Chorus net profit falls as tussle with watchdog continues

Chorus chief executive Jean-Baptiste ("JB") Rousselot. Photo / File

Chorus has reported a fall in full-year profit, though the dip is not as bad as some analysts had anticipated.

The network operator said net profit was down 10 per cent to $47 million for the 12 months to June 30.f

Forsyth Barr's Matt Henry had been picking a fall to $44m.

Chorus said softer market conditions due to the ongoing effects of Covid-19 on broadband demand - which saw a price increase tied to inflation delayed, and immigration restrictions crimping new connection growth - together with competition from other fibre and wireless networks, resulted in a $12m (1 per cent) drop in revenue to $947m.

Ebitda edged up by $1m to $649m, which Chorus put down to cost controls as full-time-equivalents were cut by around 6 per cent as the UFB rollout wound down, and the absence of one-off Covid-19 costs incurred in FY20 that ran to some $6m.

For FY2022, Chorus forecast operating earnings of $640m to $660m. However, on a conference call, CFO David Collins said that figure could change if the level 4 lockdown persisted. It was too early to judge the impact.

Dividend guidance falls short of expectations

Jarden analysts Arie Dekker and Grant Lowe said the achievement of a slight ebitda gain despite Chorus losing 75,000 connections (as some copper customers shift to fixed-wireless or upgrade to fibre in areas not covered by Chorus) reflected cost controls and the higher average revenue per customer per month of fibre. The pair noted the analyst consensus for FY2022 ebitda was $657m.

A final dividend of 14.5 cents per share would be paid out, taking the total FY2021 dividend to 25cps.

Chorus offered "initial" dividend guidance of 26 cents per share for FY2022.

Dekker and Lowe noted this was below the analyst consensus of 29.5cps.

The company earlier cautioned that its profit-share payouts will only continue to increase in the post-UFB rollout years ahead if the Commerce Commission's new regulatory regime breaks more in its favour. As things stand, Collins said "regulatory uncertainty" ahead of final Commerce Commission decisions over Maximum Allowable Revenue and other factors between December and June mean the dividend guidance offered today was provisional.

ForBarr sees the dividend reaching 50cps over the medium-term as free cashflow increases post-UFB rollout, and Chorus transitions to its new policy of paying the most of free cashflow in dividends.

An update on the dividend situation would be provided in February, Collins said. Asked what the payout policy would be if the Commerce Commission's draft decisions today turn out to be final, the CFO said a "majority" of free cashflow would be paid out in dividends - but he could not comment in detail on the amounts until the New Year.

Capital expenditure increased from the year-ago $663m to $672m. But with the bulk of the UFB rollout costs now behind it, Chorus guided to $550m-$590m for FY2022.

As Chorus begins to switch off its copper line service - still used by some 500,000 customers - over the same timeframe, expect more heated stoushes over whether those copper laggards upgrade to fibre or fixed-wireless.

The company recently complained to the Commerce Commission about what it sees as the retail telcos' overly aggressive marketing of fixed-wireless - which resulted in the regulator sending a warning letter to all market participants

Shares were down 0.7 per cent to $7.09 in early trading for a $3.2b market cap. The stock is down 11 per cent for the year, having given up gains with rising uncertainty over the new telecommunications regulatory regime that will be phased in from early next year, which will see the company operating under a revenue cap. Going into today's report, ForBarr's Henry had an outperform rating on Chorus, with a 12-month price target of $7.45 (reduced from $7.65 on August 20).

In an NZX filing accompanying this morning's report, Chorus CEO JB Rousselot made it clear that arm-wresting with the regulator would continue.

"In our submissions to the commission, we continue to make the case that some of the draft outcomes don't fairly recognise the investment made over many years by our investors," the chief executive said.

Chorus said monthly average household data usage, over copper and fibre and including both downloads and uploads, grew from 350 gigabytes (GB) to 432GB across the year.

Fibre customers consumed more, averaging 500GB in June, up from 436GB the year before.

The latest lockdown has seen traffic hit new records, including a new high set over the weekend.

Chorus said its leg of the public-private Ultrafast Fibre (UFB) rollout is now 95 per cent complete, with uptake of 65 per per cent so far.

It reported 871,000 active fibre connections, up from the year-ago 751,000.

Around 500,000 Kiwis are still on copper, with Spark, Vodafone and 2degrees all trying to steer a portion of that base on to fixed-wireless broadband rather than fibre.

Last week, Spark reported it has missed its FY2021 target of 40,000 net new fixed-wireless connections as it added just 19,000.

Chief executive Jolie Hodson said Spark was still committed to moving 30 to 40 per cent of its base to fixed-wireless by FY2021 (25 per cent of the telco's customers are on the technology today), but added the figure might now be towards the bottom of that range.

Rousselot indicated Chorus would keep pressing the Commerce Commission to act on what it sees as overly front-foot fixed-wireless marketing by Spark and Vodafone - who in turn say Chorus is motivated by self-interest in the face of competition.

"We're comfortable with competition, but we believe customers should be given all the information about the characteristics of different broadband services and time to consider their options rather than being told their service is changing and they have to make a quick decision," the Chorus CEO said this morning.

The ComCom is set to decide Chorus' "Maximum Allowable Revenue" or MAR in December.

On the conference call, Rousselot said he was "very concerned" about what he described as the drawn-out nature of the process.

In a May draft, the ComCom proposed Chorus' Maximum Annual Revenue from UFB fibre be capped at $689m for 2022, rising to $786m in 2024.

Chorus submitted that its MAR for the period should be around 4 per cent higher at $720m, rising to $820m.

The regulator's draft decision on Chorus' regulated asset base (RAB) came in 1 per cent below the network operator's figure.

On the conference call, Collins said a higher MAR would allow Chorus to invest more in its network. He noted price controls were in place for "anchor" 100Mbit/s connections - the most popular type of UFB connection today.

Retail telcos say that faster 1Gpbs plans - which are not subject to direct wholesale price controls - are the fastest-growing market segment, however.

Chorus recently launched Hyperfibre in its bid to keep fibre well ahead of fixed-wireless performance. The most recent Hyperfibre upgrade doubled UFB speed.

Rousselot said streaming - already a major factor in broadband demand - would increase with the anticipated NZ launch of direct-to-consumer services from CBS and Discovery.