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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Chorus<br>FY21&nbsp;— Cautious Dividend Guidance</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Chorus's FY21 result was in line with expectations, with the main new information being&nbsp;FY22 guidance. Those (including us) looking for an acceleration in&nbsp;CNU's&nbsp;dividend would have been disappointed by "initial" guidance. We, however, expect this might prove conservative given available free cash flow (FCF), likely lift in debt rating hurdles, and potential improvements to draft regulatory&nbsp;settings for&nbsp;CNU's&nbsp;ultra-fast broadband (UFB) network.&nbsp;Even if CNU sticks to its FY22 guidance, we remain comfortable with the view that the lift in&nbsp;CNU's&nbsp;FCF can support a ramp up in its&nbsp;dividend to around NZ50cps over the medium-term,​​​​​​&nbsp;a return we believe will prove appealing relative to other defensive stocks in the NZ market. Maintain OUTPERFORM.​​​​​​​</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings/target&nbsp;price</strong>: No material changes. Target price tweak reflects longer-term capex and opex assumptions.</li>
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<h3>No surprises in FY21 numbers</h3>
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<p>Operationally FY21 was business-as-usual for CNU. A modest decline&nbsp;in&nbsp;revenue, down -1% on&nbsp;market share losses to fibre outside its UFB network&nbsp;footprint (primarily) and fixed wireless, was offset by cost reductions to deliver flat EBITDA.&nbsp;CNU&nbsp;expects these trends to continue with&nbsp;FY22&nbsp;EBITDA guidance of NZ$640–660m (cf.&nbsp;FY21&nbsp;NZ$648m).&nbsp;​​​​​​​​​​<wbr>​​​​​​​​​​​​​​​​​</p>
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<h3>Dividend guidance could prove conservative</h3>
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<p>A key question for investors remains the level of FCF and dividend CNU will generate once its fibre network is complete by the end of 2022. The main new information provided was FY22 guidance, including for capex and the dividend, which were above and below consensus expectation <wbr>respectively. Higher&nbsp;capex&nbsp;reflects (positive) demand for fibre network connections.</p>
<p>Dividend guidance reflects (i) higher capex, (ii) payout constraints within CNU’s BBB credit rating, and (iii) remaining uncertainties around the final regulatory settings for CNU's UFB network (scheduled to be finalised in December). We view this guidance as likely conservative given (i) our forecasts have debt falling in each of the next three years, (ii) we expect the rating agencies will likely revise rating hurdles once CNU has UFB regulatory clarity, and (iii) we see potential improvements for CNU in the final UFB decision specifically on opex allocated to the UFB (in our view, the CC's assumptions are highly subjective and appear prima facie imbalanced — relative to our forecasts the UFB represents c.77% of CNU's revenue but only c.55% of cost). Even if CNU sticks to its FY22 guidance, we remain comfortable with the view that the lift in CNU's FCF can support a ramp up in its dividend to around NZ50cps over the medium-term.</p>
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Chorus FY21&nbsp;— Cautious Dividend Guidance

OUTPERFORM
Chorus's FY21 result was in line with expectations, with the main new information being&nbsp;FY22 guidance. Those (including us) looking for an acceleration in&nbsp;CNU's&nbsp;dividend would have been disappointed by "initial" guidance. We, however, expect this might prove conservative given available free cash flow (FCF), likely lift in debt rating hurdles, and potential improvements to draft regulatory&nbsp;settings for&nbsp;CNU's&nbsp;ultra-fast broadband (UFB) network.&nbsp;Even if CNU sticks to its FY22 guidance, we remain comfortable with the view that the lift in&nbsp;CNU's&nbsp;FCF can support a ramp up in its&nbsp;dividend to around NZ50cps over the medium-term,​​​​​​&nbsp;a return we believe will prove appealing relative to other defensive stocks in the NZ market. Maintain OUTPERFORM.​​​​​​​


What's changed?&nbsp;



Earnings/target&nbsp;price: No material changes. Target price tweak reflects longer-term capex and opex assumptions.



No surprises in FY21 numbers


Operationally FY21 was business-as-usual for CNU. A modest decline&nbsp;in&nbsp;revenue, down -1% on&nbsp;market share losses to fibre outside its UFB network&nbsp;footprint (primarily) and fixed wireless, was offset by cost reductions to deliver flat EBITDA.&nbsp;CNU&nbsp;expects these trends to continue with&nbsp;FY22&nbsp;EBITDA guidance of NZ$640–660m (cf.&nbsp;FY21&nbsp;NZ$648m).&nbsp;​​​​​​​​​​​​​​​​​​​​​​​​​​​


Dividend guidance could prove conservative


A key question for investors remains the level of FCF and dividend CNU will generate once its fibre network is complete by the end of 2022. The main new information provided was FY22 guidance, including for capex and the dividend, which were above and below consensus expectation respectively. Higher&nbsp;capex&nbsp;reflects (positive) demand for fibre network connections.
Dividend guidance reflects (i) higher capex, (ii) payout constraints within CNU’s BBB credit rating, and (iii) remaining uncertainties around the final regulatory settings for CNU's UFB network (scheduled to be finalised in December). We view this guidance as likely conservative given (i) our forecasts have debt falling in each of the next three years, (ii) we expect the rating agencies will likely revise rating hurdles once CNU has UFB regulatory clarity, and (iii) we see potential improvements for CNU in the final UFB decision specifically on opex allocated to the UFB (in our view, the CC's assumptions are highly subjective and appear prima facie imbalanced — relative to our forecasts the UFB represents c.77% of CNU's revenue but only c.55% of cost). Even if CNU sticks to its FY22 guidance, we remain comfortable with the view that the lift in CNU's FCF can support a ramp up in its dividend to around NZ50cps over the medium-term.


Chorus: FY21 — Cautious Dividend Guidance

Chorus Ltd

Chorus: FY21 — Cautious Dividend Guidance