Company Overview:  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. The company’s product portfolio includes a broad range of wholesale broadband, data, and voice services across a mix of regulated and commercial products. The company’s strategy is focused on developing long-term future of its business, growing new revenues, optimising non-fibre business, and wining core fibre business. 

CNU Details

Growing Fibre Connections Supporting Future Prospects: Chorus Limited (ASX: CNU) is New Zealand’s leading telecommunications infrastructure company that provides wholesale access to its network so that broadband providers can offer innovative products and services to their customers. Currently, the company is mainly focused on reshaping its business for a fibre centric future. During the first nine months of FY21, the company witnessed a decent uplift in its fibre connections. During Q3FY21, fibre uptake across the completed UFB footprint increased from 63% to 64%, with CNU’s managed migrations programme adding another 7k activations. As of 31 March 2021, the company had 831,000 fibre (GPON) connections, representing 62% of all CNU connections.

Looking ahead, the company is focused on controlling costs, promoting fibre and investing in new products and technologies. CNU expects rapid growth in customer demand for bandwidth and data volume, supported by the rising applications of multi-gigabit fibre services. CNU is focused on connecting more New Zealanders to fibre and is targeting 1 million fibre connections by 2022. The company is also making sure that its copper network well-maintained to deliver the best possible voice and broadband services.

Five-Year Financial Summary (Source: Analysis by Kalkine Group)

H1FY21 Results Highlights: For H1FY21, CNU reported operating revenue of NZ$473 million, down from NZ$483 million reported in H1FY20. Over the period, the company added 62,000 fibre connections, taking the total fibre connections nationwide to 813,000. CNU reported EBITDA of NZ$323 million in H1FY21, down by NZ$9 million on pcp, mainly due to the continued migration of customers on legacy copper services to alternative networks, particularly in non-Chorus fibre network areas. As at 31 December 2021, the company had cash of NZ$268 million and a debt of NZ$3,061 million.

H1FY21 Results Overview (Source: Company Reports)

Key Metrics: For H1FY21, the company’s gross margin 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%, down from 6.4% in H1FY20. RoE for H1FY21 stood at 2.6%, down from 3.2% in H2FY20. It reported an improvement in the cash cycle days to 63.3 days in H1FY21, compared to 70.3 days in the previous corresponding period.

Profitability Metrics (Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 41.47% 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 7.50%, respectively, as also highlighted in the chart below:

Data Source: Analysis by Kalkine Group

Dividend on Rise: At CMP of A$6.04, the company’s annual dividend yield stood at 3.66%. From 2016 to 2020, the dividend per share 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. CNU has a track record of paying decent dividend to its shareholders. This demonstrates that the company has been focussing on delivering returns to its shareholders. This might help in attracting the attention of dividend seeking investors.

Dividend Trend (Analysis by Kalkine Group)

Price-Quality Draft Decision For CNU: In FY20, the Commerce Commission released its final decisions on the input methodologies that will apply to CNU’s fibre access network from January 2022. CNU is now transitioning to a new regulatory framework, and it recently notified its maximum allowable revenue (MAR) submission to the Commerce Commission for the first regulatory period from 2022 to 2024. As per the submission, CNU has considered annual revenue range of NZ$720 million to NZ$820 million during the period, in line with CNU’s forecasted fibre revenues in the first regulatory period. On 27 May 2021, CNU notified that the Commerce Commission had released its draft decision on CNU’s price-quality determination for the first regulatory period for fibre. The Commerce Commission has considered annual revenue range of NZ$689 million to NZ$786 million, including pass-through costs, which is broadly consistent with CNU’s forecast fibre revenues for the period.

Q3FY21 Update: During Q3FY21, the company’s total fixed line connections declined by 13k to 1,356,000. However, the fibre broadband connections increased by 29k on the previous quarter. Notably, CNU completed 40,000 fibre in Q3FY21. Total broadband connections declined by 2k to 1,181,000 in Q3FY21.

Key Risks: CNU operates in a highly competitive industry, exposing it to competition risk. 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.

Outlook: For FY21, the company expects its EBITDA to be in the range of NZ$640 million to NZ$660 million. Gross capital expenditure for FY21 is expected to be in the range of NZ$670 million to NZ$700. CNU expects its total FY21 dividend to be around 25 NZ cents per share, subject to no material adverse changes in circumstances or outlook.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

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.

** 1 NZD = ~0.93 AUD

Stock Recommendation: Over the last three months, the stock of CNU has corrected by 12.69% and is trading lower than the average 52-weeks’ price level band of $5.650 - $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 some discount to its peer median EV/EBITDA (NTM trading multiple), considering the softer results in H1FY21, continued migration of customers on legacy copper services to alternative networks, while also taking into account that the company has been trading at a discount in the past 3-years over its peer median. We have taken peers like 5G Networks Ltd (ASX: 5GN), Macquarie Telecom Group Ltd (ASX: MAQ), Uniti Group Ltd (ASX: UWL), etc, which comes under communication services sector. Considering CNU’s growing fibre broadband connections, its transition to new regulatory framework, ongoing focus on controlling costs, modest long-term outlook, current trading level and valuation, we give a “Buy” recommendation for the stock at the closing price of $6.04, down by 2.424% as on 10 June 2021.

CNU Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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. 

Technical Indicators Defined: 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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