Chorus stock falls as profit drops 39%

Chorus chief executive Mark Ratcliffe.

Chorus shares fell after the telecommunications network operator reported a 39 per cent decline in annual profit as the lower regulated price for its copper-based services generated weaker revenue. Weaker earnings are expected next year.

Net profit fell to $91 million in the 12 months to June 30, from $148 million a year earlier, Chorus said.

That was below Forsyth Barr's estimate for profit of $103.7 million. Revenue fell 4.9 per cent to $1 billion, and earnings before interest, tax, depreciation and amortisation (ebitda) fell 7.2 per cent to $602 million, in line with expectations.

Chorus' adjusted ebitda, which seeks to smooth the impact of the regulated prices, rose 5.2 per cent to $546 million. The company expects a modest decline in 2016 earnings due to uncertainty over the final outcome of the Commerce Commission's ruling on the price Chorus can charge for access to its copper lines.

Shane Solly, a portfolio manager at Harbour Asset Management, said the guidance was quite conservative.

"People were hanging on for a view of what's going on in the future - there's a little bit of uncertainty there," Solly said. "They're talking about a decline year-on-year, which will be a little bit of a surprise to some."

The company's shares closed down 12.5c yesterday at $2.625.

In July, the regulator's draft ruling proposed setting the total price Chorus can charge for wholesale broadband services at an average $38.43 a month, largely in line with the $38.39 price established in an earlier estimate and up from the $34.44 set in the benchmarking process that kicked in on December 1.

The commission proposed not backdating the price, which would have seen retail service providers such as Spark New Zealand reimburse Chorus for the difference in price between the new start date and December 1 last year.

"The business initiatives we implemented in managing for cash have delivered results ahead of target for the year, going some way towards offsetting the very significant reduction in regulated pricing," said chief executive Mark Ratcliffe.

"This together with the slightly improved draft copper pricing, has helped the share price recover some value, although we remain unable to pay a dividend."

Chorus' operating cash inflow sank by a third to $416 million, producing a net outflow of $96 million and leaving it with cash and equivalents of $80 million as at June 30. Net debt stood at $1.84 billion as at June 30, a multiple to ebitda of 3.1 times, and below the 3.75 times ratio required to meet key debt covenants.

Capital expenditure was $597 million in the year, down from $679 million a year earlier, the bulk of which went towards building the nationwide fibre network.

Separately, Chorus announced former Transpower chief executive Patrick Strange will assume the chair from September 1, replacing Jon Hartley, who has been interim chairman since April.

Chorus
•$1 billion annual revenue, down 4.9%.
•$91 million net profit, down from $148 million.
•$597 million capital expenditure.
•$1.84 billion net debt as at June 30.