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Upbeat signs in telco law review not enough to save Chorus dividend, broker says

Thursday 8th August 2013

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Chorus's board will probably have to cut its return to shareholders with promising signs in a government review of telecommunications law still likely to leave a hole in the network operator's earnings, according to a broker's report.

While viewing the prospect of direct intervention in copper line pricing as a positive Craigs Investment Partners has cut its recommendation on Chorus to 'sell', saying Communications Minister Amy Adams' proposals will still hit the company's revenue by between $20 million and $100 million, and leave enough clouds hanging over its head to keep investors guessing.

Adams yesterday released a discussion document suggesting a cut to the wholesale price of between $2.50 a month and $7.50 to between $37.50 and $42.50, much smaller than the Telecommunications Commissioner's proposed $12.53 reduction to $32.45.

The commissioner's stance was roundly condemned by Chorus as undermining the government's strategy to subsidise the build of a national fibre network, and Prime Minister John Key described the decision as very problematic.

The broking house report doesn't see the softer regulatory touch as being enough for Chorus to maintain its 25 cents-per-share dividend, and anticipates a cut to 20 cents in the 2015 financial year.

"We think the board will likely wait for the outcome of the review given that the potential exists for the price to essentially be set in the next 12 months," the report said. "While there is variation in range of outcomes, we think only under the higher end of the range ($42.50) could the board contemplate no cut."

When Chorus was carved out of Telecom Corp to be a standalone company in November 2011, it was touted as a stable infrastructure stock likely to spit out regular returns.

The Craigs' report said Chorus isn't showing the characteristics typically looked for in an infrastructure stock as it doesn't have a defined regulatory framework, lacks stability in its earnings stream, faces network risks and has uncertainty hanging over its dividend.

The analysts put a 12-month $2.56 price target on the Chorus stock, below the median target of $3.10, based on nine analyst reports compiled with Reuters, with an average recommendation of 'hold'.

Chorus shares fell 2.6 percent to $2.95 today, after climbing above $3 yesterday for the first time since March.

Adams pitched the government's new proposals as seeking to ensure consumers "have access to high quality, competitively-priced services, based on world-leading technologies," she said.

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