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Chorus stock rise to 13-month high, Spark falls as copper pricing impact mulled

Wednesday 3rd December 2014

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Chorus shares rose to a 13 month high after the Commerce Commission lifted the proposed price it can charge customers for access to its copper lines, stoking expectations it will be able to resume dividends in a few years. Spark fell on concern the changes will erode earnings.

The telecommunications regulator's draft determination yesterday sets a limit of $38.39 monthly rental for access to Chorus's traditional copper lines network for broadband internet services. The rental, which had been $44.98, was cut to $34.44 effective Dec. 1. Chorus said the new pricing would slash annual earnings by $80 million, less than half of the $170 million hit it had projected until current pricing.

Chorus rose 5.6 percent to $2.65, adding to a 17 percent jump yesterday and returning the shares to their level in early November last year, when the regulator set the current price. Spark fell 1.7 percent to $2.975, the lowest in more than a month.

The proposed pricing "is within a range that we think seems relatively fair to all parties," said James Lindsay, a portfolio manager at Nikko Asset Management. "It will allow Chorus to reinstate paying dividends, maybe three years out, once it is over the peak of capex and debt."

Chorus suspended dividend payments, renegotiated bank covenants and cut a deal with Crown Fibre Holdings to bring forward some funding of the ultrafast broadband network, to meet its contractual commitments with the government to the rollout. The deterioration in its financial position left the company unable to make the sort of returns to shareholders that are typically expected from an infrastructure company, Lindsay said.

Spark is the biggest customer for Chorus's copper lines and said yesterday that the draft determination could drive up its costs by $60 million a year and hurt earnings, although it was too soon to revise guidance for low single digit growth in adjusted earnings before interest tax, depreciation and amortisation from 2014's $936 million.

Analysts are likely to wind back their forecasts, as consensus for 2015 Ebitda was $956 million.

"I wouldn't be surprised if Spark's Ebitda was below last year's," Lindsay said. Spark had "baked all the benefits" of current copper access pricing into its guidance.

He said while the new pricing is only a draft and the regulator is seeking feedback from industry, he doesn't expect it to be revised much further.

Submissions are due by Jan. 23.


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