Infrastructure company Chorus faces another tough week as debate continues on its future.
Shares in the company continued to fall yesterday, as more broker reports were released questioning the viability of Chorus' ability to complete the Government's prized ultra-fast broadband project.
Craigs Investment Partners broker Chris Timms said while the political will for Government on copper network pricing had been fading, it had now been taken off the table.
The last hope for Chorus had been extinguished and the company had difficult choices to make, he said.
Late in the day, Chorus announced it had applied to the Commerce Commission for a final pricing principle review. Chorus was also filing for a High Court appeal of the same ruling.
The commission ruled access to the Chorus copper wire network by internet service providers (ISPs) should be halved, leading the company to issue a warning its 2015 profit would be cut by $142 million with $1 billion of funding at risk.
Mr Timms said there was no timetable for either the appeal or the review and that created more uncertainty for shareholders.
Information and Communications Minister Amy Adams had been planning to legislate to overrule the commission but political support for her plans evaporated late last week, when support partners Act New Zealand, United Future and the Maori Party joined the Opposition in opposing a legislative fix.
There were suggestions Chorus should walk away from the UFB contract but Mr Timms said that was not a ''credible'' option.
''Chorus does not have a termination right.
''It has committed to the Crown as a counter party that it will roll out UFB according to very specific parameters. Chorus cannot walk away from its commitment to roll out the UFB without facing significant penalties and consequences, which include liquidated damages and Crown Fibre Holdings taking management control.''
The UFB was a flagship Government project, with wide political support, he said.
With the key option Chorus had been waiting for over the past year - Government intervention on copper - formally taken off the table, the company might be closer to providing clarity on its capital structure-dividend policy, Mr Timms said. There were good reasons why Chorus should be looking at an option which avoided raising equity, at least in the short term.
Raising equity had the greatest potential to ease uncertainty around capital structure and financial strength, but such a move would result in the company seeking further investment at the point of maximum uncertainty.
Chorus would be unable to provide investors with any confidence concerning the UFB project and capital expenditure, the outcome of the copper pricing appeal or any progress towards a new regulatory framework, he said.
''While the prospect of a suspension of dividends for a period will clearly put further pressure on Chorus' register, the alternative of raising equity under current conditions is not palatable, either.''
Craigs believed a pro rata rights issue was the only other viable alternative and it would need to be underwritten, Mr Timms said.
Outlook
Chorus has the potential to provide stable infrastructure-like cash flows in the long term. However, in the medium term, Chorus' outlook was dominated by regulatory uncertainty in relation to copper pricing and risks around the build costs associated with the ultra-fast broadband project - both of which are contributing to an outlook for reduced dividends and a potential equity ratio. In addition, Chorus does not have clarity on the regulatory framework to apply beyond 2020 and what it will mean for the pricing of its copper and fibre. There is limited visibility on how Chorus can improve margins and grow revenue against reductions in copper pricing and a fall in access line. Our recommendation is hold - Chris Timms
