported Q1/10 results Thursday morning and hosted an investor call. Shaw raised its dividend another 5%, from $0.84 o $0.88 in view of strong operating/financial results. The increase, which was partly expected sometime this year, brings the payout ratio to 78% of 2010E FCF (67% EPS). Reported EBITDA of $475MM includes $75MM of regulatory fee reversals. Adjusted EBITDA of $400MM was up 8.5% yr/yr and was a touch lighter than our $418MM estimate due to higher employee compensation costs and the timing of the Mountain Cablevision acquisition. Subscriber results (ex. Basic) were surprisingly robust and suggest a potentially softer quarter for TELUS when it reports on Feb. 12. Digital TV adds of 88k vs. 70k expected, phone adds of 61k vs. 42k expected, and Internet adds of 36k vs. 27k expected Shaw lost -1.4k basic TV subs this quarter (vs. +4k expected and +9k in Q1 last year), marking the first subscriber loss in 2 years. In RBC CM’s view, this is principally due to rising competition from TELUS TV in Alberta and BC. However, with only a modest -1.4k loss (on a base of 2.3 million) RBC CM does not believe investors should be overly concerned and the result suggests that TELUS may not have gained as much traction as believed. At quarter-end, Shaw was sitting on $651MM in cash and securities, which the company believes will be sufficient to meet all near-term business needs, including wireless. Shaw indicated that it would proceed with a roll-out of wireless starting in 2010, but provided no incremental detail.
Veritas Research: Shaw Communications Inc. (SRJ.B) – $20.66 – Q1/F10 Results Summary
Buy, Intrinsic Value Estimate: $24.00
Despite a strong quarter driven by a recovery of CRTC Part II fees amounting to $75 million, Shaw Communications Inc. (Shaw or the Company) reported a 7.5% decline in net income because of debt retirement costs and losses on financial instruments totalling $126 million. The decline in earnings did not prove to be a deterrent in any way since management announced a 5% increase in dividend to $0.88 per annum, in line with Veritas’s thesis that Shaw is better positioned for dividend increases than Telus. Management refrained from commenting on the expected wireless launch date, although we anticipate a launch by the end of 2010.Veritas believes Shaw is positioned to do well in wireless for the following reasons: 1) According to data from CRTC, Alberta and BC have the highest wireless ARPU in the country at $75.26 and $63.53 respectively. These regions with a higher ARPU than the Canadian average present a lucrative market for Shaw; and 2) Telus has market share of 53% and 41% in Alberta and BC respectively. By offering quad-play bundle in these regions, Shaw is in a unique position to steal wireless market share from Telus. Strong digital TV subscriber additions are a testament to the success of the rental strategy, for example Shaw’s digital TV penetration of 60.5% increased 19.7% YoY. With higher transactional activity in VOD and other interactive features driven by the adoption of digital TV, EBITDA margins should improve. For example, operating margin in the VOD segment for Shaw in 2008 was 59.8%. These developments are positive for revenue and EBITDA growth at the Company. Veritas continues to believe Shaw is in the best competitive position in the sector and rates Shaw a Buy.