Uncertainty plagues Chorus announcement

Mark Ratcliffe.
Mark Ratcliffe.
There was not much to like in the Chorus profit announcement for the six months ending December, as the financial profitability of the lines network company hinges on a Commerce Commission decision.

Chorus, which is in a dispute with the commission about the price of access by competitors to its copper lines network, reported an operating profit of $329 million for the period, down 1% on the $331 million reported in the previous corresponding period.

The reported profit of $78 million was down 7% on the $84 million reported in the pcp. Revenue was up 2% to $535 million.

As expected, the company did not declare an interim dividend, prompting Craigs Investment Partners broker Chris Timms to say he would not recommend the stock in the portfolios of clients.

''When you look at a utility, there is usually an advantage from the dividend stream. Without that income, you have to look at it from a shareholder's point of view. It's hard to look favourably at the stock without the income. There is too much risk here for clients.''

Auditor KPMG tagged the company's accounts as facing ''significant uncertainties'' that could impact on the value of its network.

Asked if there was anything he liked in the report from the company, Mr Timms bluntly answered ''no''.

He expected some short-term movement in the share price as investors reacted to news.

Without a final decision from the commission, and some certainty for the company, all that was left was uncertainty.

Chorus chief executive Mark Ratcliffe said in a statement the company had undertaken a fundamental review of the entire business to identify an extensive range of reducing operating costs, reducing capital expenditure and increasing revenue.

Mr Timms said the first thing which normally went with cost reductions was staff, and that would provide uncertainty and nervousness.

Forecast capital expenditure of $660 million to $690 million for the 2014 financial year was unchanged, while the operating profit was expected to be at the top end of a flat to low single-digit percentage fall.

There was an 8000 drop in fixed line connections in the last six months.

That was expected to be an ongoing trend given the take-up of ultrafast broadband (UFB), he said.

At the margins, there was likely some ongoing fall in fixed line use.

The company had begun to address the large impact of pending copper pricing falls, proceeding on the basis of no benefit from the High Court review.

Importantly, it did not appear to be far away from announcing progress on the first tranche of initiatives from its discussions with Crown Fibre Holdings.

Mr Ratcliffe said the company was getting on with managing its costs and revenue without reliance on any regulatory outcomes.

''The reality of our situation is, that like all of the communications industry, we are adapting our business to significantly lower revenues.''

Many initiatives were ready for implementation from July and some smaller measures had already been implemented.

The industry had requested the second phase of the copper pricing reviews, known as the Final Pricing Principle (FPP).

The company's analysis suggested the unbundled copper local loop price from the pricing principle could be significantly higher than it was today, and there was a clear judicial principle for backdating, he said.

''The FPP is a new phase and timelines and outcomes are uncertain. As such, Chorus will progress these in parallel but will not wait for processes to be completed.''

Total broadband connections increased by 20,000 in the period and there was also substantial growth in VDSL (very-high-bit-rate digital subscriber line).

Fibre broadband connections had doubled.

''Chorus has spent more than $1.1 billion on fibre networks and capability in the two years since demerger. Both the UFB and Rural Broadband Initiative are comfortably on track.''

 

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