Friday, 16 Apr 2021

Fatter Chorus dividends: Are they still on the way?

We’re nearing a day some Chorus investors have been dreaming about for a long time: the end of the Ultrafast Broadband rollout – and dividends that could triple to 70 cents per share in the years ahead.

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From January 1 next year, with its highest-spending days of the public-private fibre built behind it, Chorus will enter a new era of much higher free cashflow – and its CFO, Paul Collins, has already pledged to payout a majority of it as dividends after 2024, after increases during a 2022-24 transition period.

But there’s a catch: The Commerce Commission could derail the higher profit payout plan if it’s too harsh on Chorus – from the network operator’s point of view – when it finalises the regulator regime for the post-UFB rollout era.

At Chorus FY2021 first-half report, on February 22, chief executive JB Rousselot reiterated his contention that if the regulator is taking too hard a line with its preliminary numbers. Dividends could be put under pressure – and investors scared off supporting future public-private projects, he told analysts.

And following the latest developments,

analysts are sucking air through their teeth.

On Friday, Chorus submitted its initial asset value (IAV) to the Commerce Commission (as required by the regulator’s price-quality process) that it said supported a “conservative” regulated asset base or RAB (or valuation of Chorus’ assets, minus its copper lines, which are being phased out) of $5.5 billion – which in turn, it saw supporting maximum allowable revenue (MAR) from fibre in the $715m to $755m range for “regulated period 1” (RP1) – or the period through to the end of 2024.

That figure “broadly aligns with Chorus’ forecast fibre revenues for RP1 but leaves little room for unintended consequences,” the company said in an NZX filing.

What will it all mean in terms of the money going into shareholders’ pockets?

Chorus paid a 21 cents per share dividend in FY2020 and is on track for 25cps in FY2021.

This time last year, UBS NZ director Phil Campbell was expecting the payout to climb to 60cps by 2027 – up from his previous estimate of 55cps by 2028.

Today, Campbell told the Herald, “Based on $5.5bn RAB, there is risk of medium-term dividend being less than 50cps -but have to wait and see what ComCom says on May 31.”

That’s the date when the regulator will release a draft report that will include its RAB and maximum allowable fibre revenue numbers. The regulator’s final report is due to land late November.

“In the meantime Vodafone and Spark are lowering wireless broadband prices which could make it more difficult for Chorus to increase its wholesale [fibre] prices,” Campbell noted.

A recent ComCom report said some 221,000 customers are now on fixed wireless, or faster internet delivered into a home or small business via a mobile network rather than fibre or copper landline.

Jarden analysts Grant Lowe and Arie Dekker were relatively downbeat after digesting Chorus’s Friday submission – which they said “dampened expectations”.

The pair maintained their neutral rating but cut their 12-month price-target from $7.99 to $7.32.

“Our expectation remains that Chorus is well-placed to pay around 45-50c dividend per share by FY2024 or 2025 based on a conservative free cash flow pay-out profile. There is a bit more uncertainty around the duration of that dividend level following a RAB that is on the more disappointing side,” Lowe and Dekker said.

The Jarden pair earlier saw a 35cps dividend in FY2022. They now see 30cps next year, growing in five cent per year increments until it hits 50cps in 2025, then 1cps gains in the years following through to 2029.

But they also cautioned that “Chorus has signalled higher capex through 2022 and 2023 than we had previously been expecting as it continues to focus on connections
for defensive reasons. We think that FY24/25 dividend is achievable but we note the ramp up in dividend over these initial years could well be less than we are forecasting – particularly if the ratings agencies or the board maintain some conservatism for network competition.”

That new network competition is primarily a reference to Spark and Vodafone’s wireless broadband efforts, which the mobile contenders say they’ll ramp up as their 5G mobile upgrades expand. Chorus recent hiked “win-back” bounties to up to $800 for a retailer who could lure a customer from wireless broadband back to UFB fibre.

Forsyth Barr’s Matt Henry maintained his outperform rating and increased his 12-month target price from $7.77 to $8.10 following Friday’s developments.

“Our base case remains Chorus can ramp toward a dividend north of 50cps over the medium-term, appealing relative to other defensive stocks in the NZ market.”

In the short-term, he sees 30cps in 2022 and 35cps in 2023.

The regulated asset base assessment of $5.5b was in line with Henry’s estimate – which he saw as a central and promising development. He also noted that Chorus had submitted a proposal to the Commerce Commission for higher spending – but although he thought the company’s logic sound, he also thought the logic of it being accepted by the regulator was low.

“The end of a long and winding regulatory road in sight, but we’re not there yet,” Henry said.

Chorus shares were down 0.41 per cent to $7.27 in late trading. The stock is up 11.5 per cent over the past 12 months.

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