Chorus' fatter dividends hang in the balance

Chorus CFO David Collins and CEO JB Rousselot on this morning's conference call.

Chorus investors hoping the network operator can come through on its promise of much fatter dividends received only limited reassurance today.

The company has previously promised that with the high-spending years of the UFB rollout behind it, it will be able to pay-out the "majority" of its free cash flow from FY2024, with increases during the "transitional" FY2022 and FY2023.

On a conference call following this morning's full-year result report, CFO David Collins confirmed a 14.5 cents per share second-half-payout, taking the total FY2021 dividend to 25cps, in line with guidance.

And he said Chorus could provide "initial" dividend guidance of 26 cents per share for FY2022, increasing its recent slow but steady series of increases. Jarden and Forsyth analysts both see that nearly doubling to 50cps by mid-decade.

The kicker was the word "initial", however. Collins told analysts he would not be able to give firm dividend guidance until an update in the New Year, following a key Commerce Commission final determination in December - part of an extended period of arm-wrestling over a new regulatory regime that will now run through until June next year.

Collins said that even if the Commerce Commission's draft decisions - which his Chorus regards as too harsh - became its final determinations, his company would still be able to pay out the majority of its free cash flow in dividends.

But even if the 26cps FY22 dividend guidance is ultimately confirmed, Jarden analysts Arie Dekker and Grant Lowe noted that was still short of the consensus expectation of 29cps.

The shortfall did not go down well. In early afternoon trading, Chorus shares were down 3 per cent to $6.93. The stock is now down more than 11 per cent for the year. Going into today's report, ForBarr's Matt Henry had an outperform rating on Chorus, with a 12-month price target of $7.45 (reduced from $7.65 on August 20).

Further, although Chorus gave FY2022 ebitda guidance of $640m to $660m, Collins said that might have to be revisited if there was an "extended" hard level 4 lockdown. It was too soon to say.

But again, even if the original operating earnings guidance is reaffirmed, Dekker and Lowe noted analysts' consensus expectation for FY2022 is ebitda of $557m - so Chorus' forecast looks light.

The only sure thing is that the network operator's capex - 672m in FY2021 - is set to fall. But with the bulk of the UFB rollout costs now behind it, Chorus guided to $550m-$590m capital spending for FY2022, and flagged further reductions ahead.

But as with Chorus' total revenue and other metrics, capex is subject to the new, utility-style market rules being hashed out by the Commerce Commission.

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

Dialing down the rhetoric

But it was also notable that Rousselot, overall, dialled down the rhetoric.

There was no repeat of the red meat comments at Chorus' last annual meeting, when chairman Patrick Strange said the ComCom was "simply wrong" in its sums because, in his view, it undervalued the risk taken by the UFB rollout's backers.

There was a danger, "We will never be able to do another 'Chorus' [public-private partnership] to address our infrastructure deficit in New Zealand," Strange said. "International investors will not be prepared to take this risk in New Zealand again."

Today, Rousselot offered the more diplomatic, "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,"

And talking to the Herald, he noted the latest draft decision document, released by the ComCom last week, "Had specific mention of making sure investors are getting an adequate return. So we're encouraged by that. But until we see the final results, we don't really know."

"Ensure" is a stretch, but alongside its usual language about protecting consumer interests and market competition, the ComCom also acknowledged, "Our decisions may
affect investor expectations about future regulatory decisions. This matters for
future investment."

It helps that Chorus and the market watchdog seem to be inching closer to, if not being on the same page, then at least in the same chapter.

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.

And last week - in the document Rousselot was referring to - the regulator's draft decision on Chorus' Regulated Asset Base (the "RAB" or value of its network) came in 1 per cent below Chorus's submitted figure. On the conference call, Collins saw this feeding into a revised MAR that was within a couple of per cent of Chorus' target.

Net profit falls

Earlier, Chorus said 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.

Dekker and Lowe said although Chorus lost 75,000 connections (to Spark, Vodafone or 2degrees fixed-wireless, or people upgrading from copper in fibre areas not serviced by Chorus), cost controls and higher average monthly revenue per user (arpu) from fibre allowed the network operator to lift its operating earnings by 1 per cent.

Chorus also 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.

ForBarr's 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.

Rousselot continued to walk a fine line on fixed-wireless, the technology used by Spark, Vodafone and 2degrees as a landline replacement. Chorus has to both convince the Commerce Commission that alternative technologies to fibre, such as fixed-wireless and Vodafone's hybrid cable in Wellington and Christchurch - thereby making the case that Chorus does not have a monopoly that needs to be kept tightly under the regulator's thumb.

But as Chorus begins to switch off its copper line service - still used by some 500,000 customers - Rousselot is also seeking to talk up the benefits of fibre over fixed-wireless.

Chorus 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

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 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," Rousselot said this morning.

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.