Company Overview: Chorus Limited (ASX: CNU) is New Zealand’s leading telecommunications infrastructure company that provides wholesale access to its network so that broadband providers can sell their broadband plans and packages to their customers. The company maintains and builds a network predominantly made up of local telephone exchanges, cabinets, and copper and fibre cables. The company’s strategy is focused on developing the long-term future of the business, growing new revenues, and optimising non-fibre assets.
CNU Details
Long-term Outlook Supported by Decent Growth in Fibre Uptake: Chorus Limited (ASX: CNU) is a leading telecommunications infrastructure company that works with phone and broadband providers so that they can deliver their products and services to New Zealanders. As on 22 April 2021, the company’s market capitalisation stood at ~A$2.72 billion. During FY20, the company witnessed decent growth in fibre uptake and made significant progress optimising its business and reducing costs. Although the emergence of COVID-19 pandemic impacted the company’s financial performance, it has also accelerated some of the positive underlying trends that support the company’s business. Moreover, due to rising applications of multi-gigabit fibre services, the company is expecting rapid growth in customer demand for bandwidth and data volume.
In November 2020, the Commerce Commission released its final decisions on the input methodologies that will apply to CNU’ fibre access network from January 2022. CNU is now transitioning to a new regulatory framework, and it has already submitted a comprehensive Initial Asset Value model to the Commerce Commission as required under the Price-Quality process. Looking ahead, the company is focused on controlling its costs, promoting fibre and investing in new products and technologies. Further, the company is focused on connecting more New Zealanders to fibre and is targeting 1 million fibre connections by 2022. For FY21, the company’s strategy is focused on developing the long-term future of the business, growing new revenues, and optimising non-fibre assets.
Five-Year Financial Summary (Source: Company Reports, Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
H1FY21 Result Highlights: During the half-year ending 31 December 2020, the company added 62,000 fibre connections, taking the total fibre connections nationwide to 813,000. Ultrafast Broadband (UFB) rollout areas increased from 60% to 63% in H1FY21. For H1FY21, CNU reported EBITDA of NZ$323 million, down by NZ$9 million on pcp, reflecting the continued migration of customers on legacy copper services to alternative networks, particularly in non-Chorus fibre network areas. Operating revenue for H1FY21 stood at NZ$473 million. NPAT for H1FY21 stood at NZ$24 million, down from NZ$31 million in H1FY20. As a result of the company’s continued focus on controlling discretionary expenditure, the operating expenses during H1FY21 were slightly reduced to NZ$150 million, as compared to NZ$151 million in pcp.
H1FY21 Results Overview (Source: Company Reports)
FY20 Result Highlights: For FY20, the company reported operating revenue of NZ$959 million and NPAT of NZ$52 million. The company ended FY20 with 751,000 active fibre connections nationwide, up from 610,000 in FY19. Fixed line connections and Broadband connections stood at 1,415,000 and 1,206,000, respectively. During the year, the company added 41,000 mass market fibre connections and 1Gbps connections grew from 10% to 16% of connections. Moreover, UFB uptake increased from 53% to 60% in FY20 within the completed footprint.
FY20 Results (Source: Company Reports)
Key Metrics: Gross margin for H1FY21 stood at 69.6%, up from 67.9% in H2FY20. EBITDA margin for H1FY21 stood at 74.2%, up from 71.4% in H2FY20. Net margin for H1FY21 stood at 5.1%, up from 4.4% in H2FY20. Current ratio for H1FY21 stood at 0.62x, up from 0.22x in H2FY20, demonstrating that the company has improved its ability to pay short-term obligations.
Profitability Metrics and Liquidity Profile, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Top 10 Shareholders: The top 10 shareholders together form around 41.41% of the total shareholding, while the top four constitutes the maximum holding. L1 Capital Pty Ltd. and The Vanguard Group, Inc. are holding a maximum stake in the company at 8.39% and 7.5%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Dividend On Rise: The company has a track record of paying consistent and increasing dividend to its shareholders, which indicates that the company is focusing on delivering respectable returns to its shareholders. During FY20, the company paid total dividend of 24 cents per share (cps), up 1 cps on FY19. From 2016 to 2020, the dividend grew at a CAGR of ~4.66%. For H1FY21, the company paid an interim dividend of 10.5 cps, up from 10 cps in H1FY20. At CMP of A$6.190, the company’s annual dividend yield stood at 3.71%. The annual dividend yield of the company is about 4.25% on a five-year average basis (FY16-20).
Dividend Trend (Source: Company Reports, Analysis by Kalkine Group)
Submitted the Initial Asset Value Model to Commerce Commission: On 26 March 2021, the company submitted a comprehensive Initial Asset Value model to the Commerce Commission as required under the Price-Quality process. The model supported a Regulated Asset Base (RAB) of NZ$5.5 billion for CNU’s fixed line fibre access services. CNU also provided an alternative cost allocation approach that supported potential RAB outcomes between NZ$5.5 billion and NZ$6 billion. As per CNU’s indicative revenue modelling, the Initial Asset Value model of NZ$5.5 billion indicated an estimated maximum allowable revenue range of NZ$715 million to NZ$755 million per annum in the first regulatory period from January 2022 to December 2024. Later on 6 April 2021, the company reduced the indicative maximum allowable revenue range to NZ$680 million to NZ$710 million per annum.
Q3FY21 Update: During Q3FY21, the company’s copper broadband and voice connections declined by 42k and total broadband connections declined by 2k to 1,181,000. Notably, the Fibre broadband connections increased by 29k and 1Gbps consumer connections increased by 7k.
Key Risks: The company is exposed to the risks associated with the introduction of new technology. Further, the company is exposed to regulatory risks, for example, the risks related to the decisions of Commerce Commission and transition of CNU to a new regulatory framework. CNU operates in a highly competitive industry, exposing it to competition risk.
Outlook: Looking ahead, the company is focused on ensuring its copper network remains well-maintained to deliver the best possible voice and broadband services. For FY21, the company expect its EBITDA to be in the range of NZ$640 million to NZ$660 million, subject to no material changes in the expected regulatory and competitive outlook. CNU expects its total FY21 dividend to be around 25 cents per share. Gross capital expenditure guidance range has increased to NZ$670 million to NZ$700 million from prior range of NZ$630 to NZ$670 million. CNU intends to maximise value for its customers by controlling costs, promoting fibre and investing in new products and technologies.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: Over the last three months, the stock of CNU has corrected by ~18.01% and is trading below its average of 52-weeks’ levels of $5.820 - $8.780, offering a decent opportunity for accumulation. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight discount to its peer median EV/EBITDA (NTM trading multiple), considering the softer results in H1FY21, and continued migration of customers on legacy copper services to alternative networks. We have taken peers like 5G Networks Ltd (ASX: 5GN), Macquarie Telecom Group Ltd (ASX: MAQ), Uniti Group Ltd (ASX: UWL), etc. Considering the company’s track record of paying decent dividends, growth in Fibre broadband connections, the company’s transition to new regulatory framework, decent FY21 guidance, modest long-term outlook, current trading level and valuation, we give a ‘Buy’ recommendation for the stock at the closing price of $6.190, up by 1.475% as on 22 April 2021.
CNU Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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