Chorus shares jump as fatter divvy dangled

Chorus CFO David Collins and new chief executive JB Rousselot during the interim results briefing.

Chorus

Chorus' half-year result saw the network operator increase its full-year earnings guidance, and hold out the lure of increased dividends as it puts its big-spending UFB rollout years beyond it.

Shares, already on a bull run, were up 5.1 per cent to $6.70 in early afternoon trading. The stock is up 21.3 per cent over the past 12 months. (Update: Chorus closed up 5.6 per cent to $6.73).

Beyond the dangling of a potentially fatter divvy, a results conference call was notable for new chief executive JB Rousselot flagging his company would go on the front-foot to defend Ultrafast Broadband (UFB) fibre against rising competition from 4G and 5G fixed-wireless competition from Vodafone and Spark.

Full-year Ebitda guidance was raised from $625 million to $645m to $640m to $655m.

The first-half saw revenue dip 1.89 per cent as a fall legacy voice line business offset fibre gains, but ebitda and net profit grew on cost-cutting. The dry spell also helped, reducing maintenance costs on copper lines, which are habitually damaged by rain.

An interim dividend of 10 cents per share was declared, and full-year guidance of 24cps confirmed.

On the conference call, chief financial officer David Collins dropped broad hints of larger profit-share payouts ahead.

"As we reach the end of the UFB build, we do have substantial free cash flow growth in front of us as a business," the CFO said.

Phase 1 of the Ultrafast Broadband rollout has just wrapped up (completed in December, within $1.8 billion guidance), while the smaller UFB2 rollout runs through until the end of calendar 2022.

Collins did not give any specific numbers, but said Chorus would be looking to return the majority of its free cash flow to shareholders in dividends from FY2022 as it sought to adopt a policy in-line with similarly-regulated peers.

He said he was "very conscious" that investors had been "very patient" with the company over its dividend, which was suspended for two years from 2014 amid the so-called "Copper tax" war over-regulated pricing and an attendant cash-crunch, then resumed at a much lower level.

The CFO said there would be a two-year transition to the new dividend policy over FY2022 and FY2023, and indicated free cash free could still be constrained over the first year.

Collins also hinted that a one-off special dividend or share buyback could be on the cards, with $225m of available subscribed capital for the purpose. He said that if credit reviews by Moody's and S&P during 2021 went favourably, then Chorus would also "consider returning funds to shareholders" in FY2022.

Chorus

It's not all-plain sailing toward more generous dividends, however. There are regulatory clouds on the horizon, and it's not clear how successfully Chorus will navigate them.

A major overhaul of the Telecommunications Act, which will kick in on January 1, 2022 will see Chorus subject to an annual revenue cap - as, for example, listed lines company Vector is in the power sector. The wholesale price of Chorus' "anchor" (or mass market) UFB fibre plan will also be regulated. It will also have to meet minimum quality standards.

The Commerce Commission will set the revenue cap and other parameters. Chorus was broadly happy with a 700-page draft document issued by the regulator in November, but did take issue with the way it determined a key metric: the weighted average cost of capital (or WACC).

Rousselot reiterated today that Chorus thinks the ComCom is lowballing WACC, and suggesting a figure more suited to the power industry than the more competitive broadband landscape. Which brings us to:

Fibre vs UFB barney ahead

New boss Rousselot (ex Telstra and NBN) said his approach would be to "keep it simple" and focus on Chorus' core business.

But he also took a more aggressive line than his predecessors who were, in public forums at least, much more low-key about competition.

'We've previously taken an active wholesaler approach," Rousselot said on the conference call."

"We need to take that to the next level. We can't just rely on retailers to explain how great a fibre connection is. We have to do a lot more toward explaining that not all broadband connection is created equal."

The new Chorus boss did not name them, but the retailers concerned are no doubt Vodafone and Spark, who both have plans to expand fixed-wireless (using a mobile network to deliver broadband into a premise as a substitute to a landline) as they upgrade their networks to 5G.

Spark recently reported it now has 142,000 fixed-wireless customers, which it can serve over its own mobile network, cutting Chorus (and around $50m in wholesale fees) out of the loop.

And under its new ownership, Vodafone NZ wants to increase its fixed-wireless customers from 40,000 to around 100,000 or 25 per cent of its broadband base over the next couple of years.

Third-placed broadband retailer Vocus is about to get in on the act too, via a fixed-wireless partnership with Spark, revealed to the Herald last week by Vocus boss Mark Callander.

Fixed-wireless has proved popular in areas still waiting for fibre. But as the UFB rollout wraps up (see graph below), the battle will increasingly be for the hearts and minds of people who have had Chorus (or Enable or Ultrafast Fibre or NorthPower) roll fibre down their street, but who have still not called their retailer to get connected.

Of the 1.1m or so homes and businesses now within reach of UFB1 fibre, for example, some 632,00 have connected, while 459,000 have been happy to stay on copper or in some cases have turned to fixed-wireless.

Some 82,000 customers are on Chorus's fastest plan, which offers 1 gigabit/s (or 1000 megabits per second uploads). Most on Australia's National Broadband network fall below 50Mbit/s. Source / Chorus

Rousselot talked-up the robust uptake of Chorus 1 gigabit per second UFB plan, which now accounts for some 82,000 or 13 per cent of broadband connections after a 29,000 jump over last December - helped by a keen wholesale price of $60 per month.

Chorus's 1 gig plans are already roughly twice the speed of early 5G mobile service.

And the network operator has just launched its "Hyperfibre" plans that offer two-to-four times that speed, with 10 gigabit-per-second service possible before the end of the year. Vocus (via its Orcon brand) jumped on board earlier this month as the first Hyperfibre retailer (even as it partners with Vodafone to attack Chorus over the vexed, unresolved issue of charges for unbundled UFB, and partners with Spark on fixed-wireless. Asked by the Herald if Vocus was playing all sides, Callander replied, "That's how we roll").

Rousselot said January the average household data usage on Chorus' fibre network was 372 gigabytes, up from 342GB in June, driven in part by the arrival of Disney+ and more people watching streaming video in 4K or ultra-high definition.

Chorus has now broken the back of the 12-year UFB fibre rollout. 1.19m homes and businesses are now within reach of fibre; 166,000 still need it rolled down their street. Source / Chorus

Spark (600GB) and Vodafone (trialing 1000GB) have both recently supersized data caps on their fixed-wireless 4G plans, and say they will do so again as 5G rolls out (Spark is already offering 5G fixed wireless for number of small towns in the South Island; Vodafone promises a wide rollout by year's end).

Rousselot quoted a Commerce Commission report that said fibre was the best solution for a household with multiple people watching 4K on different streams (although in Twizel earlier this year, this reporter's family was able to happily stream two concurrently Disney+ streams in 4K over a 5G fixed wireless line).

Vodafone NZ has also made much of the potential for 5G fixed-wireless for business, with 5G replacing office wi-fi in years to come, with the company painting unlicensed wi-fi as flakey and less secure.

Rousselot said the new Wi-Fi 6 standard would offer a superior alternative. The back-and-forth will continue in the months and years ahead.

Meantime, the new CEO noted his company cooperates as well as competes with retailers.

He noted that Chorus recently signed a deal to provide fibre backhaul for rural celltowers built by Spark, Vodafone and 2degrees' Rural Broadband Initiative PPP joint-venture, the Rural Connectivity Group.

And said 5G mobile network upgrades would, in general, provide Chorus with more backhaul opportunities.

Subbie reform - just as the party winds up

Rousselot said Chorus had now "terminated" 28 of some 400 subcontractors following a Labour Inspectorate investigation that led to prosecutions for under-payment and poor record keeping.

He said Chorus continued to work with its two primary contractors, Visionstream and UCG, on better processes. The CEO sited a new worker portal and whistleblower service as examples.

The reforms finally arrive just as the 12-year fibre rollout reaches its tail end.

The signature development over the next few years will not be work conditions but that there will simply be far less subcontract work as the UFB1 and UFB2 rollouts wind down.

UCG and Visionstream's current UFB1 contracts run through until September 2020, and their UFB2 network build contracts expire in December 2022.

Both primary contractors had plans in place for the expected decline in workforce numbers after the contracts were renegotiated, Rousselot said.