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>
ComCom update lost in translation?
We believe the market has most likely overreacted to Friday’s Commerce Commission (CC) announcement, but we acknowledge the CC’s language is somewhat unclear and are seeking clarification. At this time we remain comfortable with our OUTPERFORM rating.
Commerce Commission release
On Friday the Commerce Commission (CC) released (a seemingly innocuous) update on the timetable for determining the input methodologies that feed into the fibre regulatory framework.
The release included the statement that the CC is “considering making (changes) to our approach to valuing the financial loss asset” which will be included in Chorus’s (CNU) initial regulatory asset base (RAB). Our current estimate of this initial loss is c.NZ$1.2b, which accounts for 23% of our opening RAB as at 1 January 2022. As CNU stated on Friday, 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).
The CC statement: “The changes we are considering in relation to the financial loss asset 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 UFB Initiative. Further details on these issues will be provided in our second consultation paper&nbsp;(to be published on 13 August).”
Lost in translation?
After reassessing the CC documentation to date including reports from advisor Martin Lally, 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.
We do not believe the CC review represents material risk to our CNU valuation or investment view, but acknowledge there is uncertainty around the CC’s language and intentions. We are seeking clarification.
A more punitive interpretation would mean CNU earns sub-WACC returns for the decade before commencement of the fibre regulatory regime on 1 January 2022 (and WACC thereafter). This is inconsistent with the principles of New Zealand’s regulatory framework and the practices of the CC to date.
Matt Henry &nbsp;CFA Head of Wealth Management Research <a href="https://www.forsythbarr.co.nz/" target="_blank" rel="noopener">Forsyth Barr Limited</a>
M: +64 21 329 291 |P: +64 9 368 0115 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland

Chorus
ComCom update lost in translation?
We believe the market has most likely overreacted to Friday’s Commerce Commission (CC) announcement, but we acknowledge the CC’s language is somewhat unclear and are seeking clarification. At this time we remain comfortable with our OUTPERFORM rating.
Commerce Commission release
On Friday the Commerce Commission (CC) released (a seemingly innocuous) update on the timetable for determining the input methodologies that feed into the fibre regulatory framework.
The release included the statement that the CC is “considering making (changes) to our approach to valuing the financial loss asset” which will be included in Chorus’s (CNU) initial regulatory asset base (RAB). Our current estimate of this initial loss is c.NZ$1.2b, which accounts for 23% of our opening RAB as at 1 January 2022. As CNU stated on Friday, 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).
The CC statement: “The changes we are considering in relation to the financial loss asset 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 UFB Initiative. Further details on these issues will be provided in our second consultation paper&nbsp;(to be published on 13 August).”
Lost in translation?
After reassessing the CC documentation to date including reports from advisor Martin Lally, 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.
We do not believe the CC review represents material risk to our CNU valuation or investment view, but acknowledge there is uncertainty around the CC’s language and intentions. We are seeking clarification.
A more punitive interpretation would mean CNU earns sub-WACC returns for the decade before commencement of the fibre regulatory regime on 1 January 2022 (and WACC thereafter). This is inconsistent with the principles of New Zealand’s regulatory framework and the practices of the CC to date.
Matt Henry &nbsp;CFA Head of Wealth Management Research Forsyth Barr Limited
M: +64 21 329 291 |P: +64 9 368 0115 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland

Chorus: ComCom Update Lost in Translation?

Chorus Ltd

Chorus: ComCom Update Lost in Translation?