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Chorus shares 'extremely undervalued', says biggest shareholder

Tuesday 26th March 2019

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Chorus shares hit a record earlier this month but are still "extremely undervalued", according to its biggest shareholder.

Australian fund manager L1 Capital owns 63.6 million Chorus shares, or 14.8 percent of the company. The holding is one of the largest long positions for the ASX-listed L1 Long Short Fund. It bought into the New Zealand network operator at $1.60 a share in September 2014 and has seen the price rise as high as $5.86 on March 15. 

The stock was recently at $5.67, a price-to-earnings ratio of 36.16 times and a dividend yield of 3.93 percent. The S&P/NZX 50 Index's average historic PE ratio is 18 times and its dividend yield 4.94 percent. 

In an investor presentation published on the ASX today, L1 said Chorus's 60 percent rally over the past year was due to legislation introducing a new framework for its regulated pricing, which the fund manager believes will provide more stable earnings and allow for higher gearing.

On top of that, a $500 million retail bond paying annual interest of 4.3 percent de-risked the company's balance sheet. Moody's Investors Service has also noted the new regulated pricing could provide clarity on future revenue and change the debt-to-earnings ratios linked to upgrading the network operator's Baa2 credit rating. 

"We believe the shares remain extremely undervalued and expect dividends to accelerate over the next five years," L1 said in presentation slides. 

In a recent submission on the Commerce Commission's proposed regulatory framework for fibre, L1 said New Zealand's ultrafast broadband network was being keenly watched by other jurisdictions as one of the first real tests of structural separation. 

L1 said shareholder support was critical for Chorus given the 10-year construction period, a significantly longer period than for most infrastructure assets. 

"The back-ended nature of returns makes it particularly crucial for investors that, at the completion of the network, the regulatory regime is not distorted through further constraints on Chorus that make it impossible to achieve regulated returns," it said in its Feb. 1 submission. 

The fund manager warned the regulator that service providers such as Spark and Vodafone had significant incentives to lobby for an unorthodox interpretation of the law to minimise their own costs or entrench their strong market positions. 

"We believe this would result in either higher costs for other users of the fibre network or the impairment of fibre assets if efficient costs cannot be recovered leading to (a), an inability to invest in fibre services and (b), higher costs of capital for future PPP projects and other NZ regulated utilities," it said. 

L1 was granted approval to buy as much as 15 percent of Chorus in December 2017. The network operator took on Telecom's old Kiwi share obligation when it was carved out of the retailer, meaning investors need government approval to hold more than 10 percent. Meantime, Spark New Zealand was unshackled form 

Chorus reported a 36 percent decline in first-half profit, due largely to an accelerating depreciation cost from the ultrafast broadband network and a heftier interest bill. It raised its interim dividend to 9.5 cents a share and expects to pay a final dividend of 13.5 cents. 


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