Company Overview: Chorus Limited (ASX: CNU) is New Zealand’s leading telecommunications infrastructure company that provides wholesale access to its network. CNU 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.

CNU Details

Rising Fibre Connections to Place CNU well for Fibre Centric Future:

• Rising Applications of Multi-Gigabit Fibre Services: The rising applications of multi-gigabit fibre services has created rapid growth in customer demand for bandwidth and data volume. CNU is currently focused on reshaping its business for a fibre centric future and connecting more New Zealanders to fibre.
• Increasing Fibre Connections: During FY21, the company has continued to witness growth in its fibre connections. As per the company’s quarterly update, fibre now constitutes 84% of Chorus broadband connections in the planned UFB zone. CNU is targeting 1 million fibre connections by 2022.

5-Year Summary (Analysis by Kalkine Group)

Q4FY21 Result Highlights:

• Rise in Fibre broadband Connections: During Q4FY21, the company’s fibre broadband connections grew by 29k. Over the quarter, the company completed 41,000 fibre installations.
• Decline in Total Broadband Connections: Total broadband connections reduced by 1k to 1,180,00 in Q4FY21 due to the impact of COVID-19 pandemic on net migration.
• Rise in 1Gbps Uptake: Over the quarter, 1Gbps connections grew from 152k (including business) to 166k. The company has added 29,000 mass market fibre connections over the quarter.
• Increase in UFB Uptake: During the quarter, uptake in UFB1 areas grew from 68% to 69%, and uptake in UFB2 areas grew from 40% to 42%.

Key Takeaways from H1FY21 Results:

• Rise in Fibre Connections: For H1FY21, CNU added 62,000 fibre connections, taking the total fibre connections nationwide to 813,000.
• Decline in Reported EBITDA: CNU reported EBITDA of NZ$323 million in H1FY21, down by NZ$9 million on pcp, impacted by the continued migration of customers on legacy copper services to alternative networks, particularly in non-Chorus fibre network areas.
• Decline in NPAT: CNU’s NPAT for H1FY21 stood at NZ$24 million, down from NZ$31 million in pcp.
• Cash and Debt Scenario: As at 31 December 2020, the company had cash of NZ$268 million and debt of NZ$3,061 million.

Key Metrics:

EBITDA margin for H1FY21 stood at 74.2%, down from 73.9% in H1FY20. Gross margin for H1FY21 stood at 69.6%, slightly down from 70% in H1FY20. Current ratio for H1FY21 stood at 0.62x, down from 0.86x in H1FY20. Cash cycle for H1FY21 stood at 63.3 days, down from 70.3 days in H1FY20. ROE for H1FY21 stood at 2.6%.

Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 41.46% of the total shareholding, while the top four constitute 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:     

Source: Analysis By Kalkine Group

Dividend History: Over the past four years (2016 to 2020), the company’s dividend grew at a CAGR of ~4.66%. Notably, the company has increased its dividend in each corresponding year. For H1FY21, the company paid an interim dividend of 10.5 NZ cps, up from 10 NZ cps in H1FY20. At CMP of A$5.850, the company’s annual dividend yield stood at ~3.87%. For the full year FY21, the company expects its dividend to be around 25 NZ cps, demonstrating an increase of 1 NZ cents from FY20, reflecting the company’s focus on paying growing dividends.

Dividend Trend (Analysis by Kalkine Group)

Latest Developments:

• Confirmation of Regulatory WACC: The Commerce Commission is currently responsible for determining the cost of capital for regulated suppliers by estimating the costs of two sources of funding for investments (debt and equity). On 1 July 2021, the Commerce Commission estimated a mid-point vanilla WACC of 4.72% and a post-tax WACC of 4.52%.
• Price-Quality Draft Decision For CNU: On 27 May 2021, the Commerce Commission released its draft decision on CNU’s price-quality determination for the first regulatory period (2022 to 2024) for fibre. As per the draft decision, annual revenue for the regulatory period is expected to be in the range of NZ$689 million to NZ$786 million, including pass-through costs.

Key Risks:

• Regulatory Risks: CNU is exposed to the risks related to the decisions of Commerce Commission in relation to price-quality determination and estimation of regulatory WACC.
• COVID-19 Uncertainties: CNU is exposed to the risks related to the uncertainties surrounded by the COVID-19 pandemic as it could impact the company’s broadband connection and disrupt its operations.

Outlook: Moving forward, the company intends to maintain its focus on controlling costs, promoting fibre and investing in new products and technologies. As the company transitions from build phase to operating the fibre network, it expects to see opportunities to evolve its business and supply chain capability to help minimise the whole of life cost of the network. The company’s FY21 EBITDA is tracking towards the lower half of NZ$640 - NZ$660 million range. FY21 gross capital expenditure is expected to be in the range of NZ$670 million to NZ$700. FY21 dividend is expected to be around 25 cents per share, provided that there are no material adverse changes in circumstances or outlook. From FY22 onwards, the company expects to transition to a dividend policy based on a pay-out range of free cash flow.  The company is planning to release its FY21 results on 23 August 2021.

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 = ~0.94 AUD

Stock Recommendation: Over the last three months, the stock of CNU has corrected by 8.01% and is trading lower than the average 52-weeks’ price level band of $5.570 - $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 decline in H1FY21 financial performance, decline in total broadband connections, COVID-19 led uncertainties, and 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), MNF Group Ltd (ASX: MNF), Uniti Group Ltd (ASX: UWL), etc. Considering CNU’s ongoing focus on reshaping its business for a fibre centric future, rising customer demand for bandwidth and data volume, increasing fibre broadband connections, modest long-term outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the closing price of $5.85, up by 0.171% as on 29 July 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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