Chorus Meets Street Expectations; Announces Roll Out of Fibre

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Chorus reported a fiscal 2013 result in line with analyst’s expectations. Fiscal 2014 earnings before interest, tax, depreciation and amortisation, or EBITDA, is guided for a low single-digit decline. Our forecast of NZD 650 million is largely unchanged and represents a 2.2% decline on fiscal 2013. Roll-out of the fibre network, take-up of the service and capital expenditure remain the key drivers of Chorus’s valuation.

Higher expenditure was a slight disappointment at the first-half result but, positively, full-year capital expenditure of NZD 681 million was in line with the revised guidance of NZD 640 million to NZD 690 million. Our capital expenditure forecast of NZD 720 million reflected a greater IT investment in fiscal 2013. As noted in our June report, management has taken steps to curb roll-out costs. Analysts also expect capital expenditure to trend lower over the long term as the scalability of the roll-out increases.

The fibre roll-out is proceeding as planned with the network passing 153,000 premises, slightly above planned schedule of 149,000. Take-up of the fibre service remains in its early days with 19,000 premises connected. Of this, 44% of premises are residential and education with the balance being larger entities taking up direct fibre.

The longer-term take-up of fibre is dependent on the two large Internet service providers Telecom New Zealand and Vodafone which, combined, have 70% of the fixed-broadband market. Telecom New Zealand launched its fibre pricing earlier this year while Vodafone has yet to announce its retail prices. We expect competition between Internet service providers to drive residential demand for fibre.

The number of copper access lines was steady at 1.76 million, but we expect this to decline as the fibre network is progressively rolled out. In areas where Chorus is not rolling out a fibre network, management noted increasing competition for its copper network as fibre is progressively rolled out by other parties and wireless networks are upgraded to 4G/LTE. We believe the migration to fibre to be the main risk in these areas given the technological difference between fixed and wireless broadband and the pricing premium for wireless. Post fibre roll-out, the company’s fibre assets will cover 75% of New Zealand’s population.

 

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