Chorus blames Covid’s effect on immigration as half-year profit falls

Chorus blamed the pandemic’s effect on immigration for a profit and revenue fall in its first half.

While strong housing growth is fuelling increased demand for fibre installations, Covid-19’s effect on net migration into the country has softened demand on overall broadband connections, chief executive JB Rousselot said in a statement to the NZX.

While Chorus was able to keep UFB fibre running smoothly for retailers like Spark, Vodafone, 2degrees and Vocus during lockdowns, as the work-from-home boom saw broadband spike, the overall softening in demand, pinned on immigration, saw net profit after tax fall from $31 million in the first half of 2020 to $24m.

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Revenue fell from $483m to $473m.

Ebitda eased from $332m to $323m.

A 10.4c per share dividend was declared for the first half. The company reiterated its full-year dividend guidance of 25cps.

Chorus said its full-year ebitda guidance was unchanged at $640m to $660m but that it was tracking to the lower half of that range.

Its spending estimate, on the other hand, crept up from the prior range of $630m to $670 to $670 to $700m.

Chorus’ UFB rollout is now 92 per cent complete, with 966,000 premises now within reach of fibre – and of those, 63 per cent have connected via a retailer like Spark, Vodafone, Vocus or 2degrees in completed UFB areas.

Chorus’ total number of broadband lines fell from 1.21m to 1.18m, with the decline reflecting Chorus customers who upgraded from copper to fibre somewhere outside of Chorus’s UFB areas, or a customer who shifted to a fixed-wireless plan offered by Spark, Vodafone or 2degrees, cutting Chorus out of the picture.

Arm-wresting with regulator continues

Today’s results come as Chorus chief executive JB Rousselot and Chorus chairman Patrick Strange continue arm-wrestling with the Commerce Commission over new legislation that will govern the post-UFB fibre rollout landscape.

This morning, Rousselot claimed rapid uptake of super-fast “multi-gigabit” plans, which now make up 17 per cent of Chorus connections, “Makes the outcome of the Commission’s current price-quality process even more important. Chorus’ ability and incentives to continue investing in better broadband forconsumers will be dependent on the Commission ensuring the initial cap on our potential revenue is set above our forecast fibre revenues.”

There is still several months of wrangling to go before the ComCom finalises the parameters with which Chorus can do business under the new regulatory regime, including anchor UFB pricing and a revenue cap.

Doubling dividends

Chorus shares were on a bull run for most of 2020 as the stock proved resilient against the pandemic as the work-from-home boom fuelled more broadband use, and the company promised a big jump in dividends post-UFB rollout – when capex should fall and cashflow rise.

At Chorus’ full-year result 2020 briefing on September 8, Chorus CFO David Collins confirmed a dividend of 24c per share and said the company was aiming to pay out the “majority of free cash flow” as dividends after 2024, with scope for increases before that during a 2022-24 transition period.

Jarden Research analysts Arie Dekker and Grant Lowe see really fat profit payouts from FY2023, when they’re picking 40 cents per share. They see 45cps then 50cps over the following two years.

Chorus shares spiked to an all-time high of $9.39 on the fatter dividend talk, but eased back in November after the company’s annual meeting, which saw Rousselot and Strange launch several broadsides at the ComCom – which had swung toward Chorus’ world view during the (months late) process of discussion papers and revisions, but not as much as the company’s executives had hoped. The stock parred some of its gains.

The ComCom is in the process of determining factors such as the market risk Chorus faces and its weighted average cost of capital (WACC), which in turn will feed into the annual revenue cap, regulated anchor pricing and other utility-like limitations that the network operator will face from January 2022.

The process has at least another six months of PR and submission and counter-submission trench warfare to go. Most exchanges are couched in dense language and peppered with formulas, in keeping with the complex process of determining how the Telecommunications (New Regulatory Framework) Act, which sets the rules of the telco game for the post-copper era.

But at the AGM, Chorus bosses switched to red meat language – and implied that the regulator was putting dividend increases, and investor confidence in future public-private projects, in peril.

The decade-long, public-private Ultrafast Broadband (UFB) fibre rollout had been “bloody hard”, chairman Patrick Strange told investors at the virtual AGM.

The Commerce Commission was “simply wrong” in its sums because, in his view, it undervalued the risk taken by the project’s backers.

“If the ComCom did not acknowledge the risk investors had taken on since 2011, international investors will not be prepared to take this risk in New Zealand again, and future financing of New Zealand infrastructure will require, essentially, Government
underwrites of the risk before they start,” Strange said.

“If they had known how we were going to, be treated at the end, they would never have invested at the outset, he added.

If the ComCom sticks with its current line, “We will never be able to do another ‘Chorus’ to address our infrastructure deficit in New Zealand,” Strange said.

Chorus' war on wireless broadband

Rousselot also called for the Commerce Commission to take a tougher line on retailers Vodafone, Spark and 2degrees, who have all moved into fixed-wireless broadband (using a mobile network to deliver broadband into a home) – taking on both wholesale and retail roles in that market while escaping a Chorus-level of scrutiny, in his view.

And while the Chorus boss found the ComCom’s wisdom lacking in terms of its input methodologies calculations as it set to finalise the new regulatory regime, he praised its smarts in another area: Its Measuring Broadband in New Zealand report, which he framed as “raising clear questions about some of the claims being made by fixed wireless providers on the performance and reliability of their services relative to fixed-line services.”

Today, Rousselot renewed his questions on whether retailers were properly educating copper line customers as they weighed an upgrade decision between fixed-wireless and fibre (a key point of interest for Chorus, as a fixed-wireless connection, cuts it out of the loop – physically and financially). Earlier, Spark and Vodafone vigorously denied Rousselot’s claim.

Retail ISPs have peeled some 200,000 customers away from Chorus with fixed-wireless (aka wireless broadband) offerings.

Today, Vodafone amped up the pressure on that front with the commercial launch of its 5G wireless broadband service.

Chorus shares closed Friday at 8.05. The stock is up 26 per cent over the past 12 months.

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