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>
<p><strong>ComCom&nbsp;Message Lost in Translation?</strong></p>
<p><strong>OUTPERFORM</strong></p>
<p>We believe the market has likely overreacted to the Commerce Commission's (CC) latest release on the fibre regulatory process. We acknowledge the CC's communication is not completely clear, however, when considered in a broader context we do not believe the announced review represents material risk to our Chorus (CNU) valuation or investment view. We remain comfortable with our OUTPERFORM rating.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/969/original/image_52686050521594683703264.png?1594683703" class="editor-image img-responsive" data-smartkarma-image-id="145969"></figure>
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<h3>ComCom&nbsp;update — loose language or potential for a material change in view?</h3>
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<p>On Friday the CC provided an update on the timetable for determining the input methodologies that feed into the fibre regulatory framework. The announcement included a&nbsp;statement that it&nbsp;is "considering making (changes) to our approach to valuing the financial loss asset" (i.e. the losses on the fibre network prior to the first regulatory period commencing 1 January 2022) which will be included in&nbsp;CNU's&nbsp;initial regulatory asset base (RAB). The changes the CC is "considering ... involve adopting a discounted cash flow approach to valuation, rather than the building blocks approach proposed in our November 2019 draft decisions, and a different treatment of investments that pre-date the&nbsp;UFB&nbsp;Initiative".</p>
<p>Our current estimate of CNU's financial loss is NZ$1.2b, which accounts for c.23% of our opening RAB. As CNU stated, a revision to this figure "could have a material impact on the initial value of the loss asset" (and therefore the valuation of CNU's fibre network). ​​​​​​​</p>
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<h3>Message likely lost in translation</h3>
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<p>After reassessing previously released CC documentation, our view is that the principal difference between the building blocks and discounted cash flow approaches is the timing of when the cost of capital is determined — upfront or on an annual basis. Our modelling already assumed cost of capital is determined on an annual basis — the more conservative assumption given the decline in interest rates over the past decade.</p>
<p>The broader context gives us comfort that the CC's review will not likely have a material impact on our CNU valuation or investment view. The Telecommunications Act looks clear — the financial losses included in the RAB "must take into account any accumulated unrecovered returns on investments made by the provider under the UFB (ultra-fast broadband) initiative" and are "adjusted to reflect present value". In our opinion, a materially more punitive approach from the CC would not adhere with the legislation or New Zealand regulatory principles, nor would it be consistent with the CC's even-handed and coherent approach to establishing the regime to date.</p>
<p>The next steps from the CC in the input methodologies process are (1) an updated Draft Determination to be released on 23 July, and (2) a consultation paper on the financial loss asset to be released on 13 August.</p>
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<div><strong>Matt Henry CFA</strong></div>
<div><a href="mailto:matthew.henry@forsythbarr.co.nz" target="_blank" rel="noopener">matthew.henry@forsythbarr.co.<wbr>nz</a></div>
<div>+64 9 368 0115</div>
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Chorus
ComCom&nbsp;Message Lost in Translation?
OUTPERFORM
We believe the market has likely overreacted to the Commerce Commission's (CC) latest release on the fibre regulatory process. We acknowledge the CC's communication is not completely clear, however, when considered in a broader context we do not believe the announced review represents material risk to our Chorus (CNU) valuation or investment view. We remain comfortable with our OUTPERFORM rating.


ComCom&nbsp;update — loose language or potential for a material change in view?


On Friday the CC provided an update on the timetable for determining the input methodologies that feed into the fibre regulatory framework. The announcement included a&nbsp;statement that it&nbsp;is "considering making (changes) to our approach to valuing the financial loss asset" (i.e. the losses on the fibre network prior to the first regulatory period commencing 1 January 2022) which will be included in&nbsp;CNU's&nbsp;initial regulatory asset base (RAB). The changes the CC is "considering ... involve adopting a discounted cash flow approach to valuation, rather than the building blocks approach proposed in our November 2019 draft decisions, and a different treatment of investments that pre-date the&nbsp;UFB&nbsp;Initiative".
Our current estimate of CNU's financial loss is NZ$1.2b, which accounts for c.23% of our opening RAB. As CNU stated, a revision to this figure "could have a material impact on the initial value of the loss asset" (and therefore the valuation of CNU's fibre network). ​​​​​​​


Message likely lost in translation


After reassessing previously released CC documentation, our view is that the principal difference between the building blocks and discounted cash flow approaches is the timing of when the cost of capital is determined — upfront or on an annual basis. Our modelling already assumed cost of capital is determined on an annual basis — the more conservative assumption given the decline in interest rates over the past decade.
The broader context gives us comfort that the CC's review will not likely have a material impact on our CNU valuation or investment view. The Telecommunications Act looks clear — the financial losses included in the RAB "must take into account any accumulated unrecovered returns on investments made by the provider under the UFB (ultra-fast broadband) initiative" and are "adjusted to reflect present value". In our opinion, a materially more punitive approach from the CC would not adhere with the legislation or New Zealand regulatory principles, nor would it be consistent with the CC's even-handed and coherent approach to establishing the regime to date.
The next steps from the CC in the input methodologies process are (1) an updated Draft Determination to be released on 23 July, and (2) a consultation paper on the financial loss asset to be released on 13 August.




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




Chorus: ComCom Message Lost in Translation?

Chorus Ltd

Chorus: ComCom Message Lost in Translation?