DBRS Morningstar Upgrades Ratings on Shaw Communications Inc. to BBB, Changes Trends to Stable

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and Senior Notes rating of Shaw Communications Inc. (Shaw or the Company) to BBB from BBB (low). DBRS Morningstar also upgraded Shaw’s Preferred Shares rating to Pfd-3 from Pfd-3 (low). DBRS Morningstar also changed all trends to Stable from Positive. The rating actions reflect the Company’s strong operating performance over the last two years with particular emphasis on solid execution in the F2020 period ending August 31, 2020. During this period, the Wireless division improved its market share position and management continued to optimize operating efficiencies and returns, despite consumer and economic uncertainty related to the Coronavirus Disease (COVID-19) pandemic, while the Company maintained its leverage target at 2.5 times (x) to 3.0x. The ratings reflect Shaw’s improved market position and multiple brand offerings in Western Canada, development of a high-quality network, and future wireless growth opportunity in attractive urban markets covering approximately 50% of the Canadian market. The new ratings continue to consider the intense competitive landscape, high capital intensity, high dividend payout, and risks associated with the potentially changing regulatory environment.

On December 3, 2019, DBRS Morningstar confirmed Shaw’s ratings at BBB (low), but changed the trends to Positive from Stable. At that time, DBRS Morningstar indicated that it may take a positive rating action if Shaw continued to witness healthy net subscriber and financial growth in its Wireless segment and deliver stable profit in its Wireline segment while sustaining its current leverage (i.e., a gross debt-to-EBITDA ratio between 2.5x and 3.0x).

Since then, Shaw’s F2020 consolidated profit was slightly higher than DBRS Morningstar’s forecast, primarily because of a materially higher-than-expected margin contribution from the rapidly growing Wireless segment. Wireline segment profit was essentially in line with expectations, despite the impact of the coronavirus through H1 F2020. Consolidated revenue of $5.4 billion (+1.3% year over year (YOY)) reflected solid revenue growth of 11.4% YOY to $1.2 billion in the Wireless segment, which offset a 1.2% YOY decline in Wireline segment revenue growth. In F2020, Wireless segment revenue represented approximately 22% of consolidated revenue, up from approximately 17% in F2018, as the Company continues to expand its mobile offering, improve network performance, and better establish its brands in the marketplace.

Shaw’s Wireless business experienced an increase of 163,000 net subscriber additions in F2020. Although this was below DBRS Morningstar’s F2020 Wireless forecast of approximately 205,000 net subscriber additions, coronavirus-related retail store lockdowns that began in mid-March 2020 negatively affected annual results. DBRS Morningstar notes that approximately 90% of mobile devices are bought in person and in store, and that coronavirus-related retail closures will likely continue to affect “normal” consumer behaviour across the industry. Average billing per user (ABPU) was up 5.9% YOY to $44.13 on a comparable basis, suggesting that the Company is gaining traction with its Unlimited and By the Gig plans that have higher price points, but larger data buckets. Revenue performance in the Wireline segment declined by 1.2% YOY to $4.25 billion as weakness in Consumer revenue (-1.6% YOY to $3.68 billion) with subscriber declines in all four services more than offset YOY growth in Business revenue (+1.8% to $567 million).

Reported EBITDA margins improved by 388 basis points YOY to 44.2% with margin expansion in both the Wireless and the Wireline segments primarily related to a higher revenue base in Wireless, lower Wireless churn, an improved bundled services offering, and ongoing cost-saving initiatives. As such, reported consolidated EBITDA increased by 11.0% YOY (+3.7% YOY on a comparable IFRS 16 basis) to $2.39 billion in F2020.

Shaw’s financial profile was stable through F2020, despite the negative impact of consumer and economic uncertainty created by the coronavirus. Cash flow from operations increased by 11.2% YOY to $1.99 billion in F2020 and was more than sufficient to fund Shaw’s high capital expenditure (capex) program ($1.15 billion) and material cash dividend payments ($573 million). Free cash flow (FCF) after dividends, but before changes in working capital was $254 million in F2020 compared with $81 million in F2019, representing 4.2% of gross debt, which was in line with DBRS Morningstar’s expectation. The gross debt-to-EBITDA ratio was 2.55x (on a comparable IFRS 16 basis) compared with a DBRS Morningstar-estimated 3.09x in F2019, reflecting both a decline in lease-adjusted gross debt and an increase in EBITDA. Shaw ended F2020 with approximately $2.3 billion in liquidity comprising $763 million in cash and $1.5 billion available on its fully undrawn credit facility that matures in December 2024. DBRS Morningstar notes that the Company has no senior debt maturities until November 2023 ($500 million 3.80% Senior Notes due November 2, 2023).

Over the near to medium term, DBRS Morningstar believes that Shaw’s earnings should benefit from several key strategic initiatives in F2020, including launching the Shaw Mobile wireless offering, rebranding the wireline offering to Fibre+, and introducing a quad-play bundle in the Alberta and British Columbia regions. DBRS Morningstar expects that these initiatives should enable Shaw to offer a compelling value proposition within the industry. The competitive dynamic in the marketplace looks to have intensified in H2 2020; however, with two distinct wireless brand offerings, a solid complement of wireline services, a streamlined pricing/bundling go-to-market strategy in H2 F2020, and improving network performance, DBRS Morningstar expects that the Company will continue to deliver modest but profitable long-term growth in its Consumer division and better-than-industry-average Wireless profit growth. Taken together, Wireless segment growth in terms of subscribers and ABPU combined with improving churn rates should offset Wireline revenue generating unit (RGU) declines, particularly in video and telephony services. While DBRS Morningstar expects Wireline RGU declines to continue, they should be offset by rate increases, the migration to larger Internet data packages and speeds and growth in the Business segment. In F2021, DBRS Morningstar expects Shaw’s revenue to grow in the low- to mid-single-digit range to $5.5 billion to $5.6 billion and increase to about $5.8 billion in F2022 with low-single-digit revenue declines in the Wireline segment that will partially offset substantial growth in the Wireless segment. While DBRS Morningstar expects the consolidated EBITDA margin to decline modestly YOY, primarily as a result of Wireless margin pressure reflecting increased device loading as coronavirus restrictions ease, EBITDA should increase in the low-single-digit range. As such, DBRS Morningstar expects consolidated EBITDA to increase to $2.4 billion to $2.5 billion in F2021 and toward $2.6 billion in F2022.

DBRS Morningstar expects Shaw’s financial profile to remain supportive of the new rating level through the capital investment cycle, supported by sound operating performance and sustainable cash flows and reflecting EBITDA growth rather than debt reduction. DBRS Morningstar expects FCF to be positive through the forecast period, tracking improvement in operating income and reflecting a capex program that ranges from $1.0 billion to $1.2 billion through F2023 (not including spectrum acquisition costs). DBRS Morningstar expects FCF (before dividend payments) to exceed $800 million in F2021 and that the Company will likely reinstitute share repurchase activity through its normal course issuer bid program in F2021. Shaw’s FCF-to-debt ratio should remain in the mid-single-digit range. DBRS Morningstar expects the Company’s gross debt-to-EBITDA ratio to remain between 2.50x and 3.0x through F2024. With roughly $2.3 billion of liquidity available and, as of August 31, 2020, the ability to generate solid FCF with no debt maturities until November 2023, DBRS Morningstar believes that Shaw is well positioned to fund wireless spectrum license purchases, for which the bulk of payments are expected to occur in F2022 and F2023.

DBRS Morningstar does not anticipate a change in Shaw’s ratings over the near to medium term. However, if the Company achieved a substantial increase in wireless market share with commensurate growth in the Wireless segment’s earnings profile, maintained profitability in the Wireline segment, materially grew its cash-generating ability, and maintained its current leverage (i.e., gross debt-to-EBITDA ratio between 2.5x and 2.75x), a rating upgrade may occur. Conversely, if despite the utility-like nature of the industry, the Wireless division is unable to continue delivering improving profit growth and/or there is a material deterioration in Wireline operating performance (which could reflect regulatory actions) in addition to a sustainable rise in leverage, a negative rating action may ensue.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Communications Industry (July 30, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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