Shaw starts poorly but remains a buy

 In the first quarter of fiscal 2016, Shaw Communications’ existing businesses generated lower revenue and operating income than a year earlier. But newly-acquired ViaWest offset the shortfall.

The company has raised its dividend again, to $1.185 a year. This yields an attractive four per cent. The shares (TSX─SJR.B) remain a buy for long-term price gains as well as attractive and rising dividends.

In the three months to Nov. 30, 2014, Shaw Communications earned $227 million, or 46 cents a share. This was down by 9.8 per cent from $245 million, or 51 cents a share, a year earlier. In fact, without the September 2, 2014, acquisition of ViaWest Inc., Shaw would’ve done even worse.

As we reported in August, 2014, Shaw paid $1.2 billion for ViaWest. It was one of the largest privately-held providers of data centre infrastructure, cloud technology and managed information technology services in North America. Shaw writes that through the acquisition it “has gained significant capabilities, scale and immediate expertise in the growing market for enterprise data services.”

ViaWest offset lower results

Shaw says that its consolidated revenue rose by two per cent, to $1.389 billion. But ViaWest added $55 million in Business Infrastructure Services to Shaw’s revenue. Remove this and the company’s revenue declined to $1.334 billion. This was down by nearly 2.1 per cent from a year earlier.

Shaw’s large Consumer and Media divisions saw their first-quarter revenue fall $18 million each. The migration of ads to the Internet is hurting this source of revenue for traditional media. The $36 million decline overcame a rise of $8 million from the smaller Business Network Services segment. What saved the day was $55 million in new revenue from ViaWest.

Similarly, Shaw writes that its “operating income before amortization of $606 million was comparable to the prior period.” In fact, it was down slightly from $608 million a year earlier. Without ViaWest’s operating income before amortization of $21 million, Shaw’s decline would’ve been more severe.

On the positive side, Shaw’s acquisition of ViaWest is likely to pay off. It writes that “excluding the impact of foreign exchange, ViaWest is on track to achieve year-over-year low to mid-teen revenue and operating income before amortization growth.” That’s faster growth than its older businesses.

Shaw launched Shomi in November

Shaw is also investing in new initiatives. In November, for instance, Shaw teamed up with Rogers Communications to launch Shomi, a subscription video-on-demand service with the most popular movies and television shows. This should add to its revenue.

Shomi will offer 14,000 episodes and titles, 11,000 hours of TV shows, 1,200 movies and 340 TV series. It should succeed, particularly if Netflix is forced to charge its customers taxes.

In the first quarter, Shaw increased the number of its WiFi “hotspots” to 55,000. Even so, its capital investment declined in the first quarter. This improved the company’s free cash flow by $36 million, to $193 million. As a result, it felt confident enough to cement its position as a ‘dividend aristocrat’ by raising its dividend again.

In fiscal 2015, Shaw is now expected to earn $1.87 a share. That would represent earnings per share growth of 5.6 per cent from $1.77 a share last year. But if it keeps earning less, this estimate will fall.


The Investment Reporter, MPL Communications Inc.
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