DBRS Confirms Shaw Communications at BBB, Pfd-3, Stable Trends

DBRS has today confirmed Shaw Communications Inc.’s (Shaw or the Company) Issuer Rating at BBB, Senior Notes rating at BBB, and Preferred Shares rating at Pfd-3; the trends remain Stable. The confirmation reflects the view that the Company’s earnings profile remains reasonable for its current rating category, based on its incumbent position in Western Canada, large subscriber base and industry-leading operating margins, while acknowledging that intensifying competition is placing increasing pressure on the Company’s cable television and broadband subscriber base. DBRS notes that slowing top-line growth in recent periods is also somewhat offset by the fact that key credit metrics remain reasonable for the current rating category.

Shaw’s revenue growth rate decelerated to 5.4% in F2012 versus almost 10% in prior years as Shaw’s broadband Internet and home phone subscriber growth was partially offset by declines in cable TV subscribers. The Company’s TV segment lost 70,000 basic cable subscribers (predominantly to TELUS Corporation) over the period while Internet and home phone subscriber growth decelerated compared to prior years. That said, consolidated operating margins remained relatively stable at 43%, resulting in EBITDA growth of 4% to $2.1 billion. Shaw’s financial profile remains relatively stable and consistent with the current rating category as operating income/cash flow generation and debt levels have remained fairly steady. Gross debt-to-EBITDA decreased slightly to 2.47 times (x) for F2012 from 2.56x the prior year.

DBRS expects Shaw’s earnings profile to remain within a range consistent with the current rating category over the near term; however, we note that it could come under pressure if Shaw continues to lose TV and Internet subscriber share to the competition. Sustained TV subscriber losses may begin to affect Shaw’s broadband and, possibly, home phone subscriber bases in the future should subscribers switching television service providers choose to bundle. This could place pressure on the Company’s revenue growth over the next few years. DBRS forecasts revenues will be flat to slightly higher in F2013, ranging between $5 billion and $5.2 billion, with gains coming primarily from rate hikes. Although DBRS expects Shaw’s consolidated EBITDA margins to remain relatively stable (above 40%) over the near term, we caution that it may be challenging for the Company to maintain 47% EBITDA margins in its Cable segment with subscriber declines over the longer term (due to its high fixed cost structure).

DBRS also expects Shaw’s financial profile to remain within a range adequate for the current rating category in the near term. The concern is that sustained pressure on cash flow, combined with the Company’s high dividend payout, may challenge financial flexibility over the longer term. DBRS forecasts that operating cash flow will grow modestly to between $1.3 billion and $1.4 billion in F2013, while capex requirements in F2013 are expected to decline modestly to slightly above $900 million. DBRS expects Shaw to increase its declared dividend by approximately 5% in F2013. As such, DBRS forecasts that the Company may only generate nominally positive free cash flow before working capital in F2013. DBRS believes Shaw may pursue network improvements, subsidized set-top box upgrades and other investments at some point in the future. The corresponding capital requirements would have to be funded by external financing, non-core asset dispositions or meaningfully higher cash flow generated from operations. Shaw’s financial management objectives include maintaining gross debt-to-EBITDA in the 2.0x to 2.5x range. If Shaw’s credit metrics are challenged by weakness in operating income and/or higher debt levels, the Company’s ratings could come under pressure.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating the Communications Industry and Rating the Television Broadcasting Industry, which can be found on our website under Methodologies.