CNU - Chorus

[Snoopy]

I also appreciate your analysis on this company Snoopy. Their capital management certainly is difficult to decipher!

I've been a long time holder and have been trying to come up with an intrinsic valuation based on future earnings. The bit I'm figuring out if how much earnings growth we should expect in the future.

Chorus's future earnings appear to be unclear due to the regulatory framework. As per their latest presentation, they are exploring new revenue sources but it may a bit speculative at this stage to put numbers against them.

So my question is whether you believe there is still potential growth in Chorus or will it become a stable dividend payer like the gentailers?

My gut feeling is that in the medium term, we should regard CNU as a 'good dividend payer'. In the longer term there is growth potential, but that growth comes in the shadow of what to do with Crown Infrastructure Partners 'billion dollar debt' that will need to be repaid or refinanced.

The 26th March press release on 'Initial Asset Value Presentation' seems to have precipitated the share price slump from around $7.75 at the time to around $6.50 today. So I think it is worthwhile spending some time trying to decipher what this press release is saying.

https://www.nzx.com/announcements/369756

I understand that there has to be some government price controls on monopoly assets. The IAV (Initial Asset Value) model is not necessarily reflective of the balance sheet valuation of these fibre assets. I -think- that slide 4 in that presentation is telling us that although the fibre broadband network is fully justified as being valued at $5.5billion for IAV modelling purposes, proposed government imposed revenue constraints means that the network should now only be valued at $4billion.

As an aside, the net carrying amount of 'Fibre Assets' + 'Ducts Manholes and Poles' + 'Network Electronics' sums to $3.916m (AR2020 p42). It was Zspoon (post 2667) that told me this is not relevant to IAV modelling. But I take some comfort from the fact that the reduced IAV value of the Fibre Asset network for modelling proposes ($4b), and, as near as I can figure, the balance sheet value of the fibre assets ($3.916b) are very closely aligned.

I am unclear as to whether IAV modelling applies to 'Fibre Broadband', 'Fibre Premium' or both. Why is that important? Because I see enhancements to the broadband network as the primary path of growth for Chorus going forwards, Chorus seems concerned that the mooted regulatory revenue will constrain their ability to invest in 'network enhancing options', some of which may not have been invented yet. Then again, maybe Chorus is not the right business to innovate in this area? Take a look at these revenue trends from the last four years:

	FY2017	FY2018	FY2019	FY2020
Revenue Fibre broadband (GPON)	$123m	$198m	$294m	$393m
Revenue Fibre Premium (P2P)	$79m	$78m	$74m	$73m

Why is 'fibre premium' declining, even as the rest of the fibre network revenue grows? I had hoped that 'fibre premium' might be the cash cow that allowed Chorus profitability to grow above a government regulated pace. But is looks like this potential 'growth engine' is actually sick. If I look in the AR2020 glossary:

''Fibre Premium' means "Where two parties or devices are connected point to point by fibre." whereas

'Fibre Broadband' means 'Gigabit passive optical network'.

As fibre broadband gets faster and faster, I am wondering if the need for a direct peer to peer 'fibre premium' service diminishes?

The principal driver of Fibre Premium, according to AR2020 p23, is 'Direct Fibre Access Service".

https://company.chorus.co.nz/sites/d...une%202017.pdf

Anyone got any insights as to how 'fibre premium' might yet become the next Chorus growth story?

SNOOPY

[newtrader]

I am unclear as to whether IAV modelling applies to 'Fibre Broadband', 'Fibre Premium' or both. Why is that important? Because I see enhancements to the broadband network as the primary path of growth for Chorus going forwards, Chorus seems concerned that the mooted regulatory revenue will constrain their ability to invest in 'network enhancing options', some of which may not have been invented yet. Then again, maybe Chorus is not the right business to innovate in this area? Take a look at these revenue trends from the last four years:

	FY2017	FY2018	FY2019	FY2020
Revenue Fibre broadband (GPON)	$123m	$198m	$294m	$393m
Revenue Fibre Premium (P2P)	$79m	$78m	$74m	$73m

Why is 'fibre premium' declining, even as the rest of the fibre network revenue grows? I had hoped that 'fibre premium' might be the cash cow that allowed Chorus profitability to grow above a government regulated pace. But is looks like this potential 'growth engine' is actually sick. If I look in the AR2020 glossary:

''Fibre Premium' means "Where two parties or devices are connected point to point by fibre." whereas

'Fibre Broadband' means 'Gigabit passive optical network'.

As fibre broadband gets faster and faster, I am wondering if the need for a direct peer to peer 'fibre premium' service diminishes?

The principal driver of Fibre Premium, according to AR2020 p23, is 'Direct Fibre Access Service".

https://company.chorus.co.nz/sites/d...une%202017.pdf

Anyone got any insights as to how 'fibre premium' might yet become the next Chorus growth story?

SNOOPY

My current understanding is that 'Fibre Premium' is a business offering to allow their different business premises to be directly linked up (peer-to-peer). It might be useful for complex applications where reliability or security may be important. Imagine if a business wants to establish a private network between their different sites without going through the internet. My view is that this is a very niche product/service and small/medium business may not require this service.

However based on the HY Result Presentation on 22 February 2021, it appears this Fibre Premium revenue is captured under 'regulated fibre revenue'. On slide 24 it estimates the following input revenues:
~$480m in FY20
~$270m in H1 FY21

If you compare these numbers against slide 13 (revenue), it appears the numbers is derived from the sum of Fibre Broadband and Fibre Premium.

[Aaron]

Am I correct in thinking this is just more competition for Chorus?
https://www.nzherald.co.nz/business/...LRASQJYZKB65I/

Its behind the paywall so here is the free one

https://www.stuff.co.nz/business/ind...land-preorders

Obviously it is not fibre but moving data with speeds from 50Mb/s to 150Mb/s in most locations.

Not really what Chorus need right now.

[Snoopy]

Am I correct in thinking this is just more competition for Chorus?
https://www.nzherald.co.nz/business/...LRASQJYZKB65I/

Its behind the paywall so here is the free one

https://www.stuff.co.nz/business/ind...land-preorders

Obviously it is not fibre but moving data with speeds from 50Mb/s to 150Mb/s in most locations.

Not really what Chorus need right now.

"Some orders may take six months or more to fulfil.

The Starlink hardware would cost $799 plus $114 for shipping and handling, and the service would cost $159 per month with no data cap.

Those wanting to secure their position in line were required to pay a $159 deposit."

Seems a bit more pricey than any Chorus offering? Might a solution for a business operating in a remote area without fibre access though?

SNOOPY

[676767]

[QUOTE=Aaron;885191]Am I correct in thinking this is just more competition for Chorus?
https://www.nzherald.co.nz/business/...LRASQJYZKB65I/


I dont believe so, its not really targeted at urban centers where chorus makes their main income, Starlink have a low maximum number of endpoints per square km i believe that doesn't support that model.
Hopefully these LEO services take over the hard to maintain and loss making Rural DSL services that chorus currently have to operate.
A UFB only future would be great for chorus's OPEX as the cost to upgrade and maintain is much lower

[dobby41]

Am I correct in thinking this is just more competition for Chorus?
https://www.nzherald.co.nz/business/...LRASQJYZKB65I/

Probably not - an edge case rather than mainstream for NZ I think. Wait for a few rain fades and see how people feel.

[Snoopy]

Interesting announcement to the market from Chorus today:

https://www.nzx.com/announcements/370164

"Chorus is today providing an update to the indicative maximum allowable revenue (MAR) range of $715 million to $755 million per annum included in its Initial Asset Value presentation update of 26 March, to a reduced range of $680 million to $710 million per annum for the first regulatory period."

That doesn't sound good to me. The revenue is going to be further constrained but there is no mention of lower costs to offset that.

One month and a bit on, and there has been another 'price sensitive' announcement to the market, a submission by Chorus to the Commerce Commission.

https://www.nzx.com/announcements/372272

There is a mention in there of allowing the use of 'tilted depreciation'.

“The MAR (Measurement of returns Adjusted for Risk) proposal includes the use of tilted depreciation to ensure a smooth transition into the new regulatory regime and properly reflect the commercial risks we face.”

I have done a websearch on this term and Come up with this

https://www.accc.gov.au/system/files...20Jul%2007.pdf

From paragraph 85

"The rate of depreciation determines the rate at which the costs of an investment are recovered over time. For example, if the TSP (Telecom Service Provider) invests $10m in cable to provide services to TSO (Telecommunications Service Obligation) customers, the rate of depreciation determines the rate at which the $10m investment is recovered by the TSP. The rate of depreciation therefore determines the rate of return of capital."

Now as I understand it, the Commerce Commission are already determining what an acceptable level of 'return on capital' is for Chorus. So what Chorus is suggesting here ( I think) is that, because broadband equipment has a long life, and use of broadband is still developing, the depreciation rate of equipment should be 'slowed down', until 'the use of that equipment grows' to the extent that the 'actual wear and tear' on that equipment reflects its increased use. The depreciation rate will eventually be accelerated again such that overall depreciation over the life of the equipment asset does not change.

From the Chorus link

"Depreciation tilting was identified by government and confirmed by the Commission in the Input Methodologies as a tool to be used to reduce revenue volatility in the transition to the new regulatory framework. It is NPV neutral, so doesn’t change the overall returns Chorus receives."

Maybe the overall return for Chorus does not change. But it seems to me this policy will result in more profits declared by Chorus in the short to medium term and less in the long term. So my question is, what is the advantage to Chorus in doing this? They pay more tax up front ;-P !!!?!

SNOOPY

[Snoopy]

One month and a bit on, and there has been another 'price sensitive' announcement to the market, a submission by Chorus to the Commerce Commission.

https://www.nzx.com/announcements/372272

This is a table of the changing fibre revenue picture as Chorus's take on their network modelling evolves:

	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021F	FY2022F	FY2023F	FY2024F	FY2025F
(1) Fibre Revenue (26-03-2021 estimate)	$133m	$202m	$276m	$368m	$466m	$591m	$715m(1)	$735m	$755m(1)
(2) Fibre Revenue (06-04-2021 estimate)	$133m	$202m	$276m	$368m	$466m	$591m	$680m(2)	$695m	$710m(2)
(3) Fibre Revenue (17-05-2021 estimate, tilting)	$133m	$202m	$276m	$368m	$466m	$591m	$760m(2)	$770m	$780m(3)

Notes

1/ Figures taken from 26th March 2021 Press Release.
2/ Figures taken from 6th April 2021 Press Release.
3/ Figures taken from 17th May 2021 Press Release.
4/ I have not reported the 'smoothed revenue' result for 17th May because none of the other results are smoothed.

Iteration 2 is the same as Iteration 3 but without the 'tilted depreciation'. As in the previous post 'Tilted Depreciation' means more profit for Chorus in the short term, to be ultimately 'balanced out' by lesser profits further into the future.

I still find it intriguing that the RAB (Regulated Asset Base) for fibre is expressed as at 26-03-2020, (Slide 4 of Presentation) , at as a $5.5 billion dollar asset made up of a financial loss asset of $1.5b and a base of $4b. The $1.5b reduction is presented as asset depreciation. The depreciated value of the remaining fibre assets on the balance sheet is $1.547b (which ties up). By using the higher $5.5b network valuation figure, it looks like regulation is being done assuming all assets are new.

Commentary attached to the 17th May 'Press Release':

"The MAR submission is based upon the conservative starting Regulated Asset Base (RAB) of $5.5 billion submitted to the Commission in late March, which Chorus advocates strongly should be higher to better reflect the cost of building our UFB network."

Presumably if the RAB is valued at $6b, like Chorus want, then Chorus can legitimately charge more money to get that pre-determined return on assets? Looking at Note 1 in the balance sheet on Network assets would suggest that Chorus has spent more than $6b in real life on fibre broadband anyway, and they talk of wanting to spend more. But if the Commerce Commission says the whole lot is only worth $5.5b new, retrospectively after the fibre network was built, the implication is that Chorus spent too much building it - despite the whole thing coming in slightly under the CIP budget. Is it just me, or is the Crown being two faced with their fibre network valuations here?

SNOOPY

[newtrader]

My thoughts on Starlink and other technologies are that they probably aren't a direct threat. They fill a need where fibre isn't available or cost prohibitive (e.g. rural or remote areas). Fibre is likely to be best choice for consumers that need reliable internet

Reliability, stability and low latency is quite important for a few use cases (including gaming and video/audio calling).
A extra few milliseconds in internet delay has a dramatic impact on video/audio calling and gaming. You know how awkward it is if you've been a call where there is an even small delay in audio or video.

[newtrader]

"Depreciation tilting was identified by government and confirmed by the Commission in the Input Methodologies as a tool to be used to reduce revenue volatility in the transition to the new regulatory framework. It is NPV neutral, so doesn’t change the overall returns Chorus receives."

Maybe the overall return for Chorus does not change. But it seems to me this policy will result in more profits declared by Chorus in the short to medium term and less in the long term. So my question is, what is the advantage to Chorus in doing this? They pay more tax up front ;-P !!!?!

SNOOPY

Perhaps management are proposing this so they have better cashflow and to continue to pay out that dividend?

On the topic of this regulatory framework, are prices inflation protected? i.e. if we see high inflation is Chrous entitled to adjust their prices accordingly? Just thinking what Chrous may look like in a world of high inflation.