Shaw Communications on a Roll

Shaw Communications (SJR - Analyst Report) on Friday June 26, 2009, delivered another strong quarter of earnings amid a grim economic environment. The company’s third-quarter result was marked by strong subscriber growth with a rise in digital penetration. Digital penetration among basic subscribers is now 52.0% compared to 40.2% at August 31, 2008.

Shaw’s ongoing capital investments have helped it to expand its areas of operations to include digital programming, Internet, Video-on-Demand (VOD), High Definition Television (HDTV), and digital phone. The company experienced subscriber growth across all its operations. Basic cable net subscriber additions during the reported quarter were 9,622 to 2,283,526, Digital customers increased 110,810 to 1,187,183, and Internet and Digital Phone lines climbed by 24,625 to 1,650,959 and 54,633 to 774,009, respectively. DTH subscribers rose 1,580 to 898,213. In order to satisfy the growing consumer demand for more speed and higher performance, Shaw in the previous quarter increased its Internet offerings by more than 50% and launched High-Speed Nitro, a new 100 Mbps service. Internet penetration of basic subscribers is now 72.3% compared to 69.4% at August 31, 2008.

Shaw’s 3Q09 EPS from continuing operations increased 11.1% year over year to C$0.30, whereas on a net basis, including non-operating items, EPS increased 3.3% to C$0.31. Consolidated service revenue increased 8.7% year over year to C$861.4 million for 3Q09, owing to customer growth across its Cable and Satellite segments and rate increases. The Cable Division’s revenue for the reported quarter grew 10.2% to C$669.6 million, whereas Satellite Division’s revenue increased 4.1% to C$191.8 million.

EBITDA for the reported quarter grew 11% to C$395.3 million, driven by an increase in revenue, whereas EBITDA margin expanded 90 basis points to 45.9% in 3Q09 from 45.0% in 3Q08. The company’s free cash flow has nearly doubled, increasing 90% to C$154.3 million on account of increased EBITDA and lower capital expenditure.

Shaw’s management has reiterated its guidance for fiscal year 2009 with EBITDA growth of 10% in Cable division, and modest growth in Satellite division. The company still targets a free cash flow generation of at least C$500 million for fiscal year 2009.

Despite a strong track record of earnings and a healthy outlook, we maintain a Hold rating on the stock. We believe that with the completion of the spectrum auction for advanced wireless services on July 21, 2008, the new entrants may substantially increase Shaw’s competition and reduce its market share.