New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Chorus</h2>
1H20 Result — Cash Prize In Sight
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127
OUTPERFORM&nbsp;
Chorus’s (CNU) 1H20 result and upgraded guidance were ahead of our expectations; however, we suspect it was the indication of a material, medium-term step up in dividend that triggered the positive market reaction. CNU inferred that from FY22 it will pay out a high portion of its free cash flow (FCF) as dividends. We estimate from FY24 (when the "communal" part of the fibre network is complete) CNU will generate FCF &gt;NZ70cps (albeit with nil tax paid). This attractive FCF profile continues to underpin our positive investment view; maintain OUTPERFORM.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">CNU</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$6.73</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">53.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">55.9</td>
<td style="text-align: left; width: 43.2pt;">51.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">51.3&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">8.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.4</td>
<td style="text-align: left; width: 48pt;">8.5</td>
<td style="text-align: left; width: 42.6pt;">8.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target Price</td>
<td style="width: 48pt;">NZ$6.90</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">12.2</td>
<td style="text-align: left; width: 42.6pt;">12.6</td>
<td style="text-align: left; width: 43.2pt;">11.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">11.5</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">21.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">21.6</td>
<td style="text-align: left; width: 48pt;">22.7</td>
<td style="text-align: left; width: 42.6pt;">22.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">High</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">-39.7</td>
<td style="text-align: left; width: 42.6pt;">3.7</td>
<td style="text-align: left; width: 43.2pt;">-9.4</td>
<td style="text-align: left; width: 48pt;">0.5&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">439.3m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">23.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">24.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">25.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">30.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">3.8</td>
<td style="text-align: left; width: 42.6pt;">4.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.3</td>
<td style="text-align: left; width: 42.6pt;">4.8</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$2,956m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">43</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">3.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">3.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.5</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">455.4k (NZ$2,565k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">4.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.2</td>
<td style="text-align: left; width: 42.6pt;">5.2&nbsp;</td>
</tr>
</tbody>
</table>
Cost savings coming earlier than we expected
CNU's revenue, down -1%, has now largely stabilised with the growing fibre base now bigger than the declining copper one. For us, the surprise in 1H20 was the sharp reduction in operating costs, including a -6% decline in staff numbers, lower maintenance costs (helped by both the transition to a new fibre network, and less adverse weather events), and a reduction in the Telco Development (regulatory) Levy. Lower opex underpin both (1) a lift in FY20 EBITDA guidance to NZ$640–655m (from NZ$625–645m), and (2) upgrades to our medium-term forecasts FY20/21/22E EBITDA +4%/+6%/+5%. We expect opex reductions to be an ongoing feature as CNU's focus shifts from network build to network operations.
Free cash flow and increased dividend one step closer
In our opinion, the positive share price reaction to CNU's result is a response to (1) the company's statement it expects to generate "substantial FCF" once the fibre network build is complete in 2022, and (2) its indication it will distribute a high portion of this FCF to shareholders. We estimate from FY24 (when the "communal" part of the fibre network is complete) CNU will generate FCF &gt;NZ70cps (with nil tax paid), and assume a long-term sustainable dividend of c.NZ50cps (partly imputed long-term). CNU reiterated its current imputation credit balance will be fully utilised during FY22, and for a period thereafter dividends will not be imputed (consistent with our forecasts). CNU may consider other capital management options and has c.NZ$225m of available subscribed capital to buy back stock tax efficiently.
Regulatory settings remain a key driver
The most material medium-term driver of CNU’s valuation remains the to-be-finalised regulatory settings and maximum allowable revenue (MAR) for its fibre network. In November, the regulatory picture improved with the Commerce Commission’s (CC) draft decision on the “input methodologies” which will feed into determining CNU's MAR. The potential range of outcomes has narrowed, but (1) there still remains an element of uncertainty, with (2) the valuation implications magnified by CNU’s high operating and financial leverage. The CC’s current schedule is to finalise the input methodologies on 2 June 2020, and the MAR in 2Q 2021

Chorus
1H20 Result — Cash Prize In Sight
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127
OUTPERFORM&nbsp;
Chorus’s (CNU) 1H20 result and upgraded guidance were ahead of our expectations; however, we suspect it was the indication of a material, medium-term step up in dividend that triggered the positive market reaction. CNU inferred that from FY22 it will pay out a high portion of its free cash flow (FCF) as dividends. We estimate from FY24 (when the "communal" part of the fibre network is complete) CNU will generate FCF &gt;NZ70cps (albeit with nil tax paid). This attractive FCF profile continues to underpin our positive investment view; maintain OUTPERFORM.
         


NZX Code
CNU
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$6.73
NPAT* (NZ$m)
53.0&nbsp;
55.9
51.0&nbsp;
51.3&nbsp;
EV/EBITDA
8.4&nbsp;
8.4
8.5
8.4&nbsp;


Target Price
NZ$6.90
EPS* (NZc)
12.2
12.6
11.5&nbsp;
11.5
EV/EBIT
21.9&nbsp;
21.6
22.7
22.3&nbsp;


Risk rating
High
EPS growth* (%)
-39.7
3.7
-9.4
0.5&nbsp;
PE
n/a
n/a
n/a
n/a


Issued shares
439.3m
DPS (NZc)
23.0&nbsp;
24.0&nbsp;
25.0&nbsp;
30.0&nbsp;
Price/NTA
3.8
4.0&nbsp;
4.3
4.8


Market cap
NZ$2,956m
Imputation (%)
100
100
100
43
Cash div yld (%)
3.4&nbsp;
3.6&nbsp;
3.7&nbsp;
4.5


Avg daily turnover
455.4k (NZ$2,565k)
*Based on normalised profits


Gross div yld (%)
4.7&nbsp;
5.0&nbsp;
5.2
5.2&nbsp;



Cost savings coming earlier than we expected
CNU's revenue, down -1%, has now largely stabilised with the growing fibre base now bigger than the declining copper one. For us, the surprise in 1H20 was the sharp reduction in operating costs, including a -6% decline in staff numbers, lower maintenance costs (helped by both the transition to a new fibre network, and less adverse weather events), and a reduction in the Telco Development (regulatory) Levy. Lower opex underpin both (1) a lift in FY20 EBITDA guidance to NZ$640–655m (from NZ$625–645m), and (2) upgrades to our medium-term forecasts FY20/21/22E EBITDA +4%/+6%/+5%. We expect opex reductions to be an ongoing feature as CNU's focus shifts from network build to network operations.
Free cash flow and increased dividend one step closer
In our opinion, the positive share price reaction to CNU's result is a response to (1) the company's statement it expects to generate "substantial FCF" once the fibre network build is complete in 2022, and (2) its indication it will distribute a high portion of this FCF to shareholders. We estimate from FY24 (when the "communal" part of the fibre network is complete) CNU will generate FCF &gt;NZ70cps (with nil tax paid), and assume a long-term sustainable dividend of c.NZ50cps (partly imputed long-term). CNU reiterated its current imputation credit balance will be fully utilised during FY22, and for a period thereafter dividends will not be imputed (consistent with our forecasts). CNU may consider other capital management options and has c.NZ$225m of available subscribed capital to buy back stock tax efficiently.
Regulatory settings remain a key driver
The most material medium-term driver of CNU’s valuation remains the to-be-finalised regulatory settings and maximum allowable revenue (MAR) for its fibre network. In November, the regulatory picture improved with the Commerce Commission’s (CC) draft decision on the “input methodologies” which will feed into determining CNU's MAR. The potential range of outcomes has narrowed, but (1) there still remains an element of uncertainty, with (2) the valuation implications magnified by CNU’s high operating and financial leverage. The CC’s current schedule is to finalise the input methodologies on 2 June 2020, and the MAR in 2Q 2021

Chorus: 1H20 Result — Cash Prize In Sight

Chorus Ltd

Chorus: 1H20 Result — Cash Prize In Sight