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Chorus shares seen as overvalued as its client base continues to shrink

Tuesday 3rd July 2018

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Shares of Chorus are overvalued because the telecommunications network operator’s overall connections continue to decline, Morningstar analyst Brian Han wrote in a bearish note.   

"We concede challenges facing no-moat Chorus (connections, UFB-building, execution with the cost-cut programme) pale in comparison to those facing retail-facing telecoms on both sides of the Tasman," Han wrote in the July 2 note. 

"However, they are risks nevertheless and we believe not reflected in the current stock price, trading at an 8 percent premium to our $3.90 (A$3.60) fair value estimate,” Han noted.

Shares of Wellington-based Chorus, the biggest player in the nation’s ultra-fast broadband rollout, traded 0.1 percent weaker at $4.195 at 12.10pm. The stock has dropped 4 percent in the past year. 

Morningstar's note compares with more positive analyst positions compiled by Reuters; two have ‘outperform’ ratings, while three have ‘hold’ recommendations.

While Chorus' broadband connections rose for the March quarter, the first gain in at least six quarters, the company’s overall connections are still on the decline, Han noted, adding he 

forecasts the company will end fiscal 2018 with 73,000 fewer total line connections. 

As a result, Han expects Chorus to post earnings before interest, taxes, depreciation and amortisation of $641 million for fiscal 2018, a 2 percent decline from the previous year.

"It is through this prism that we view management's decision to cut its workforce by 10 percent, or just over 100 employees, by the end of fiscal 2019," Han wrote. "We believe the cost review represents a more fundamental reshaping of Chorus' operating structure."

"It is one designed to fortify earnings against continuing copper line losses, while Chorus continues the build-out of its UFB (ultrafast broadband) fibre network," which will not be completed until the end of 2022, according to Han. 

In June, Vodafone and Vocus announced a surprise joint venture to bring competition to the UFB fibre network, a move the government has made possible by allowing so-called unbundling from 2020.


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