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We upgrade our recommendation to Outperform on Shaw Communications Inc. (SJR - Analyst Report) mainly based on the company’s improving EBITDA margin and free cash flow due to the discontinuation of promotional activities. The problem for Shaw Communications was, whenever the company tried to reduce its promotional activities it lost a large amount of pricier subscribers. On the other hand, higher promotional activities are impairing its bottom line and free cash flow. It seems management has finally found out an appropriate trade-off between these two situations.

Moreover, Shaw Communications launched “Shaw Go”, an innovative TV Everywhere service, which will be available on Apple Inc. (AAPL - Analyst Report) developed iPad 2 and iPhone 5. Initially, this service will only offer the company’s Movie Central applications. However, in the near future, the company will offer streaming live TV, on-demand content and several family-focused programs through Shaw Go.

In the third quarter of fiscal 2012, Shaw Communications performed impressively with respect to net customer additions on several fronts. The company added 246 digital TV customers. Digital TV penetration rate is now 6.1% of basic cable TV. Furthermore, Digital phone lines were 1,339,559, reflecting a year-over-year net addition of 29,142. Quarterly EBITDA margin was 47.5% compared with 43.8% in the prior-year quarter.

Shaw Communications is gradually expanding its Wi-Fi network. The company’s improved user interface called “DreamGallery” is currently going through trial runs in two markets. This innovative software is backward compatible with the company’s installed 700,000 set top boxes. Additionally, the acquisition of Canwest placed the company as a major content and distribution player in the Canadian Cable TV industry.

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