We are downgrading our recommendation on Shaw Communications (SJR) to Underperform ahead of the release of its third quarter-fiscal 2012 financial results. The company continues to lose basic cable TV customers, reflecting that management has yet to make a turnaround. Since the company already abandoned its wireless venture, it is very crucial for Shaw Communications to execute video offerings properly.

Furthermore, the Media segment is facing continued softness in the Canadian advertisement market. Apart from the video segment, the company markedly improved its customer base for other offerings in the previous quarter. However, this impressive performance is related to massive spending for aggressive promotional activities, resulting in sheer fall of EBITDA margin and free cash flow.

Consequently, the company reduced its previous outlook for fiscal 2012. We do not find any immediate growth catalyst for Shaw Communications and believe the company will continue to face increasing competitive pressures in the near future. We thus downgrade our rating with a price target of $17, based on 11.3x our fiscal 2012 earnings estimate.

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