Watchdog could snarl Chorus hope
We’re nearing a day some Chorus investors have been dreaming about for a long time — the end of the ultrafast broadband rollout, and dividends that could triple to 70 cents per share in the years ahead.
From January 1 next year, with its highest-spending days of the public-private fibre build behind it, Chorus will enter a new era of much higher free cashflow — and its chief financial officer, Paul Collins, has already pledged to pay out a majority of it as dividends after 2024, following increases during a 2022-24 transition period.
But there’s a catch: The Commerce Commission could derail the higher profit payout plan if it’s too harsh on Chorus — from the network operator’s point of view — when it finalises the regulator regime for the post-UFB rollout era.
At Chorus’ first-half report, on February 22, chief executive JB Rousselot reiterated his contention that the regulator is taking too hard a line with its preliminary numbers.
Dividends could be put under pressure and investors scared off supporting future public-private projects, he told analysts. And after the latest developments, analysts are sucking air through their teeth.
On Friday, Chorus submitted its initial asset value (IAV) to the commission that it said supported a “conservative” regulated asset base or RAB (or valuation of Chorus’ assets, minus its copper lines, which are being phased out) of $5.5 billion — which in turn, it saw supporting maximum allowable revenue (MAR) from fibre in the $715m to $755m range for “regulated period 1” (RP1) — to the end of 2024.
That figure “broadly aligns with Chorus’ forecast fibre revenues for RP1 but leaves little room for unintended consequences”, it told the NZX.
What will it all mean in terms of the money going into shareholders’ pockets?
Chorus paid a 21c a share dividend in 2020 and is on track for 25cps in FY2021.
This time last year, UBS NZ director Phil Campbell was expecting the payout to climb to 60cps by 2027 — up from his estimate of 55cps by 2028.
He told the Herald: “Based on $5.5b RAB, there is risk of medium-term dividend being less than 50cps — but have to wait and see what ComCom says on May 31.” That’s when the regulator will release a draft report that will include its RAB and maximum allowable fibre revenue numbers. Its final report is late November.
“In the meantime Vodafone and Spark are lowering wireless broadband prices which could make it more difficult for Chorus to increase its wholesale [fibre] prices,” he noted.
A recent ComCom report said some 221,000 customers are now on fixed wireless, or faster internet delivered into a home or small business via a mobile network rather than fibre or copper landline.
Jarden analysts Grant Lowe and Arie Dekker were relatively downbeat after digesting Chorus’s Friday submission — which they said “dampened expectations”.
The pair maintained their neutral rating but cut their 12-month price-target from $7.99 to $7.32.
The Jarden pair earlier saw a 35cps dividend in FY2022. They now see 30cps next year, growing in 5c per year increments until it hits 50cps in 2025, then 1cps gains in the years through to 2029.
Forsyth Barr’s Matt Henry kept his outperform rating and increased his 12-month target price from $7.77 to $8.10 after Friday’s developments.
“Our base case remains Chorus can ramp toward a dividend north of 50cps over the medium-term, appealing relative to other defensive stocks in the NZ market.” In the short-term, he sees 30cps in 2022 and 35cps in 2023.
The regulated asset base assessment of $5.5b was in line with Henry’s estimate, which he saw as promising.
He thought Chorus’ bid to the commission for higher spending was sound logic, but thought the logic of it being accepted was low.
Chorus can ramp toward a dividend north of of 50cps. Matt Henry, Forsyth Barr