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Chorus first-half profit falls as depreciation, interests costs mount

Monday 25th February 2019

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Chorus reported a 36 percent decline in first-half profit as it faced rising depreciation costs from the roll-out of its ultrafast broadband network and a heftier interest bill from new debt issued last year. 

Still, underlying earnings fell 3.3 percent, in line with analyst expectations, as the network operator kept a lid on its operating costs to match a smaller revenue stream from the older copper-line network, as customers migrate to fibre and wireless connections. 

Net profit fell to $30 million in the six months ended Dec. 31, from $47 million a year earlier, with depreciation rising 7.9 percent to $150 million and interest costs up 12 percent at $83 million. Earnings before interest, tax, depreciation and amortisation fell to $318 million from $329 million. That was slightly ahead of First NZ Capital's ebitda estimate of $317 million and Forsyth Barr's prediction of $313.6 million. 

Chorus is targeting a return to earnings growth in the June 2020 financial year, affirming ebitda guidance for the current year of $625-640 million. It reported earnings of $653 million in the June 2018 year. 

"Maximising the number of connections on our network through broadband growth and our innovation programme are pivotal to this," chief executive Kate McKenzie said in a statement. "At a cost level, we’re maintaining a tight focus on capital and operating expenditure as we optimise our business."

The board declared an interim dividend of 9.5 cents per share, up from 9 cents last year, payable on April 16. The company expects to declare a final dividend of 13.5 cents in August, which would take the annual return to 23 cents. 

Chorus ramped up its marketing effort last year as its cornerstone customer, Spark New Zealand, embarked on a campaign to convert customers to its wireless broadband connections in an effort to side-step the cost of using the network company's infrastructure.

The network operator's total fixed line connections fell to 1.49 million as at Dec. 31 from 1.56 million a year earlier, as copper customers convert to fibre or wireless alternatives. Chorus's fibre broadband connections climbed 43 percent to 517,000 and its premium fibre connections dipped 1,000 to 12,000. 

Chorus raised its forecast capital spending on the fibre network to $685-715 million for the year through June, from earlier guidance of $660-690 million. It also wound back its forecast capital expenditure on the copper network to $75-95 million, having previously projected $90-110 million.

McKenzie said the fibre roll-out is within budget and on time and is leading to lower network maintenance and other operating costs. 

"The pace of this migration will continue to shape our business as we transition to a fibre future and the new regulatory framework," she said. 

The company's UFB network passed 738,000 premises as at Dec. 31 and another 80,000 are expected to be passed by the end of June. 

Chorus recorded its highest customer satisfaction score of 7.9-out-of-10 in December, up from 7.5 in June. That has been a key focus for the network operator. Its contracting out of the installation build to the likes of Visionstream, Downer, Broadspectrum and UCG came under scrutiny last year when a Labour Inspectorate inquiry found widespread issues. 

The company hired Martin Jenkins to review those practices in October. Chorus spent $4 million on consultants in the December half, up from $3 million a year earlier. 

The shares hit a record $5.32 on Feb. 13, and last traded at $5.205, up 39 percent during the past 12 months. 

(BusinessDesk)

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