Chorus shares jump on fatter-than-expected dividend forecast

Everyone expected Chorus to fatten its dividends as it put the big-spending years of the UFB rollout behind it.

But this morning, at its first-half result, the network operator forecast larger profit payouts sooner than some had been expecting – plus a $150 million share buyback.

The upside surprise saw Chorus shares jump 10.44 per cent to $7.45 in early afternoon trading.

Chorus announced a 14 cents per share payout for its first half, and upped its full-year dividend guidance from 26 cents per share to 35 cps.

Its 2023 dividend was forecast at a minimum 40 cps.

And its 2024 profit payout at a minimum 45 cps.

Forsyth Barr analyst Matt Henry told the Herald that while Chorus’s solid result was in line with expectations, the dividend guidance through to 2024 represented “a quicker ramp up than we expected.” ForBarr had picked 35 cps in 2023 and 40 cps in 2024.

Chorus had long indicated it wanted to pay out most of its free cashflow once the cap-ex heavy UFB was complete (its second and final phase wraps up this year).

But today was the first time it had put its dividend forecast in black and white.

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On a conference call, chief executive JB Rousselot said Chorus could now “better articulate guidance” now that the new regulatory regime was now near-finalised – with the parallel development that ratings agencies had upped their rating thresholds.

Henry noted that on January 17, Moodys kept its Chorus rating at Baa2 stable, but increased its downgrade threshold from a debt-to-ebitda rating of 5.25x from the previous 4.2x. S&P followed suit on January 31.

The revised ratings help to underpin Chorus’ new generosity, Henry said, and its new clarity on its fiscal management approach.

Or as Chorus put it in its investor presentation: “We consider it prudent to utilise our new credit thresholds to return $150 million to shareholders via an on-market share buyback.”

The buyback programme will begin on February 25.

Increased profits

On today’s conference call, CFO David Collins said the “accelerated transition” to Chorus’ new dividend policy would see 60 to 80 per cent of free cash flow paid out in 2024 (when the company is anticipating a 45 cents per share dividend).

The forecast did not look out any further, but going into today’s briefing, Jarden head of research Arie Dekker was picking a payout as high as 50 cps by 2025.

Before the market opened, Chorus reported a $42 million first-half net profit, up from the year-ago $24m (or an adjusted $27m).

Ebitda increased to $347m from $328m and revenue was $483m versus $477m.

Operating expenses dropped from $148m to $136m. Full-year cap-ex guidance was reduced from the previous $550m to $590m band to between $520m and $560m.

Going into today’s report, Jarden has a neutral rating on Chorus, with a 12-month target of $6.38.

Forsyth Barr was also neutral, with a 12-month target of $7.30.

Going into today’s report, Jarden has a neutral rating on Chorus, with a 12-month target of $6.38.

Forsyth Barr was also neutral, with a 12-month target of $7.30.

The past 24 months has seen Chorus’ stock spike brief above $9 as the company confirmed plans for higher dividends once the UFB rollout was behind it, then give back some of its gains as the Commerce Commission has finalised maximum allowable fibre revenue and other parameters under the new regulatory regime.

Orcon-2degrees merger red flag

The past week has also seen Chorus raise a red flag as the Commerce Commission asked for submissions on a planned deal between Voyager Australia (the new owner of Orcon Group) and 2degrees, which would see Orcon and the Kiwi telco merge their operations.

In its submission, Chorus did not express a view on whether the merger should go ahead, but it did flag that it could spur more growth in the fixed-wireless market (that is, Spark, Vodafone and 2degrees pitching their mobile networks as a landline-alternative for broadband in a home or small business).

Chorus noted that New Zealand already had the third-highest fixed-wireless penetration in the world – but without the wholesale layer (largely, Chorus) that underpins competition between retailers in the fixed-line market.

“The Commission must ensure that all elements of its telecommunications regulatory toolkit remain fit for purpose,” Chorus said.

To translate that into playground language, Chorus thinks it’s unfair that UFB fibre is heavily regulated, while the fixed-wireless services offered by Spark, Vodafone and the soon-to-be-enlarge 2degrees are policed with a light hand. Its merger submission is another chance to push this barrow.

Henry says Chorus has a point, to a degree. “Fixed-wireless hasn’t been as recognised in New Zealand as it has been by some regulators offshore.

But he also doesn’t want to over-egg the competitive risk to fibre from fixed-wireless. He says recent market experience has shown. “It’s not one or the other. There’s a market for both.”

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