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Chorus lifts capital spending, projects flat-to-lower 2014 earnings; shares slip

Monday 26th August 2013

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Shares in Chorus fell after the telecommunications network operator spent more on capital projects, including the national fibre network, than analysts were picking and as it predicted flat to lower earnings in the coming financial year.

The shares fell 1 percent to $2.94 as at 1pm today, and are little changed this year. The stock is rated an average 'hold' based on nine analyst recommendations compiled by Reuters, with a median target price of $3.25.

Capital expenditure of $681 million included $27 million brought forward from the 2014 year, of which 85 percent went toward building the ultrafast broadband and rural broadband initiative networks. The Wellington-based company predicts capex of between $660 million and $690 million in 2014.

Chorus reported adjusted earnings before interest, tax, depreciation and amortisation rose 1.2 percent to $654 million in the 12 months ended June 30, and forecast flat-to-low single-digit decline EBITDA in 2014, it said in a statement.

Annual net profit of $171 million compares to earnings of $102 million in the prior period, which only captured seven months of Chorus operating independent of Telecom.

"The roll-out itself is a huge project they're going about, and it seems they're so far got themselves ahead of target, which is obviously a good thing," said James Lindsay, portfolio manager at Tyndall Investment Management.

Chorus is 18 percent through its roll-out of a nationwide fibre network, and has passed 153,000 premises as at June 30, ahead of its 149,000 target. The company wants an average cost per premises passed of between $2,900 and $3,200 in the 2014 financial year, from an average of $2,935 in 2013.

The company anticipates the UFB network will cost between $1.7 billion and $1.9 billion, and the RBI bill is expected to be between $280 million and $295 million, of which the government is putting $927 million towards the former and $236 million to help fund the latter.

Chief executive Mark Ratcliffe told an analysts' briefing in Wellington the company is attracting more demand for its fibre services since Telecom, the country's biggest telecommunications company, rolled out its retail offering on the high-speed services, and he anticipates that will accelerate when Vodafone New Zealand launches its product.

Chief financial officer Andy Carroll told the briefing about 10 percent of the 2014 capital spending budget is linked to demand, and higher demand could drive that up.

"If there is significantly more demand for services than anticipated at the beginning of the year, there will be a consequential impact on the overall capex envelope," Carroll said.

Chorus has a question mark hanging over its head as to how the regulatory landscape will change as the government considers whether to overrule the Commerce Commission's proposed price cuts on the company's regulated copper lines. Chorus says enforced price cuts may make its construction of a national fibre network uneconomic.

The network operator estimates the outcome of the regulatory review could slice between $20 million and $100 million from annual EBITDA.

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