Chorus will avoid capital-raising for a couple of years, Deutsche Bank says

Tuesday 17th December 2013

Chorus is likely to delay any new capital-raising to help fund the ultra-fast broadband rollout until after the Commerce Commission completes its redetermination of copper network-based broadband pricing under an alternative methodology, says Deutsche Bank.

In a research note to clients following the weekend release of the government-ordered Ernst & Young Australia report on Chorus's UFB funding challenge, research analyst Arie Dekker says Chorus will be targeting annual operational and capital expenditure savings of around $80 million to $90 million a year, but that these will carry significant business risks.

"Requiring customers to pay upfront for non-contracted connection capex may impact competitive positioning; reduced service levels across products and provisioning might drive customers to consider alternative options," said Dekker.

Meanwhile, telco provider CallPlus, trading as Slingshot, issued a statement calling on Chorus to stop overstating the size of its problems and start taking the "prudent" actions it should have seen were necessary long before the Commerce Commission determination which cut prices for copper network-based broadband pricing more heavily than anticipated.

The E&Y Australia report agreed with the Chorus estimate of a $1 billion funding shortfall between now and 2020, when the UFB rollout is meant to be complete, but suggested that could be cut to between $200 million and $250 million with dividend cuts, higher borrowing, savings and revenue increases.

"Chorus has been enjoying a 'golden summer', which is clearly reflected in the high levels of profitability and returns to shareholders, that couldn't last," said CallPlus chief executive Mark Callander in a statement. "A cultural change from monopoly-type behaviour is well overdue and it seems that everyone, but Chorus, knew this had to end."

Dekker said the E&Y report gave little new detail beyond confirming that Chorus "requires assistance."

"There is limited detail on how Chorus will change the business plan (half of the savings) and no visibility provided on the important areas of UFB capex and debt headroom," he wrote, classifying Chorus shares as a "hold" with a price target over the next year of $1.58. The shares rose slightly this morning to $1.45.

"The report confirms an equity raise and/or substantial dividend cut is required," said Dekker. "We think Chorus will work hard to avoid raising equity at this point" before the outcome of its triggering a requirement that the Commerce Commission recalculate its regulated broadband prices on a cost-of-replacement basis rather than the international benchmarking basis used to date.

That process could take at least two years and could reverse the recent decisions, which saw the cost of unbundled bitstream access (UBA) cut by 49 percent.

Dekker speculates that both the government and banks may seek to influence the outcome in this so-called "final pricing principle" process.

"Outside of these workstreams there remains potential that an industry-led solution might offer some upside although we note impediments including divergent group of parties, gap between the parties, and requirement for legislation and time to complete in election year. Politics remains a key risk and the political reaction to the report will be interesting," said Dekker.

CallPlus's Callander accused Chorus of being "deliberately disingenuous" by continuing to focus on the Commerce Commission's pricing decisions, which will kick in late next year, "compared with the current situation in which they have been artificially protected by the regulatory holiday."

BusinessDesk.co.nz

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