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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Chorus</h2>
Improvements for CNU in ComCom’s “draft decision
The Commerce Commission (CC) has released its draft decision on the “input methodologies” into Chorus’s (CNU) new ultrafast fibre broadband (UFB) regulatory regime.
The reports total c.700 pages. At this early stage, our summation is that, from a CNU perspective,&nbsp;the draft decision is positive progress relative to the CC’s emerging views published in May, and ahead of base case scenario.
The principal changes that benefit CNU are:
<ul>
<li>Asset beta: Increased to 0.49, from 0.46, but below our assumed 0.51.</li>
<li>Market risk premium: Increased to 7.5%, from 7.0%. (We had assumed no change.)</li>
<li>Tax losses: The opening regulatory asset base (RAB) is to include the present value of pre-2022 losses. Tax losses are now able to be included in those loss calculations. Previously the CC’s view was to exclude tax losses based on the assumption that they had already been used to offset profits in other parts of the company. (We had assumed no change.)</li>
<li>Crown financing: The benefit of the Crown financing is to be deducted in the determination of the “maximum allowable revenue” CNU is able to earn on the UFB. The CC now proposes to calculate this benefit at the (lower) cost of debt vs. previously at WACC. (We had assumed no change.)</li>
<li>Asset stranding (“type II”) risks: A +10bp margin to compensate for asset stranding risk. (We had assumed no change.)</li>
</ul>
CNU is a long-dated business with substantial operating and financial leverage, and therefore, any assessment of the company’s fundamental value can vary materially depending on the CC’s input methodologies that underpin its UFB maximum allowable revenue. As such there is currently an inherently high margin of error in any CNU valuation.&nbsp;Whilst it is difficult to be precise at this early stage, we believe (all-else-equal) the changes above are materially positive for CNU’s valuation.
It is important to note that there is a long way to go in the CC UFB regulatory process, there are a number of other yet-to-be-determined factors which will influence CNU’s price path, and the initial price path will not be determined until 2Q CY21.
Matt Henry &nbsp;CFA Head of Wealth Management Research &nbsp; &nbsp; Forsyth Barr Limited
T:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;+64 9 368 0115 TF:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;0800 367 227 F:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;+64 9 368 0092 P:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;PO Box 97, Auckland 1140 W: &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;<a href="https://foundry.smartkarma.com/www.forsythbarr.co.nz" target="_blank" rel="noopener">www.forsythbarr.co.nz</a> Twitter: @forsythbarr

Chorus
Improvements for CNU in ComCom’s “draft decision
The Commerce Commission (CC) has released its draft decision on the “input methodologies” into Chorus’s (CNU) new ultrafast fibre broadband (UFB) regulatory regime.
The reports total c.700 pages. At this early stage, our summation is that, from a CNU perspective,&nbsp;the draft decision is positive progress relative to the CC’s emerging views published in May, and ahead of base case scenario.
The principal changes that benefit CNU are:

Asset beta: Increased to 0.49, from 0.46, but below our assumed 0.51.
Market risk premium: Increased to 7.5%, from 7.0%. (We had assumed no change.)
Tax losses: The opening regulatory asset base (RAB) is to include the present value of pre-2022 losses. Tax losses are now able to be included in those loss calculations. Previously the CC’s view was to exclude tax losses based on the assumption that they had already been used to offset profits in other parts of the company. (We had assumed no change.)
Crown financing: The benefit of the Crown financing is to be deducted in the determination of the “maximum allowable revenue” CNU is able to earn on the UFB. The CC now proposes to calculate this benefit at the (lower) cost of debt vs. previously at WACC. (We had assumed no change.)
Asset stranding (“type II”) risks: A +10bp margin to compensate for asset stranding risk. (We had assumed no change.)

CNU is a long-dated business with substantial operating and financial leverage, and therefore, any assessment of the company’s fundamental value can vary materially depending on the CC’s input methodologies that underpin its UFB maximum allowable revenue. As such there is currently an inherently high margin of error in any CNU valuation.&nbsp;Whilst it is difficult to be precise at this early stage, we believe (all-else-equal) the changes above are materially positive for CNU’s valuation.
It is important to note that there is a long way to go in the CC UFB regulatory process, there are a number of other yet-to-be-determined factors which will influence CNU’s price path, and the initial price path will not be determined until 2Q CY21.
Matt Henry &nbsp;CFA Head of Wealth Management Research &nbsp; &nbsp; Forsyth Barr Limited
T:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;+64 9 368 0115 TF:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;0800 367 227 F:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;+64 9 368 0092 P:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;PO Box 97, Auckland 1140 W: &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;www.forsythbarr.co.nz Twitter: @forsythbarr

Chorus: Improvements for CNU in ComCom’s “draft Decision

Chorus Ltd

Chorus: Improvements for CNU in ComCom’s “draft Decision