By Jenny Ruth
Sunday 19th June 2011
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Valuing Telecom's Chorus, which is expected to become a separately listed company, probably late this year, is challenging because of the lact of details on its capital structure, assets divested and assumptions on UFB (ultra fast broadband) take-up rates, says Michael Wu, an analyst at Aegis Equities Research.
“A rough valuation sees Chorus' fibre enterprise value at around $2.6 billion,” Wu says. “In its annual regulatory review to the Commerce Commission, the regulator values Chorus' fixed assets at around $5 billion on a net replacement cost basis, but this includes copper fixed assets,” he says.
How the regulator values Chorus is important as it will become a regulated asset.
“The return on capital allowed for natural monopolies such as electricity and gas distribution assets is typically determined by weighted average cost of capital and regulated asset base.” Wu says he has changed his valuation methodology to sum-of-the-parts and has raised his per-share valuation to $2.70 from $2.05.
“There is further upside by participating in the UFB rollout in Christchurch and Rangiora.”
The estimated cost of the UFB rollout per premise ranges between $2,250 and $2.750, implying total capital spending of $1.9 billion to $2.3 billion. While cost increases are a risk, management is confident costs will fall within that range, Wu says.
Recommendation: Accumulate (upgraded from hold).
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