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. All trends remain Stable. The confirmation reflects the view that the Company’s earnings profile remains adequate and its financial profile remains reasonably sound for the current rating categories. The ratings continue to be supported by Shaw’s incumbent position in western Canada, its large subscriber base and its industry-leading operating margins. The ratings also acknowledge that the intensifying competition, combined with market maturation, is placing increasing pressure on the Company’s subscriber base.

Shaw’s revenue growth rate for the nine months ended F2013 continued to decelerate, falling to 2.9%. DBRS notes the trend of deceleration in subscriber revenue began in early F2012, with top-line growth slowly declining from the mid-to-high single-digit increases seen in F2011 and F2010. As Shaw’s decelerating broadband Internet and home phone subscriber growth was largely offset by declines in cable TV subscribers, revenue growth was primarily a result of rate increases. The Company’s TV segment lost almost 80,000 basic cable subscribers (predominantly to TELUS Corporation (TELUS)) over the period, while Internet and home phone subscriber growth also decelerated. Operating income grew modestly, increasing from $1.6 billion to $1.7 billion over the period. Shaw’s financial profile remained consistent with the current rating category as cash flow generation remained stable and debt levels declined moderately. LTM gross debt-to-EBITDA decreased to 2.16x from 2.47x at the end of F2012.

Going forward, DBRS notes that Shaw’s earnings profile could come under pressure if the Company continues to lose subscriber share to the competition. Sustained TV subscriber losses may begin to affect Shaw’s home phone and, possibly, broadband subscriber bases in the future, should subscribers switching television service providers choose to bundle. DBRS has also made note of the popularity of over-the-top services and the potential for increased cord cutting going forward. As DBRS does not expect price increases to continue indefinitely, subscriber declines could place pressure on the Company’s revenue growth over the next few years. DBRS forecasts revenues will be flat to slightly higher in F2014, ranging between $5 billion and $5.2 billion, with gains attributed primarily to 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 high 40% operating margins in its Cable segment with subscriber declines over the longer term (due to its high fixed-cost structure).

In terms of financial prolife, DBRS also expects Shaw to remain within a range adequate for the current rating category in the near term. The concern is that 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 continue to grow modestly, ranging between $1.35 billion and $1.45 billion in F2014. Capex is expected to rise modestly, to above $900 million. In terms of dividends, DBRS expects Shaw to increase its declared dividend by 5-10% in F2014. As such, DBRS forecasts that the Company will likely end up free cash flow neutral before working capital in F2014. DBRS expects $750 million of annual Cable capex going forward (independent of the completion of the Company’s accelerated capex program over the next three years, which will be funded primarily through asset sales). DBRS continues to note that Shaw’s financial management objectives include maintaining net 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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