CNU - Chorus

[Zaphod]

5G Wireless provides higher yields for the telco's, so no doubt they will continue to steer as many as possible towards that solutions, however fibre still has massive advantages over wireless for most applications particularly data-intensive ones. I do wonder whether the government will keep a keen eye on the telco behaviour with wireless technologies in order to protect the crown's investment.

[Aaron]

I couldn't find the thread this morning either.

I recall discussing this a long time ago but don't Crown Fibre Holdings (CFH) start getting repaid after 2025 and also that may take the form of shares so dividends would be expected to be diluted a lot in 4-5 years time.

No one really answered my question last time. It could be that I am so far off it was not worth replying.

Half year report summary shows a drop in income and for some important metrics. Fibre connections up but Vodafone pushing its 5G network. Chorus not really competing with the advertising for the connections and Spark has shown it is happy to put customers on its wireless network ahead of recommending fibre. Probably a steady infrastructure company but could someone tell me if I am right about dilution once CFH starts being repaid?

Guess I'll have to do the work myself. I found a summary, so my understanding is that the $929mill funding from CFI is split 50/50 with debt and equity securities.
The debt half is interest free but gets repaid 2025 2030 2033 and 2036 18.5% 18.5% 27.7% 35.4% of the debt.

The equity securities aren't the great dilution I had surmised, they are preference shares with no voting rights so more like a debt security, but the dividend rate on the CFH1 Equity Securities (when payable) is equal to a reference rate (based on the 180 day bank bill rate in New Zealand) plus a margin of 6% per annum. So probably 6% or less depending on interest rates going negative or not. Dividends are payable six-monthly in advance, and the dividend payment dates will be aligned with the dividend payment dates for Chorus Shares.
The number of CFH1 Equity Securities on which the dividend is payable at any date will be reduced by the number of CFH1 Equity Securities which have been redeemed by Chorus up to that date (the redemption terms are described below).
The table below shows the number of CFH1 Equity Securities that will attract dividends
(unless redeemed earlier):
30-Jun 30-Jun
2025 2030 2033 2036 2025 2030 2033 2036
Equity on which
dividends become
payable $86m $172m $300m $465m 18.5% 36.9% 64.6% 100%

Sorry the last table doesn't show well but I guess it is a matter of going back and seeing whether the interest on the preference shares will significantly impact cashflow or not. 2036 is a long way away.

[Marilyn Munroe]

5G Wireless provides higher yields for the telco's, so no doubt they will continue to steer as many as possible towards that solutions, however fibre still has massive advantages over wireless for most applications particularly data-intensive ones. I do wonder whether the government will keep a keen eye on the telco behaviour with wireless technologies in order to protect the crown's investment.

Someone on the internet posing as a telecommunications expert was dismissive of universal roll-out of 5G.

While it has high data rates it restricted by a small range. He claimed while it was a natural fit for high usage areas such as shopping malls, airport terminals and sports stadiums it would require a cell base on every second power pole to deploy in a suburban setting.

He also predicted 5G would struggle in areas with installed fiber.

While predictions especially about the future are difficult I found his ideas credible.

Boop boop de do
Marilyn

[macduffy]

A bit of licence taken with the graphics in the company's Letter to Investors. The 2021 numbers for broadband connections, fixed copper connections etc are shown in comparison with the previous year's numbers. 2021 numbers are more prominently drawn in larger spheres - the only problem is that some of them are actually smaller numbers!

[Snoopy]

Don't Crown Fibre Holdings (CFH) start getting repaid after 2025 and also that may take the form of shares so dividends would be expected to be diluted a lot in 4-5 years time.

Probably a steady infrastructure company but could someone tell me if I am right about dilution once CFH starts being repaid?

Guess I'll have to do the work myself. I found a summary, so my understanding is that the $929mill funding from CFI is split 50/50 with debt and equity securities.

The debt half is interest free but gets repaid.

Repayment Year	2025	2030	2033	2036	Total
Percentage to Repay	18.5%	18.5%	27.7%	35.4%	100%

The equity securities aren't the great dilution] I had surmised, they are preference shares with no voting rights so more like a debt security, but the dividend rate on the CFH1 Equity Securities (when payable) is equal to a reference rate (based on the 180 day bank bill rate in New Zealand) plus a margin of 6% per annum. So probably 6% or less depending on interest rates going negative or not. Dividends are payable six-monthly in advance, and the dividend payment dates will be aligned with the dividend payment dates for Chorus Shares.

The number of CFH1 Equity Securities on which the dividend is payable at any date will be reduced by the number of CFH1 Equity Securities which have been redeemed by Chorus up to that date (the redemption terms are described below).

The table below shows the number of CFH1 Equity Securities that will attract dividends (unless redeemed earlier):

Repayment Year	2025	2030	2033	2036
Cumulative CFH Equity on which dividends become payable	$86m	$172m	$300m	$465m
Cumulative CFH Equity %ge on which dividends become payable	18.5%	36.9%	64.6%	100%

It is a matter of going back and seeing whether the interest on the preference shares will significantly impact cashflow or not. 2036 is a long way away.

I have taken the liberty of reformatting your tabulated information Aaron, so hopefully you will tell me if I haven't done it correctly.

I am surprised you are the only one who has brought up the issue of Crown Fibre Holdings debt repayment. You say 2036 is a long way away. But 2025 isn't so far into the future. And the reduced discount rates that lower interest rates bring means that the shadow of those future repayments looms ever larger. I would be interested where you pulled your numbers from. I have had a cursory look and can't find the figures you have documented. However, I shall assume your figures are correct and carry on. I am particularly interested in those debt repayments because they cannot be deferred. Reading between the lines, I think that if the debt is not repaid then CFH has the right to convert that debt into Chorus shares. So this future debt repayment schedule should be something that demands serious attention from Chorus shareholders.

For Chorus, I would judge a 5.5% discount rate on future cashflows to be about right. The debt and equity components of the Crown Fibre Holdings funding is equally split, so $465m of CFH debt must be repaid.

Repayment Year	2025	2030	2033	2036	Total
Percentage to Repay	18.5%	18.5%	27.7%	35.4%	100%
Dollars to Repay	$86m	$86m	$129m	$165m	$465m
Discount Rate Divisor: 5.5% discount rate (FY2020 perspective)	1.239	1.619	1.901	2.232
PV Dollars to Repay (FY2020 perspective)	$69m	$53m	$68m	$74m	$264m

At EOFY2020 there were 444.492m Chorus shares in issue. So to work the future CFH capital repayments into today's Present value of Chorus shares, you have to reduce the value of Chorus shares by:

$264m / 444.492m = 59cps

Is that the quantifiable result of what you are saying Aaron?

SNOOPY

[Snoopy]

I have taken the liberty of reformatting your tabulated information Aaron, so hopefully you will tell me if I haven't done it correctly.
I would be interested where you pulled your numbers from. I have had a cursory look and can't find the figures you have documented.

No need to reply Aaron. I have found your referenced repayment schedule in the 'Share in Two Journeys' booklet published way back on 13th September 2011, just before Spark (it was Telecom then) and what was to become Chorus, split. The information is on page 140 of that document.

CFH1 Bond Repayment Schedule

Repayment Year	2025	2030	2033	2036	Total
Percentage to Repay	18.5%	18.5%	27.7%	35.4%	100%

CFH1 Equity Dividend Repayment Schedule

The table below shows the number of CFH1 Equity Securities that will attract dividends (unless redeemed earlier):

The dividend rate on the CFH1 Equity Securities (when payable) is equal to a reference rate (based on the 180 day bank bill rate in New Zealand) plus a margin of 6% per annum. So probably 6% or less depending on interest rates going negative or not ;-P. Dividends are payable six-monthly in advance, and the dividend payment dates will be aligned with the dividend payment dates for Chorus Shares.

Repayment Year	2025	2030	2033	2036
Cumulative CFH Equity on which dividends become payable	$86m	$172m	$300m	$465m
Cumulative CFH Equity %ge on which dividends become payable	18.5%	36.9%	64.6%	100%

There is nothing about these repayment schedules in the Annual Reports. Most likely half of all today's shareholders were still at school when this information was published. Perhaps Chorus management just hoped that shareholders would forget about it. Just as well that you didn't Aaron!

SNOOPY

[Snoopy]

The gravitational pull of gross dividend yields consistently and long term much higher than bank deposit interest rates and unreliable finance companies deposit rates which have no capital gain. And backed by Government financing and guarantees and assistance.

I have taken this thread back to its root and this post from 'The Major' which really sums up why we are all here. Ok maybe not 'all'. I, for instance, am a Chorus shareholder that has never bought a single Chorus share. Chorus were spun out of what was then Telecom ten years ago and that is where my Chorus shares came from. This was a time of fast changing internet technology: ADSL, VDSL, Fibre and the mobile networks making their own independent challenge into the internet space. It was very difficult to see where everything would end up. And investing in such a fast changing space was not something I was comfortable with. So my Chorus shares went into the bottom drawer and have had a pretty wild ride in the last decade. Yet ultimately it seems that something quite simple -dividend yield-, or should I say 'prospective future dividend yields ' has driven the share price up to the stratospheric PE ratios (on an historical basis) we see today.

The acceptance of fibre broadband has been way above what the government of ten years ago expected. The goal was to have a minimum 20% of households sign up to fibre running past their front gate. The actual figure today is close to 65%. Despite the existence of competing technologies, in particular wireless broadband (which still uses Chorus for their back haul operations anyway once the signal cellphone gets to the network), I am going to call fibre broadband 'the winner'. With a somewhat more mature market outlook that ten years ago, Chorus has now become investible, at least potentially.

Contrary to popular belief, the roll out of fibre has only been partially and transiently funded by the government. Note 13 of AR2019 suggests that the total budget to roll out UFB1 (which covers the major towns and cities) followed by UFB2 and UFB2+ will cost $2.3b to $2.4b by the end of FY2022. Of that $548m to $568m is the cost of UFB2 and UFB 2+ going out to smaller towns (note 13 AR2020). By simple subtraction then, the cost of rolling out UFB1 alone must be between $1.732b and $1.852b. The total government funding for Chorus's share of UFB1 is $959m (forecast, Note 5 AR2012), or about half the cost of building the network. But from 2025 half of that funding becomes due by progressive repayment. In a similar time-frame, the other half of that funding becomes a preference share with what by today's standard will be a startlingly high interest rate (something north of 6, probably 8%). So it will make sense to refinance and repay that as well. By 2036 all of the crown funding, most likely, will have been repaid.

Capital spending will not stop after FY2022. But it will be a step change down from the hundreds of millions of dollars of recent years.

Operational Year	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021	FY2022	FY2023	FY2024
Capital Expenditure Fibre	$486m	$503m	$620m	$664m	$548m (3)	$560m-$590m (1)	$399.9m (2)	$333.2 (2)	$295.9m (2)

Notes

1/ Forecast from HY2021 presentation: Slide 20
2/ These are the forecast 'Fibre Fixed Line Access Services' FFLAS 'Capital expenditure Proposals' as outlined in the 17th December 2020 market release on the 'Price Quality Expenditure Proposal Overview', Slide 10
3/ For FY2020, $186m of the total Capex for the year of $663m was defined as 'sustaining' (Full Year Result presentation, 24-08-2020, slide 25)

Potentially we have a very significant drop in CAPEX coming through, notwithstanding the fact that UFB2 and UFB2+ and the Rural Broadband Initiative (in partnership with Vodaphone) are still rolling out. FY2023 and FY2024 look like they will become comparatively sweet years for Chorus, before a very heavy debt repayment schedule disrupts things. It strikes me that with such a systematic change coming onto the horizon, a Buffett type analysis of Chorus today will be more an historical curiosity, rather than a forecasting tool for the future. But let's do it anyway :-)

SNOOPY

[Snoopy]

I have taken the liberty of reformatting your tabulated information Aaron, so hopefully you will tell me if I haven't done it correctly.

I am surprised you are the only one who has brought up the issue of Crown Fibre Holdings debt repayment. You say 2036 is a long way away. But 2025 isn't so far into the future. And the reduced discount rates that lower interest rates bring means that the shadow of those future repayments looms ever larger. I would be interested where you pulled your numbers from. I have had a cursory look and can't find the figures you have documented. However, I shall assume your figures are correct and carry on. I am particularly interested in those debt repayments because they cannot be deferred. Reading between the lines, I think that if the debt is not repaid then CFH has the right to convert that debt into Chorus shares. So this future debt repayment schedule should be something that demands serious attention from Chorus shareholders.

For Chorus, I would judge a 5.5% discount rate on future cashflows to be about right. The debt and equity components of the Crown Fibre Holdings funding is equally split, so $465m of CFH debt must be repaid.

Repayment Year	2025	2030	2033	2036	Total
Percentage to Repay	18.5%	18.5%	27.7%	35.4%	100%
Dollars to Repay	$86m	$86m	$129m	$165m	$465m
Discount Rate Divisor: 5.5% discount rate (FY2020 perspective)	1.239	1.619	1.901	2.232
PV Dollars to Repay (FY2020 perspective)	$69m	$53m	$68m	$74m	$264m

At EOFY2020 there were 444.492m Chorus shares in issue. So to work the future CFH capital repayments into today's Present value of Chorus shares, you have to reduce the value of Chorus shares by:

$264m / 444.492m = 59cps

Is that the quantifiable result of what you are saying Aaron?

I notice in the 'UBS Australia virtual conference' on 17th November 2020, the Chorus CIF debt repayment schedule has been updated to include repayments from the UFB2 roll out (slide 43). I have revised my table accordingly

Repayment Year	2025	2030	2033	2036	Total
Percentage to Repay	15%	18.5%	29.4%	37.1%	100%
Dollars to Repay	$85.3m	$104.7m	$166.7m	$210.2m	$566.9m
Discount Rate Divisor: 5.5% discount rate (FY2020 perspective)	1.293	1.619	1.901	2.232
PV Dollars to Repay (FY2020 perspective)	$69m	$65m	$88m	$94m	$316m
Discount Rate Divisor (corrected): 5.5% discount rate (FY2020 perspective)	1.307	1.708	2.006	2.355
PV Dollars to Repay (FY2020 perspective, corrected)	$65m	$61m	$83m	$89m	$298m

Note

I have preserved my uncorrected calculations because other posts further down in this thread now reference those (wrong) figures. It would be confusing if those sent back to look at this post could not find the wrong figures the subsequent posts have referenced.

At EOFY2020 there were 444.492m Chorus shares in issue. So to work the future CFH capital repayments into today's Present value of Chorus shares, you have to reduce the value of Chorus shares by:

$316m / 444.492m = 71cps

Corrected Calculation: $298m / 444.492m = 67cps

This is the amount that must be taken off the value of CNU based on earnings potential to adjust for the debt repayment schedule.

SNOOPY

[Snoopy]

Potentially we have a a very significant drop in CAPEX coming through, notwithstanding the fact that UFB2 and UFB2+ and the Rural Broadband Initiative (in partnership with Vodaphone) are still rolling out. FY2023 and FY2024 look like they will become comparatively sweet years for Chorus, before a very heavy debt repayment schedule disrupts things. It strikes me that with such a systematic change coming onto the horizon, a Buffett type analysis of Chorus today will be more an historical curiosity, rather than a forecasting tool for the future. But let's do it anyway :-)

Chorus is the largest builder and operator of the fibre broadband telecommunications network in New Zealand. Of the 33 identified 'build regions', Chorus has the contract to build 24 of them. Fibre broadband networks not being built by Chorus include:

1/ Greater Christchurch being built by 'Enable' (a wholly owned subsidiary of the Christchurch City Council)
2/ Whangarei and Kaipara being built by 'Northpower' (Northpower is owned by consumers connected to Northpower's Electricity network).
3/ Hamilton, Cambridge, Te Awamutu, Tauranga, Tokoroa, Hawera, New Plymouth and Whanganui already built by 'Ultra Fast Fibre' (owned by Australian firm 'First Sentier Investments')

All of the above are part of a 'Regulatory Asset Base' (RAB) for NZs partially government funded Fixed Fibre Local Access Service (FFLAS).

Chorus is also the owner operator of the legacy copper telecommunications network which is present over the whole country. Chorus is a regulated wholesaler of telecommunications services for many retail partners including Vodaphone, Spark, 2degrees, Vocus, Trustpower and Sky.

By FY2023 Chorus will have made the transition from being a 'builder of broadband' and an 'operator of telecommunications fixed networks' to a 'fully regulated operator of networks'. Despite being a legislated monopoly network provider, Chorus continues to roll out an innovation program for their customers. Over FY2020 they launched:

1/ The new 'Hyperfibre' service. This is new network technology that allows 2Gbps or 4Gbps symmetric connection speeds.
2/ A new streamlined fault restoration service, instigated for small business.
3/ A streamlined connection service to connect widely dispersed customers at a single network handover point, which will improve customer management for retailers.
4/ A WiFi service that does not require retailer supplied routers.

Looking further out, Chorus are considering the implementation of 'Wi Fi 6', which is expected to deliver a big step up in performance in speed and latency. 'Wi Fi 6' is an effective prospective rival to mobile network 5g services.

Conclusion: As a monopoly fibre broadband provider, that is expected to maintain a bandwidth and latency edge of competing fixed mobile offerings from Spark and Vodaphone (both minor players in terms of market share) , this test result is a PASS

SNOOPY

[Snoopy]

Earnings per share are calculated by taking the normalised net profit after tax and dividing that by the number of shares on issue at the end of the financial year.

FY2016: ($91m + 0.72( $3m+$9m )) / 400.800m = 24.9cps

FY2017: ($113m + 0.72( $6m+$3m+$11m+$6m )) / 411.002m = 32.0cps

FY2018: ($85m + 0.72( $5m+$5m+$7m)) / 429.641m = 22.6cps

FY2019: ($53m + 0.72( $1.5m+$2m+$3m+$3m+$6m+$2m )) / 439.288m = 14.9cps

FY2020: ($52m + 0.72( $2m+$6m+$5m+$2m+$1m+$5m+$2m )) / 444.492m = 15.4cps

Notes

1/ To normalise the FY2016 result, remove a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap. The interest rate exposure is only partially hedged, explaining the need for a reset. (ref AR2017 p20). A further $9m interest charge relating to the part amortisation of a now defunct (from 9th December 2013) hedge residual, was added back

2/ Normalised FY2017 result adds back $6m in incremental Consultancy fees spent on strategic review of the regulatory framework and Chorus itself. Removed a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). Further interest charges of $11m + $6m, based on the ineffectiveness of the EMTN cashflow hedge have been added back.

3/ Normalised FY2018 result removes a $5m labour restructuring charge, removed a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). A further interest charge of $7m, based on the amortisation of the ineffectiveness of the EMTN cashflow hedge (closed out on 9 December 2013), has been added back.

4/ Normalised FY2019 removes $1,5m of labour restructuring costs, $2m of consultants fees investigating the forthcoming regulatory regime, and $3m from a set aside implementation charge to get the new regulatory framework in place. Removed a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). A further interest charge of $6m, based on the ineffectiveness of the EMTN cashflow hedge has been added back. A $2m one off expense for restructuring two forward dated interest rate swaps has also been removed.

5/ Normalised FY2020 removes a combined $2m Covid-19 relief payment for both Fibre and Copper broadband customers, a $6m increase in Covid-19 staff leave provisions and contractors to help make the transition to the new regulatory framework, a $5m payment to contracted service companies to help them through the lock-down periods, an incremental $2m increase in consultancy fees related to the regulatory transition, a $1m one off expense for restructuring forward dated interest rate swaps, Removed a $5m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). A final further interest charge of $2m, based on the ineffectiveness of the EMTN cashflow hedge has been added back, and at EOFY2020 and, this 9 December 2013 transaction, was finally 'closed out' of the account books.

Lots of adjustments made to gather a normalised result free from one offs and loan adjustments that have nothing to do with the underlying operational performance of the company. The result is that Chorus has performed 'better than you think'. Nevertheless there have been more downs that ups in the NPAT earnings per share trend, which, if anything is down. Warren would not be impressed!

Conclusion: FAIL TEST

SNOOPY