Chorus at six-month low as profit sinks 39%; earnings to fall in 2016

Monday 24th August 2015

Chorus shares fell to a six and a half month low after the telecommunications network operator reported a 39 percent decline in annual profit as the lower regulated price for its copper based services generated weaker revenue. Weaker earnings are anticipated in the 2016 financial year.

Net profit dropped to $91 million, or 19 cents per share, in the 12 months ended June 30, from $148 million, or 31 cents, a year earlier, the Wellington based company said in a statement. That was below Forsyth Barr's estimate for profit of $103.7 million. Revenue fell 4.9 percent to $1 billion, and earnings before interest, tax, depreciation and amortisation fell 7.2 percent to $602 million, in line with expectations.

Chorus's adjusted Ebitda, which seeks to smooth the impact of the regulated prices, increased 5.2 percent to $546 million. The company anticipates a modest decline in 2016 earnings due to uncertainty over the final outcome of the Commerce Commission's ruling on the price Chorus can charge for access to its copper lines.

Shane Solly, a portfolio manager at Harbour Asset Management in Auckland, said the guidance was quite conservative.

"People were hanging on for a view of what's going on in the future - there's a little bit of uncertainty there," Solly said. "They're talking about a decline year on year, which will be a little bit of a surprise to some."

The shares dropped 3.6 percent to $2.65, the lowest level since Feb. 2.

In July, the regulator's draft ruling proposed setting the total price Chorus can charge for wholesale broadband services at an average $38.43 per month, largely in line with the $38.39 price established in an earlier estimate and up from the $34.44 price set in the benchmarking process which came into effect on Dec. 1. The commission proposed not backdating the price, which would see retail service providers such as Spark New Zealand reimburse Chorus for the difference in price between the new start date and Dec. 1, 2014.

"The business initiatives we implemented in managing for cash have delivered results ahead of target for the year, going some way towards offsetting the very significant reduction in regulated pricing," chief executive Mark Ratcliffe said. "This together with the slightly improved draft copper pricing, has helped the share price recover some value, although we remain unable to pay a dividend."

Chorus suspended dividends when it renegotiated the terms of Crown funding for the ultra-fast broadband fibre network, following regulatory uncertainty about copper network access prices. That prompted the company to clamp down on spending to help bridge the funding gap caused by the commission's initial decision, while remaining within its banking covenants.

Chief financial officer Andy Carroll told analysts on a conference call that the company was ahead of schedule in a cost-cutting exercise, but operating expenses were likely to increase in the coming year

"We've thrown the kitchen sink at FY15," Carroll said. "After we overachieved in FY15, we're not expecting much more upside on costs or revenue initiatives front in FY16."

The company today said it's unable to update investors on the dividend policy until the regulator's final pricing review is completed.

However, a dividend update is likely when Chorus reports its first-half result in February.

Chorus's operating cash inflow sank by a third to $416 million in the year, producing a net outflow of $96 million and leaving it with cash and equivalents of $80 million as at June 30. Net debt stood at $1.84 billion as at June 30, a multiple to Ebitda of 3.1 times, and below the 3.75 times ratio required to meet key debt covenants.

Capital expenditure was $597 million in the year, down from $679 million a year earlier, the bulk of which went towards building the nationwide fibre network. Chorus forecast capex of between $580 million and $630 million in 2016, and retained its guidance for the total fibre network cost at between $1.75 billion and $1.8 billion.

The average cost per premise passed was $2,134, below the $2,150 to $2,400 target range and Chorus expects that to fall to between $1,700 and $1,770 in 2016.

Total fixed-line connections edged up 1 percent to 1.79 million in the year as gains in naked basic, enhanced unbundled bitstream access (UBA), and naked very high speed digital subscriber lines (VDSL) offset declines in broadband copper connections. Total broadband connections rose 3.8 percent to 1.21 million, largely in the higher value fibre, VDSL and enhanced UBA products.

Separately, Chorus announced former Transpower chief executive Patrick Strange will assume the chair form Sept. 1, replacing Jon Hartley, who has been interim chairman since April.

BusinessDesk.co.nz

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