Forsyth Barr has upgraded its recommendation on Chorus shares
to accumulate following the release at the weekend of the
Ernst and Young (EY) review on cash-saving initiatives for
the infrastructure company.
The EY review reported a potential funding shortfall of up to
$250 million in meeting the commitment to the Government's
ultra-fast broadband (UFB) and rural broadband initiative
Forsyth Barr broker Suzanne Kinnaird said the shortfall
identification was expected.
The shares rose yesterday to $1.53 after the review's release
as investors started to understand more about the problems.
Chorus earlier identified a shortfall close to $1 billion
following the Commerce Commission ruling a cut to wholesale
internet pricing through the company's copper line network.
Ms Kinnaird said Chorus' current share price reflected
regulatory risks and uncertainty over the cost-based reviews
and the final costs of the UFB programme.
''There is potentially long-term value in owning both the
legacy copper network and what will be the largest fibre
network in New Zealand.''
There was also potential in the event of relatively small
increases in copper prices as a result of the cost-based
review of access to the network.
''We recognise there is significant short-term uncertainty
around Chorus until copper pricing is resolved.
Accordingly, we apply a market discount over the next 12
months to our long-term valuation to allow for this,'' she
Forsyth Barr has a $1.90 target for Chorus shares.
Ms Kinnaird said the EY report assumed dividends from Chorus
would stop until the second half of the 2016 financial year,
resuming at 12.5c per share.
Chorus was expected to achieve cost savings of $400 million
to $450 million from 2015-20 - around $70 million a year.
The EY review suggested no benefits were likely from
discussions between Chorus and Crown Fibre Holdings and no
change in copper pricing from the cost-based reviews.
Ms Kinnaird said it was important to remember the review was
an independent report and, while influenced by Chorus, did
not represent actual decisions made by the company.
''The cost out target appears aggressive given Chorus has
already assumed UFB-related costs per connection or house
passed will fall significantly over this same time period.
"However, the shortfall will be offset by a relatively small
increase in copper charges which are being reset under the
The most important aspect of the review was it highlighted
some of the actions Chorus would need to consider to reduce
• Reducing discretionary investment in copper services,
leading to gradual deterioration in services;
• Delays in new connections;
• Full upfront recovery of any non-UFB or RBI connection
Chorus would provide telecommunications access infrastructure
to most of New Zealand for the next generation but its
valuation during the next 12 months would be hampered by
regulatory uncertainty, Ms Kinnaird said.
''We consider there is potentially an attractive long-term
investment case but uncertainty will prevail in the
Chorus chief executive Mark Ratcliffe said in a statement the
EY review aligned with the company's market disclosure on
November 5 and information provided to shareholders last
Revenue, cost and investment-related initiatives identified
would be weighed carefully.
''While they may save money that can then be invested into
UFB, they also have the potential to negatively impact
service levels and broadband services for consumers across
New Zealand on the current network.''
The right balance must be struck to ensure consumers continue
to benefit from high quality infrastructure, he said.
EY had provided a high-level view on some potential capital
management scenarios but Mr Ratcliffe's view was the true
cost and viability of those options was incomplete.