Shaw Communications to Underperform

We are downgrading our recommendation on Shaw Communications Inc. (SJR - Analyst Report) to Underperform, ahead of the release of its third quarter-fiscal 2012 financial results. The company continues to lose basic cable TV customers, reflecting that management is yet to make a turnaround. Since the company already abandoned its wireless venture, it is very crucial for Shaw Communications to execute video offerings properly in order to sustain its future growth. Furthermore, the Media segment is facing continued softness of the Canadian advertisement market.

Apart from video segment, the company markedly improved its customer base for other offerings in the previous quarter. However, this impressive performance is related to massive spending for aggressive promotional activities, resulting in sheer fall of EBITDA margin and free cash flow. Consequently, the company reduced its previous outlook for fiscal 2012.

Shaw Communications offers triple-play cable TV and satellite TV, Internet, and wireline phone services, whereas its main competitor Telus Corp. (TU - Analyst Report) offers Cable TV, Internet, wireline, and wireless services. Telus shares a national wireless network with Bell Canada, a division of BCE Inc. (BCE - Analyst Report). Its popular Optik TV, offering IPTV services, is quickly eroding Shaw’s market share. In addition, Shaw Communications will now lack a major competitive weapon, which is the wireless service.

Shaw Communications decided to put aside its much-hyped plan to enter into the wireless market of Canada. Instead, the company will now build a cheaper Wi-Fi network, which will enable offloading 3G/4G wireless data traffic across a short distance from landline Internet access points. We believe the decision of Shaw Communication to abandon its wireless venture will significantly reduce the company’s competitive strength in a highly lucrative Canadian telecom market.