Chorus also bumped up its payout ratio from 60% to 80% of free cash flow to 70% to 90%.
Swing to net loss, but operating earnings up
Jarden analysts Arie Dekker and Grant Lowe said the results were broadly in line with expectations.
The pair flagged there was scope to increase their forecast for dividend growth. They currently have 59cps by FY2028.
The full-year FY2024 result Chorus saw a 3% increase in revenue to nudge over $1 billion for the first time.
Operating earnings increased by 4% to $700 million.
A swing from a $25m net profit in FY2024 to a $9m net loss was pinned on higher interest costs, plus accounting changes. Specifically, a one-off $15m non-cash tax expense following the removal of deductibility of tax depreciation for buildings, a $14m increase in depreciation of copper assets, and higher interest costs.
“Earnings came in at the very top end of their guidance range,” said Nikko Asset Management portfolio manager Michael De Cesare.
“The result was broadly in line to a touch better than expectations and admirable given cyclical headwinds.”
The only surprise was a positive one: The FY2025 dividend guidance.
Modest growth forecast, price rises ahead
Chorus forecast $700m to $720m in earnings before interest, taxes, depreciation, and amortisation (Ebitida) in FY2025.
It said “low single-digit growth” would be partly offset by two “headwinds” out of its direct control - an expected reduction of some legacy network services and the Commerce Commission’s decision on Maximum Allowed Revenue (MAR) for 2025 to 2028, which had seen price rises set for October this year delayed until January next year.
Once they do arrive on January 1, Chorus’ round of wholesale prices rises (typically passed on to consumers by retailers like Spark, One NZ and 2degrees) would include its 50/10Mbps Home Starter plan rising by a proposed 14% from $35 to $40, its “anchor” 300/100Mbps plan rising 5% from $61.86 to $66.19 and its popular 1Gbps plan increasing in price by 7% from $70 to $74.90.
All of the price rises are still under consultation.
Strategy reset to all-fibre by 2030
On a conference call with analysts, chief executive Mark Aue outlined a “strategy reset” that aimed for Chorus to be an all-fibre business by 2030, with a target of 80% fibre update (Crown Infrastructure Partners put overall UFB update at 75% in its March quarter report).
Fibre uptake would be a bigger focus than arpu (average revenue per user), Aue said.
On the call, Aue was asked what would be the catalysts for future data growth. Forsyth Bar analyst Aaron Ibbotson said growth in data consumption over Chorus’ network had slowed, at a time when wireless technology was becoming more capable.
“What I think will happen - it’s my personal view, but it’s backed by a lot of the global trends - is that data will continue to grow and potentially exponentially grow with the adoption of AI and cloud-based apps in particular,” Aue replied.
He added that all television shifting to “4K” streaming would double NZ’s data use alone.
4K or ultra high definition (HD) video consumes four times the bandwidth of the standard HD used by local services like Sky Sport Now, Neon, 3Now and TVNZ+ today (the international streamers are already on 4K).
“The thing we take comfort in is that that type of expansion requires a high-quality differentiated connectivity network - and that’s fibre,” Aue said.
He said Chorus stats for July showed the average customer using more than 630GB of data, with 17% on Hyperfibre.
He added, in a reference to his former employers (Aue was previously CFO then CEO of 2degrees, and CFO of Vodafone Global Enterprise), “Yes, I’ve been around the industry for a long time and on the other side for mobile, but it’s not something you’d see a wireless network coping with from a capacity or a congestion perspective.”
“As a reference point, I’d look to T-Mobile in the US, who pushed really hard into fixed wireless, particularly 5G as customers are rolling off cable. They are now actively acquiring fibre assets and [signing] fibre partnerships because they’ve openly recognised they have some concerns about some of the future constraints around capacity and congestion.”
The copper exit payoff
Aue said there were potential cashflow benefits of $50m-plus from exiting copper by 2030, between opex and capex savings.
Around $25m could be saved from operating expenditure around fault management, with another lower property maintenance and taking total opex savings to “$30m-plus” with another “$20m-plus on capital expenditure”.
For now, Chorus’ ambition to be copper-free by 2030 is aspirational.
The exact timing will be subject to approval from the Commerce Commission, which is overseeing the withdrawal of copper service. Aue quoted a recent survey by the regulator that found 97% of today’s copper customers were covered by mobile networks as an alternative and that satellites, “particularly Starlink”, could cover the rest.
“There’s a substantial prize and benefit for us from being about to exit copper, but what we need is some certainty. In fibre areas today, we have the Copper Withdrawal Code. We need something similar for rural [areas].”
Asked if Chorus had discussed subsidies for those moving from copper in rural areas - given alternatives could cost more - Aue said it hadn’t. “Self-migration is already taking place,” he said, “With satellites and especially Starlink.” A ComCom report released earlier this month found Elon Musk’s satellite broadband service was the fastest-growing in rural NZ, with connections surging from 12,000 to 37,000 last year - with 35,000 customers in rural areas.
Offload property?
Aue said while there were costs involved with withdrawing from copper, it also opened an opportunity to “monetise non-core assets”.
“I can’t give specifics because we’re still exploring it,” the CEO said.
“But we are one of New Zealand’s largest property owners. We have 400 exchanges. We have thousands of cabinets, we have a couple of hundred thousand poles. As we accelerate the withdrawal from copper, those increasingly become passive assets - some of which we have ongoing costs to maintain. We think there is a clear opportunity for us to optimise that property portfolio - either as cost avoidance or as a sale.”
Shares were trading at $7.92 ahead of today’s result. The stock is up 0.8% for the year.
Ahead of today’s earnings - where they saw no major surprises bar the dividend being ahead of their forecast 52.5cps - Jarden’s Dekker and Lowe had an underweight rating on Chorus and a 12-month target of $7.17.
Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.
