Chorus, Crown Fibre Holdings announce UFB 'improvements' - analysts' verdict

Chorus [NZX: CNU] and Crown Fibre Holdings have reached an agreement for a series of "improvements" to the Ultrafast Broadband (UFB) rollout, backed by $1.35 billion in taxpayer funds. (Scroll down for Chorus' quick summary of the new measures, which kick in immediately).

The analyst consensus is that the deal is a modest win for Chorus. However, uncertainty remains. No dollar value was put on savings that could be yielded from the measures announced today, so it's unclear how closer the company is to closing its UFB funding gap. And Chorus' various appeals against the Commerce Commission decision to slash its wholesale copper line pricing remain up in the air.

The changes involve no extra government funds for Chorus, but the company will get some of the $929 million in Crown Fibre funding allocated to it sooner, and it gets a more flexible rollout timetable. It can also take advantage of existing ethernet cable in multi-dwelling units, which mean people in flats and apartments get hooked up sooner, if not with quite the speed and reliability of full fibre. 

Negotiations continue, and more "improvements" could be announced.

No major changes, will help with costs
Forsyth Barr senior equities analyst Blair Galpin tells NBR, "The deal is largely as expected, with no major changes but some sensible ones particularly around FTTB [fibre-to-the-building] for modern MDUs [multi-dwelling units such as apartments], which is an area the industry has been grappling with. This should aid Chorus in reducing its CPPP [cost per premise passed] and CPPC [cost per premise connected] but doesn’t mitigate the impact of the UBA decision."

The Commerce Commission's decision to cut UBA (unbundled bit-stream access or copper broadband) pricing from December 1 this year will blow a $1 billion hole in Chorus' revenue up to 2019, hindering its ability to fund the Ultrafast Broadband fibre rollout, Chorus says. 

Since the 10-year UFB rollout began, Chorus' cost per premise passed has blown out from $2500 -$2,700 to $2,900 - $3,200, and the company has revised its estimate of the amount of its own money it will have to tip into the project from $1.4 billion to $1.6 billion to $1.7 billion to $1.9 billion.

Deal doesn't address big issue
"The improvements look positive. They are pragmatic, short term steps, but they are  more about optimising the current contract and don't really do much about the bigger issue of addressing the large funding gap for Chorus to complete the UFB," IDC research manager Peter Wise tells NBR.

"Unfortunately that's unlikely to get resolved until the issues over wholesale broadband copper pricing are resolved - and this looks to be over a year away," Mr Wise says. At Chorus' request, the Commerce Commission is undertaking a Final Pricing Principals review of its determination to cut copper wholesale pricing by 21% from December 1. The regulator says the process could take up to two years. Chorus has also filed a High Court appeal against the ComCom's ruling (the case is scheduled to be heard  March 17 to 21, but going by previous regulatory cases, appeals and counter-appeals are likely to take months or years).

Shuffling cards
Telecommunications Users' Association (Tuanz) CEO Paul Brislen was blunter, saying the deal was "a case of shuffling the cards, not dealing any new ones."

Should help Chorus get over spending hump
“The mix of changes announced should help Chorus through the peak period of capital expenditure pressure the company faces in 2015/16, as they defer some investment costs into the future and should save some costs in the short and medium term," InternetNZ CEO Jordan Carter says.

“More flexible use of the Crown Fibre Holdings financial contribution is a welcome concession that won’t cost taxpayers more, but will help Chorus. More flexibility in the deployment schedule has the same effect, though it may mean some prospective users get fibre later than they would have done otherwise."

Increased confidence
Craigs Investment Partners analyst Arie Dekker says, "Together with Chours' own initiatives to look for revenue and cost savings, today’s package should help provide increased confidence in Chorus' ability to manage its liquidity (along with suspension of dividend) and manage its capex envelope while it works through FPP on copper and managing its UFB capex build while it looks to try to avoid raising equity while it has so much uncertainty on the regulatory front."

Nothing to address fundamental problems
"This measure simply shores up the provision of the government's UFB policy," says Bronwyn Howell, Research Principal of Victoria University's New Zealand Institute for the Study of Competition and Regulation.

"It does nothing to address the fundamental regulatory problems that arise from Chorus being required to provide access to copper services at the same prices in areas where the UFB will be deployed (and hence fixed line infrastructure competition will exist) and the areas where it will not (and hence different incentives are required to ensure that all industry participants face the appropriate incentives to continue investing in technologies that increase the quality of services provided over copper - for example VDSL [the fastest type of copper broadband].

"Until the regulatory matters are addressed, there will continue to be distorting signals sent to industry participants that will impede investment across all network technologies, to the detriment of the statistically average NZ consumer."

Closes some of the $1b funding gap - Adams
This morning, ICT Minister Amy Adams said the changes "are intended to close some of the funding gap that was identified in the Government-commissioned independent report by Ernst & Young Australia."

On December 4, EY's report agreed with Chorus $1 billion deficit estimate, and recommended a series of measures to save $700 million to $750 million, including cancelling its dividend for two years and then halving it to save $290 million (Chorus cancelled its half year dividend, but has given no guidance beyond that), and reducing spending, to save up to $400 million (Chorus has already cut maintenance spending on existing copper lines and will reduce staff numbers, Chorus CEO Mark Ratcliffe said on the company's recent earnings call).

A new equity issue is another possible avenue to raise funding. On the February 24 earnings call, Mr Ratcliffe said there were "no immediate plans" to issue new shares. He added, dryly, that "The greatest enthusiasm for capital raising comes from those who are not current investors."

How much saved?
The measures announced today will go some distance toward closing the $250 million to $300 million funding gap that will remain after Chorus institutes EY's various cost-cutting recommendations - but just how much, none of the parties are saying.

"At this stage it’s difficult to put a definitive figure on all components of the package as it will vary somewhat with take-up and other variables, such as how quickly some of the initiatives can be implemented.  But there are a number of cash flow, build efficiency and non-core revenue benefits that make it worthwhile for us," Chorus spokesman Ian Bonnar tells NBR.

Chorus also wants the government to amend the Resource Management Act to make the UFB a designated service - which would mean the company would not have to get consent from every owner before laying fibre down a right-of-way or through a multi-dwelling building - a process that is leading to instal delays of up to two months, according to the company. But Ms Adams has indicated that option is not on the table.

Chorus shares [NXZ:CNU] which are down 46.94% over the past 12 months, closed yesterday at $1.56, and were flat in midday trading today.

Forsyth Barr has an "outperform" rating on the stock and a 12-month target of $1.90.

Craigs Investment Partners research analyst Arie Dekker recently upgraded Chorus from "hold" to "buy", lifting the 12-month price target from $1.58 to from $1.80. 

RAW DATA: Chorus statement

Chorus and Crown Fibre Holdings agree package of UFB improvements

Summary of initiatives

Deployment Flexibility
While the agreed completion date for each candidate area does not change, Chorus now has greater flexibility in how it phases the rollout within those timeframes.  Key deliverables of Minimum Annual Build and Priority Premises by Dec 2015 (100% of schools and hospitals, and at least 90% of business premises) will be met.

For example, Chorus now has greater flexibility to manage the build programme in conjunction with local councils and other utilities to optimise cost and minimise any disruption in the community.

Better matching time of CFH investment to Chorus cost of build
CFH has agreed to subscribe for a portion of the CFH securities on a monthly basis as work is completed, better aligning receipt of Chorus’ cash flows with its out-goings, with the balance paid on completion of stages and User Acceptance Testing. This will allow Chorus to manage its cash flow more effectively.   So long as a number of conditions continue to be met regarding Chorus’ financial position this will apply for an initial period to June 2015 and will be reviewed further after that. [The Crown is investing $929 million of the $1.35 billion in taxpyer funds allocated to the UFB with Chorus - half in the form of non-voting shares, half in the form of interest-free debt securities - CK]

Pre-fibred premises
In meeting the Priority User target of December 2015, Chorus will have greater flexibility in the deployment of UFB in areas where Chorus already has an extensive fibre footprint.

This initiative defers UFB build in these areas to later in the programme and relates to around 12,000 premises.  Chorus will continue to connect customers to existing fibre on demand. 

Fibre to the Building (FTTB)
Chorus may deliver UFB services in Multi-Dwelling Units (MDUs) with common communications rooms using Fibre to the Premises (FTTP) and in-building reticulation where Cat 5e cabling exists. Where existing cabling isn't sufficient to deliver requested UFB services Chorus will continue to reticulate using fibre.

This solution will reduce the cost of installations, including cost that may be chargeable to the building owner, while still delivering UFB services, and potentially eliminate some consent requirements that delay connection. The increased flexibility should lift UFB uptake. 

Greenfields Reticulation
Chorus will charge developers for reticulation of Greenfields developments as it does in the non-UFB areas of the country to a maximum of $900 per Premises.

Chorus already charges for Greenfields Reticulation in non UFB areas.

Non-Standard Installation Fund Contribution
Chorus has agreed to increase its Non-Standard Installation Fund by $8m.

This will provide the industry with greater certainty regarding installation costs, giving them more confidence when marketing fibre services.

[Chorus, under earlier government pressure, has previously chipped in $20 million to the Non Standard Installation fund. Non-standard installations include multi-dwellling units and homes down right-of-ways. Chorus said it anticipated the $20 million fund would run out toward the end of 2015 - CK]

Marketing fund
In line with the above increase in the Non Standard Installation fund contribution, Chorus will reduce its own fibre marketing spend from $5m per annum to $2.5m.

Chorus will focus its marketing efforts into direct tangible marketing for the Network, such as Gigatown, which has proven extremely successful at raising awareness of the potential of NZ’s fibre future.