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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Chorus 1H21 — Share Price Jumping at Shadows

OUTPERFORM
We saw little significant new information in Chorus's (CNU) 1H21 result, and nothing that explained the share price weakness on the day. Perhaps (1) Vodafone NZ's announced launch of 5G fixed wireless access (FWA) broadband reignited concerns about the competitive threat to CNU — we continue to believe fibre and FWA can coexist non-detrimentally, or (2) higher near-term debt and capex have lowered expectations for the medium-term dividend path. We maintain the view CNU will generate strong free cash flow over the medium to long-term that could support a sustained dividend in the NZ50–60cps range. Rising bond yields are headwind for dividend stocks, but in CNU's case increased rates are also reflected in a higher regulatory WACC and allowable revenue. Maintain OUTPERFORM.


A no major surprises result


Modest declines in CNU's revenue and EBITDA, down -2% and -3% respectively, reflect market share losses to fibre outside its ultra fast broadband (UFB) footprint and to fixed wireless. EBITDA is “tracking towards the lower half” of NZ$640–660m guidance, consistent with our expectation. Capex guidance increased NZ$30m to NZ$670–700m, reflecting (1) demand for greenfield fibre (from new houses) “ahead of expectations”, and (2) greater mass market fibre connections. This is business as usual for CNU, with (positive, demand-driven) increases to capex and lower debt costs post re-financing the principal changes to our forecasts.


Prospect for a step change in dividend still in tact


A key question for investors remains the level of free cash flow (FCF) and dividend CNU will generate once its fibre network is complete in 2022. CNU reiterated it will transition to a FCF-based dividend policy from FY22, where FCF is defined as operating cash flows less maintenance capex of c.NZ$200m pa. Our forecasts suggest CNU can sustainably generate FCF (on this definition) of c.NZ65–70cps pa (albeit with partial tax paid due to depreciation tax shields), supporting a long-term dividend above NZ50cps. Higher near-term capex may flatten the gradient of dividend increases medium-term, but should not impact the longer-term payout.&nbsp;


Regulatory conclusion in sight


The most material driver of CNU’s valuation remains the to-be-finalised regulatory process and the resulting maximum allowable revenue (MAR) for its fibre network. Positively, CNU's regulatory proposals/forecasts (capex, opex,&nbsp; fibre revenues) continue to appear (we require further clarification) higher than our assumptions, representing upside risk to our forecasts. Precedents do highlight the CC may not fully accept CNU's proposals and we have not revised our assumptions at this time. We will further review these risks in the near future. The CC’s current schedule is to finalise the regulatory process in 3Q/4Q 2021.




Matt Henry CFA
matthew.henry@forsythbarr.co.nz
+64 9 368 0115




Chorus: 1H21 — Share Price Jumping at Shadows

Chorus Ltd

Chorus: 1H21 — Share Price Jumping at Shadows