Chorus shares jump on maiden $102m seven-month profit

Chorus has posted a maiden profit in its first seven months since splitting from Telecom and flagged a 25.5 cent dividend for its first full year as a standalone entity in 2013.

Net profit was $102 million, or 26 cents per share, in the seven months ended June 30, on sales of $613 million, the Wellington-based company says.

Annualised operating revenue, which includes its time under Telecom's umbrella, rose to $1.03 billion from $1.02 billion in 2011 on a pro-forma basis. Annualised earnings before interest, tax, depreciation and amortisation of $665 million beat analysts' consensus forecast of $638.4 million.

Chorus shares [NZX:CNU]  jumped 8.53% on the result to $3.39 as the market opened (a n exact mirror image of Telecom [NZX:TEL] which fell 8.53% on Friday and was down another 5.56% in early trading today).

CEO Mark Ratcliffe wasn't reading too much into the rise, which he was picking was mostly trading by retail investors. His sense was that large institutional investors had not encoutered any surprises in today's result.

Unexpected levy hit
CFO Andrew Carroll said the complexities of the Telecom demerger made it difficult to make an apples-to-apples comparison, but that including Chorus' unexpected contribution to the new Telecommunications Development Levy, ebitda was slightly behind 2011 ebitda (he refused to put a dollar value on the levy, citing commercial sensitivity). Withtout the TDL, it was slightly ahead.

Dividend guidance clouded
The company's board declared a fully-imputed dividend of 14.6 cents per share, or $56 million, to be paid on October 5, and says next year's return will be 25.5 cents. Regulatory uncertainty over copper pricing meant it couldn't see farther out.

The result "looks solid and people will have taken some comfort from that," said Forsyth Barr analyst Guy Hallwright. The rebound in the share price looks like it came after "fears of a dividend cut" didn't emerge, he said.

Mr Ratcliffe said he couldn't offer detail on two key issues: the wholesale cost of copper connections (whose regulated average price is under review by the Commerce Commission), and the cost of connecting fibre from the kerb to a home (retail ISPs want Chorus to bear the cost). He offered only that talks were ongoing with the Commission on copper, and with Crown Fibre Holdings on fibre connection costs.

As of June 30, fibre had been run past 42,000 homes, with another 5000 in progress. However, it was difficult for Chorus to predict UFB uptake over the next year given the three largest ISPs (Telecom, TelstraClear and Vodafone) have yet to reveal details of their fibre plans, Mr Ratcliffe said.

Slow fibre update
There had been only 200 actual fibre connections, from the kerb to a home, school or business. Mr Ratcliffe was not worried by the number. He said it was early days for the 10-year roll-out. Many customer were waiting for their ISP to release a fibre plan (Telecom has said it won't launch plans until the New Year; Vodafone and TelstraClear have yet to set a timeframe).

"We've focused on supporting our customers during what is a period of complex industry transition, and it has been good to see their success in adding about 50,000 broadband connections to the network," chief executive Mark Ratcliffe says.

"While fibre demand is uncertainty, there are early signs that it is emerging."

Chorus was spun out from Telecom as a separately-listed company last year to free up the telecommunications company from its regulatory burden and allow the network operator to successfully win a billion-dollar subsidy to build a nationwide fibre network and rural broadband system.

The bulk of Chorus' sales were to former parent Telecom, with $523 million, or 85 percent, coming from the country's biggest listed company. Most of the network operator's sales came from its copper network, with $399 million from basic copper services, $89 million from enhanced copper, and $28 million from fibre.

As at June 30, Chorus had 1.78 million fixed line connections, of which 1.59 million were base copper. Total broadband connections were 1.04 million.

Ratcliffe sees growth opportunities in the growing emergence of wireless technologies, with mobile devices driving fixed-line uptake as more households use a central connection.

"Most people are using mobile devices linked to their fixed network," Ratcliffe told BusinessDesk. "Allowing people to use their home broadband on mobile and fixed-line is complementary to both."

Chorus spent $346 million on gross capital expenditure in the period, and retained its forecast capex spend of $560 million to $610 million in 2013. It estimates the government's UFB project will cost between $1.4 billion and $1.6 billion to build by 2019, while the rural broadband initiative is expected to cost between $280 million and $295 million.

Ratcliffe said entertainment services will be the primary driver for fibre uptake, and the market won't have a clearer idea as to what the penetration will be until the likes of Sky Network Television and Television New Zealand share their strategies for offering video content over the network.

The stock is rated an average 'outperform' based on 10 analyst recommendations compiled by Reuters, with a median target price of $3.44.