Regulation change of tune for Chorus investors
Company: Chorus Sector: Telecommunications Overview: Chorus investors will be very pleased to see that they and the Government are now singing from the same song sheet. Chorus investors have had a rocky ride lately as regulation from the Commerce Commission brought back memories of the value erosion inflicted on Telecom investors. Chorus was split from Telecom in November 2011 as part of a deal that sees Chorus building 70 per cent of the Ultra-Fast Fibre Broadband network. Pros: Chorus owns 90 per cent of
A BROKER’S VIEW
New Zealand’s older copper network, making it a quasimonopoly and meaning it is subject to Commerce Commission regulation. In December 2012 the commission announced a draft decision that sent the Chorus share price into a dive. The Government essentially nullified that decision on Wednesday when it announced a review of the Telecommunications Act. The review will focus on ensuring consumers are properly incentivised to switch from the old copper network to the new fibre network, by basing the total copper price on the cost of replacing the network. The best indicator of this cost is the tender cost of the fibre network, $37.50 to $42.50. This copper price should allow Chorus to maintain profitability in the medium term while it builds the new fibre network. Cons: Chorus gets a majority of its revenue from charging internet service providers for Unbundled Bitstream Access (UBA). As the final price for copper broadband is made up of UBA and UCLL (unbundled copper local loop), the final mix will have a large bearing on Chorus’ copper revenue. There are still large cost overruns ($300m) in the roll-out of the fibre network to factor in, but the company is investigating ways to mitigate these. Next year’s election could be a factor and in the long run regulation will always be an issue. Price performance: The share price shot up 4.5 per cent to $3.03 on Wednesday after the announcement. It is up marginally over the two years since splitting from Telecom. That performance is very poor compared to the NZX, which is up 38 per cent for the same time. Investment outlook: The future of the company looks far brighter now the Government has recognised the need for a change in regulation. Risks still remain, but a gross dividend yield of close to 12 per cent will be attractive for income investors.
A Broker’s View is written by Grant Davies, NZX associate adviser, employed by Hamilton Hindin Greene. This article represents general information provided by Hamilton Hindin Greene, which may hold an interest in the security. It does not constitute investment advice.