Chorus gets reprieve on copper, though fibre questions linger, First NZ says

Thursday 28th January 2016

Chorus has gained several years of breathing space after last month's Commerce Commission decision on what the network operator can charge for access to its copper lines, but uncertainty over how the fibre market plays out could pose problems for its bottom line, according to First NZ Capital analysts.

The competition regulator last month said Chorus wouldn't have to cut prices for wholesale access broadband service by as much as previously indicated, and that decision looks set to stay after both Chorus and its biggest customer, Spark New Zealand, said they don't plan to appeal the decision.

First NZ analysts say that decision will provide Chorus with a stable earnings outlook for the next few years, but pressure will emerge as the regulatory landscape changes and as the use of fibre-based services becomes more widespread.

Increased fibre coverage will push down Chorus's revenue, while at the same time making it more difficult to offset those losses as other fibre players win market share, First NZ said in a research report.

Using Ultra Fast Fibre, a partnership between the Crown and Waikato Networks Limited, as a case study, First NZ predicts fibre revenue will more than double to $25.2 million in the 2016 financial year, with connections increasing to 51,000 from 21,100 in 2015. Fibre uptake is projected to keep growing rapidly, hitting $79.8 million in revenue on 141,100 connections by 2021.

"If the momentum in connections that is starting to build is sustained over the next couple of years, then Ultra Fast Fibre quickly starts to generate some meaningful revenues and operating profitability," First NZ said.

A Commerce Commission study into what would drive broadband uptake found online video content would probably be the most important factor in convincing consumers to sign up to the faster and potentially more expensive service, and the launch of streaming video providers including Netflix and Spark's Lightbox over the past year has been seen as underpinning the rapid uptake last year.

The government is consulting on the 15-year-old Telecommunications Act and has indicated plans to put copper and fibre under a "building block" pricing regime similar to that used by electricity distribution utilities.

Chorus backed this plan in November, saying it would limit uncertainty for investors while providing enough flexibility to manage the copper-to-fibre migration and allow for reasonable returns.

However, First NZ says that regulatory review creates uncertainty for Chorus's pricing regime beyond 2020 and the firm has kept its rating on the stock at 'neutral' with a target price of $3.97.

"Chorus's re-rate is likely coming to an end for now with a relatively stable earnings outlook, and some headwinds from fixed-line loss, but a stronger investment case challenged by post-2020 uncertainty," First NZ said.

Chorus will need to participate in the extension of the government's ultra-fast broadband initiative if only to avoid a worse outcome, the analysts said. They anticipate the Crown taking a tough negotiating stance and building over the copper network with fibre. While participating will be financially negative for Chorus, it will be worse if the company does not, they said.

Chorus's shares rose 0.1 percent to $3.73 today, and have risen 47 percent in the last 12 months, largely due to the Commerce Commission's final determination in December.

BusinessDesk.co.nz

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