Analyst Research

Chorus Ltd (CNU) – NEUTRAL

September 6, 2018
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September 6, 2018

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Chorus Ltd (CNU) – NEUTRAL

COMPANY DATA

Date of ReportASXPricePrice TargetAnalyst Recommendation
06/09/18CNUNZ$4.82NZ$5.00NEUTRAL
Date of Report

06/09/18

ASX

CNU

Price

NZ$4.82

Price Target

NZ$5.00

Analyst Recommendation

NEUTRAL

Sector : Healthcare52-Week Range: A$3.67 – 4.84
Industry: Healthcare SuppliesMarket Cap: A$2,073.0m

Source: Bloomberg

INVESTMENT SUMMARY

We rate CNU as a Neutral for the following reasons:

  • CNU trades on our FY18E PE-multiple of 19.6x and yield of 5.4% dividend yield, with an achievable FY18 guidance.
  • Once UFB capex and capex on fiber network significantly fades, CNU is very cash generative and its capex will revert to maintenance spend.
  • Significant barriers to entry with high capex required for new competitors.
  • Benefits from population growth (i.e. potential for more connections) and increasing bandwidth requirements from trends such as end-users watching TV on the internet or increasing content on the internet.
  • Fiber remains the best possible broadband product and has become the preferred broadband product of choice for customers. CNU announced in January 2017 that CNU reached an agreement with the government to take fiber to ~200,000 more customers (on top of the 1.1m already planned for first year UFB roll-out). CNU expects UFB2 rollout to commence in July 2017 and to complete around December 2024. This would result in high penetration with ~85% of NZ population with access to fiber by 2024. The NZ government provided an additional up to ~NZ$291m in funding (whereas other fiber companies received ~NZ$16m in funding to extend fiber to ~33k more premises).

We see the following key risks to our investment thesis:

  • Potential changes to management and strategy with new incoming Kate McKenzie.
  • Increasing prevalence in usage of wireless networks over fiber networks, especially in regional NZ, where there is either poor or no broadband coverage.
  • Any capex blowout.
  • Network outages or reliability issues.

Figure 1: Revenue split by Segment

Source: Company, FY18

ANALYST’S NOTE

Chorus Ltd (CNU) reported earnings (NPAT) of $85m and EBITDA of $653m for FY18, modestly above the top end of the management’s FY18 guidance range of $625m-$650m but coming well below consensus estimates.

Operating revenue for the period was $990m, down -5.5% on FY17 (adjusted) and operating expenses were $337m were down -0.3%. This equated to EBITDA of $653m, down -8.0%, and EBIT of $266m, -19.6% lower than the adjusted FY17 EBIT of $331m.

Management still expects to lose customers to fixed wireless in FY18, however on a positive note, CNU continues to make progress on its fibre rollout, completing 156,000 fibre installations, helping fibre uptake grow from 35% to 45%.

Management announced a fully franked final dividend of 13cps and a dividend reinvestment plan for the final dividend at 3% discount. We yield to management’s FY19 guidance of weak performance (with declining EBITDA) and a potential return to EBITDA growth in FY20. CNU trades on our FY20E PE-multiple of 23.0x and yield of 4.8% dividend yield. Neutral.

  • FY18 results. Key points to the results include:
    1. 
    CNU reported EBITDA of $653m, down -8.03% from $710m in FY17(adjusted) and NPAT of $85m reflecting the impact of declining copper revenues as customers migrated to Chorus fibre or competing fibre/wireless networks.
    2. During FY18 CNU completed record 156,000 fibre connections (up +20% compared to pcp), helping grow fibre uptake from 35% to 45%. However, total fixed line connections fell -5% to 1,526,000 and total broadband connections increased by 1,000, with 64% of broadband connections on high performing VDSL or fibre services.
    3. Total expenses declined marginally to $337m, driven by -12% decline in staff from pcp and reduced consultants cost following FY17 strategic review. 4. Total capex of $810m, towards the higher end of FY18 guidance of $780-$820m, with expenditure of $620m, $132m and $58m in fibre, copper and common respectively.
    5. Total net debt at end of FY18 was $2,239m with Net debt/EBITDA of 3.43x.
    6. Management declared a final dividend of 13cps (fully imputed) and announced a dividend reinvestment plan for the final dividend at a discount rate of 3%.
  • Guiding to weaker FY19. Management expects FY19 EBITDA to be in the range of $625-645m, with market growth in broadband and continued slowdown in overall line loss. This implies a decrease of -1.2% to -4.3% in FY19 from FY18. Capex is expected to be in the range of $820-86m. Management expects to pay dividend of 23cps, given normal market circumstances and outlook.
  • Management signalling a return to EBITDA growth in FY20. The strategic changes undertaken by management in FY18, which are supposed to continue through FY19, are focused on achieving the company’s objective of a return to modest EBITDA growth in FY20. The CEO noted, “Our return to broadband connection growth in FY18, together with strong forecasts for urban housing development and underlying broadband trends, such as fibre uptake and the demand for streamed video content, give us added confidence in our strategy.”

CNU FY18 RESULTS SUMMARY...

Figure 2: CNU FY18 results

Source: Company

Figure 3: CNU Financial Summary           

Source: Company, BTIG, Bloomberg

COMPANY DESCRIPTION

Chorus Ltd (CNU) is a dual-listed (ASX and NSX) wholesale and retail telecommunications company based in New Zealand. CNU maintains and builds the Chorus local access network made up of local telephone exchanges, cabinets and copper and fiber cables throughout New Zealand.


Recommendation Rating Guide

Recommendation Rating GuideTotal Return Expectations on a 12-mth view
Speculative BuyGreater than +30%
BuyGreater than +10%
NeutralGreater than 0%
SellLess than -10%

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