CNU - Chorus

[peat]

I saw this announcement as initially giving CNU some strong power in negotiating the cost required to provide unbundled access, but ultimately it will constrain their profitability as other players zoom in.

I was looking for an opportunity to short CNU already and this rise to 4.14 was very tempting but I set my sell order at 4.15 and so didnt get it today.

[Aaron]

I was looking for an opportunity to short CNU already and this rise to 4.14 was very tempting but I set my sell order at 4.15 and so didnt get it today.
Shorting shares I understand is borrowing (for a fee) someones shareholding in a company. Then selling the shares, wait for the share price to drop then buy them back at a lower price and keep the gain after giving back the shares.

I didn't know you could do this with NZ shares. Who provides this service in NZ, I should check out the fees and whats involved. If I put my money where my mouth is I should be shorting stocks in expectation of a crash. Although the downside risk is potentially unlimited if a company takes off or interest rates go negative.

[stoploss]

Shorting shares I understand is borrowing (for a fee) someones shareholding in a company. Then selling the shares, wait for the share price to drop then buy them back at a lower price and keep the gain after giving back the shares.

I didn't know you could do this with NZ shares. Who provides this service in NZ, I should check out the fees and whats involved. If I put my money where my mouth is I should be shorting stocks in expectation of a crash. Although the downside risk is potentially unlimited if a company takes off or interest rates go negative.

You can do this on NZ shares via a CFD with someone like CMC markets .

[Bobdn]

https://sp.chorus.co.nz/product-update/10gpon-ufb-trial-starts-now

Great to see that Chorus has started 10gb trials, looks like the fibre technology is well future proofed. I'm still happy with my 100/20 connection at this stage :)

On a separate note, I wonder if 5g will ever be rolled out in NZ? I know Spark did a bit of a demo awhile back but it could be years before we see it widely available (if ever). Which telco could afford it?

https://www.bloomberg.com/news/articles/2017-12-18/upgrade-to-5g-costs-200-billion-a-year-and-may-not-be-worth-it

[dobby41]

On a separate note, I wonder if 5g will ever be rolled out in NZ? I know Spark did a bit of a demo awhile back but it could be years before we see it widely available (if ever).

Yes it will, may not be ubiquitous but it will be rolled out.

[Marilyn Munroe]

What are the implications of the switch from copper to fiber announced in Chorus's latest report?

The report blames this shift for lower profits. Will future abandoning of copper in fiber areas help reduce costs?

A worry from the shareholders newsletter is the decline in employee engagement from 81% to 57%.

Boop boop de do
Marilyn

[Bobdn]

Chorus appears to have had a monster day across the Tasman - up 3.5% to finish on $4.14 ($4.54 NZD).

[couta1]

Chorus appears to have had a monster day across the Tasman - up 3.5% to finish on $4.14 ($4.54 NZD). After it's latest result it's insane that it's trading over $4 NZ full stop.Lol.

[Bobdn]

Don't look now...up 5% to $4.65

[freddagg]

After it's latest result it's insane that it's trading over $4 NZ full stop.Lol.

It was 5 years ago that you got burned. Let it go.

[couta1]

It was 5 years ago that you got burned. Let it go. HaHa I collected a 20k divvy off the stock last Sept as a divvy strip when it was at $3.90. Your barking up the wrong tree here Freddy boy, I would suggest that those that think the current price is anywhere near fair value after the latest result may need to visit specsavers.

[Bobdn]

Another day in paradise. Will be interesting to see whether it can hold up ok XD.

[couta1]

Another day in paradise. Will be interesting to see whether it can hold up ok XD. Enjoy the insanity while it lasts.PS-Whats a 13c divvy when the stock is nearly $1 over fair value.

[Bobdn]

Enjoy the insanity while it lasts.PS-Whats a 13c divvy when the stock is nearly $1 over fair value.

I don't know what fair value is but this Morningstar analyst would agree with you, he sees fair value at $3.90. His note came out on 2 July when the price was $4.20 (the price is $4.72 today)

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12082306

It's really really hard to work out fair value for a company. That's why most of us (certainly me) should be in low cost index funds. I get around this a little by not having all my eggs in one basket (a lesson I learned after the troubles in 2013). I like individual shares because of the dopamine hit I get when they go up,the same feeling I use to get when i played video games or got a win on the pokies. I actually left the pokies behind in 2008 and cross addicted into the share market. The timing couldn't have been better. I've reached a point now where the daily checking of shares has become a bit of a pain. I bet I'm not the only one who feels that way.

In the meantime, my Chorus shares deliver me a 9 per cent net dividend return and the dividends increase 5 per cent every year. But one day I'll sell and stick the proceeds in a Superlife 60/40 fund :)

[couta1]

HaHa, love your post Bobdn, I swapped a few previous addictions for the sharemarket and so far no therapy has helped. PS-With your buy in price of CNU, you are well positioned.

[freddagg]

I don't know what fair value is but this Morningstar analyst would agree with you, he sees fair value at $3.90. His note came out on 2 July when the price was $4.20 (the price is $4.72 today)

Craigs were at about $3.90 but end of Aug they upgraded to $4.35 in the anticipation of earnings growth.
I would like more but certainly not at $4.35.

[Bobdn]

Craigs were at about $3.90 but end of Aug they upgraded to $4.35 in the anticipation of earnings growth.
I would like more but certainly not at $4.35.

Yeah, kind of wish I was back in the DRP to get some more with that juicy discount but I need the cash now. DRPs make everything less stressful, one almost wishes that the share price tanks a little.

[Bobdn]

It was too much for me and I sold 4000 shares yesterday for 4.855 (I think yesterday's 4.86 was an all time high) which is paying for a big trip to Europe next year. I have just 21,000 Chorus shares left now. The most I ever owned was 56,000. I've also signed up for the DRP again, because I felt dirty selling my shares which is insane I know. Shares are bought to be sold, unless you're Buffett and Cocoa-Cola.

Many years ago, 2011, Chorus was tipped to get to $5.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10767510

[couta1]

It was too much for me and I sold 4000 shares yesterday for 4.855 (I think yesterday's 4.86 was an all time high) which is paying for a big trip to Europe next year. I have just 21,000 Chorus shares left now. The most I ever owned was 56,000. I've also signed up for the DRP again, because I felt dirty selling my shares which is insane I know. Shares are bought to be sold, unless you're Buffett and Cocoa-Cola.

Many years ago, 2011, Chorus was tipped to get to $5.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10767510 HaHa just hit $5.04, on a PE of 25 and no growth this has to be the finest example of an irrational market currently on the NZX, SPK also starting to look a bit that way also at current price.

[Bobdn]

Well, as I think Fred reminded me once, I said I would sell if it hit $5. However if I sell, it will go up to $6, so I'll keep my 21,700 shares and drag the price back down.

[couta1]

Well, as I think Fred reminded me once, I said I would sell if it hit $5. However if I sell, it will go up to $6, so I'll keep my 21,700 shares and drag the price back down. To pay the current price I would be wanting a $1 divvy not 13c.Lol.

[bung5]

To pay the current price I would be wanting a $1 divvy not 13c.Lol.


Workout their free cashflow from 2020 and you will understand why ...

[nzspeak]

I bought it because I got a tip from the same person who put me onto FPH. I'm assuming this person is the biggest money manager in NZ but I could be wrong. I bought it for $4.17 about a year ago. It seemed like a dumb trade to me but this person got me 600% in FPH so what the hell. I dont understand the share price increase but I'm happy.

[Jerry]

Free cashflow from 2020 dropping steadily if gently. ROCE steady 5%. Interest cover 4.1 and dropping, net debt to capital 72% and rising. What's to love?

[bung5]

Free cashflow from 2020 dropping steadily if gently. ROCE steady 5%. Interest cover 4.1 and dropping, net debt to capital 72% and rising. What's to love?

I see a company that will have 400mil + free cash-flow with an asset that will last 20 + years and a mcap of aprox 2bil.

CNU could keep raising the dividend yield like the power companies did after listing as they don't have the huge capex requirement to keep generating profits.

[bung5]

The other scenario is CNU continue with the CAPEX spend building the 5G network

[macduffy]

I see a company that will have 400mil + free cash-flow with an asset that will last 20 + years and a mcap of aprox 2bil.

CNU could keep raising the dividend yield like the power companies did after listing as they don't have the huge capex requirement to keep generating profits.

But they do have a regulator keeping a close watch on their charges and return on capital.

[bung5]

But Jerry mentions roce steady at 5%...

[Marilyn Munroe]

I have been uneasy about the threat posed by the telecommunications company named after an electrical discharge and their advocacy of cellular wireless data including new generation cellular deployments in place of fibre. I was concerned this would pose a threat to the uptake of Chorus's fibre.

The Chorus 2018 annual report gives me some comfort. I quote from page 4;

There has been much speculation about the potential future performance of 5G technology and what it means for fixed line networks. We are monitoring developments and have visited international telecommunications operators to learn more of their 5G plans. Where developments are occurring overseas they tend to be in areas where fibre to the premises networks aren't available. Some operators have questioned the economic viability of 5G deployments in areas where a superior fibre service is already available.

Boop boop de do
Mariyn

[peat]

I have been uneasy about the threat posed by the telecommunications company named after an electrical discharge and their advocacy of cellular wireless data including new generation cellular deployments in place of fibre. I was concerned this would pose a threat to the uptake of Chorus's fibre.

The Chorus 2018 annual report gives me some comfort. I quote from page 4;

There has been much speculation about the potential future performance of 5G technology and what it means for fixed line networks. We are monitoring developments and have visited international telecommunications operators to learn more of their 5G plans. Where developments are occurring overseas they tend to be in areas where fibre to the premises networks aren't available. Some operators have questioned the economic viability of 5G deployments in areas where a superior fibre service is already available.

Boop boop de do
Mariyn

I can see why you're looking for comfort as regards the threat of 5G. The quote you refer to doesn't stack up from what I'm reading. Telstra and Optus are delivering 5G in Australia as we speak and anecdotally the nephew is getting fibre speeds using a fixed wireless connection in various areas in QLD. Apparently its not even geo-locked so he can move it anywhere with instant 80MB/S to the new house.

Of course they may be right and it might not be economically viable. But they're doing it.

[freddagg]

I can see why you're looking for comfort as regards the threat of 5G. The quote you refer to doesn't stack up from what I'm reading. Telstra and Optus are delivering 5G in Australia as we speak and anecdotally the nephew is getting fibre speeds using a fixed wireless connection in various areas in QLD. Apparently its not even geo-locked so he can move it anywhere with instant 80MB/S to the new house.

Of course they may be right and it might not be economically viable. But they're doing it.

Wow, 80MB/s is equivalent to 640Mb/s, that is way faster than most fibre. He will use a months data cap in a few hours.

[peat]

Wow, 80MB/s is equivalent to 640Mb/s, that is way faster than most fibre. He will use a months data cap in a few hours.

sounds silly what you say
why does the capital B make a difference and how can 80 = 640 at the same yardstick? sorry I'm not with you
There is no data cap

I think 5G will affect Chorus, sooner or later.

[dobby41]

sounds silly what you say
why does the capital B make a difference and how can 80 = 640 at the same yardstick? sorry I'm not with you
There is no data cap

I think 5G will affect Chorus, sooner or later.
MB = megabytes, Mb = megabits - there are 8 bits to a byte
so 1MB=8Mb

We'll ignore any nibbles (4 bits to a nibble).

[Snow Leopard]

sounds silly what you say
why does the capital B make a difference and how can 80 = 640 at the same yardstick? sorry I'm not with you
There is no data cap

I think 5G will affect Chorus, sooner or later.

1 MegaByte is made up of 8 Megabits

[freddagg]

sounds silly what you say
why does the capital B make a difference and how can 80 = 640 at the same yardstick? sorry I'm not with you
There is no data cap

I think 5G will affect Chorus, sooner or later.

Capital B = bytes
Lower case b = bits
8 bits to the byte
Telecom companies usually measure in bits because it sounds more.
Would be amazing if we could get wireless in NZ without data caps because that is the main problem with wireless, much more than the slower speed.

[peat]

i figured it would be technicalities.

Bottomline:
Fibre speeds available over what is a wireless connection

Result:
CNU is screwed.

[dobby41]

i figured it would be technicalities.

Bottomline:
Fibre speeds available over what is a wireless connection

Result:
CNU is screwed.

Fibre speed is always fibre speed (well there is the possibility of contention but less likely) where as wireless will suffer greatly and increasingly from contention (to many users trying to share the same resource).
They just need to sell the difference.

[bung5]

Default
5g cost and speed won't be a comparable alternative to majority of the population.
5g essentially requires a large fibre network underneath it as it requires multiple more nodes per connection than 4g.
This is why it makes sense for chorus to build and wholesale 5g.

[Bobdn]

Hard to know how new technology will affect Chorus. Useful article on the state of 5g here. My feeling is it costs a lot to implement and might not be in NZ for decades (apart from the odd test site here and there).

https://www.bloomberg.com/news/articles/2018-09-17/when-will-ultrafast-internet-come-to-your-phone-quicktake

For me the only thing I worry about across all of my investments in NZ is the Government. As we saw with the oil and gas debacle, things can change over night.

[mcdongle]

https://www.sparknz.co.nz/news/Spark-outlines-5G-network-intentions/

Spark 5G Plans

[dobby41]

https://www.sparknz.co.nz/news/Spark-outlines-5G-network-intentions/

Spark 5G Plans

This paragraph
Mr Moutter said it was important for policymakers to recognise 5G is not a standalone technology or solution. It will operate together with previous generations of wireless technology and will be deployed as an overlay of existing network infrastructure. Therefore, policy settings need to support network operators having control over the evolution of their wireless networks.
Is saying to the Govt - don't let Chorus take control here.

[peat]

email from sharechat over the weekend re 5G in USA

http://moneyonline.cmail19.com/t/ViewEmail/r/94DD30ED41FB23EF2540EF23F30FEDED/F46D551ED9DE5B672A1BF84ACBDD178B

[Bobdn]

Yeah nah

https://www.bloomberg.com/news/articles/2017-12-18/upgrade-to-5g-costs-200-billion-a-year-and-may-not-be-worth-it

And as it applies to NZ, useful thread here:

https://www.geekzone.co.nz/forums.asp?forumid=39&topicid=239883

There are some top experts in this thread who question the benefits of 5g (over 4g) and think its being hyped too much.

I have a lot more Spark shares than I do Chorus shares. I just hope Spark doesn't bet the farm on this.

[Bobdn]

I sold the rest of my Chorus shares today. What a great company and I'll miss not owning it :( however for sometime now I've been wanting to move some funds into index funds. So I guess I will still own some Chorus but it will only be a sliver of my portfolio, not almost 10% of it! It has recovered completely from the blood bath last month, and then some, so today was as good a day as any.

[Marilyn Munroe]

Coalition Government minister Angry Andy placing a tapu on Chinese Huawei 5G wireless network equipment may place a taiaha in the spokes of Sparks plans to shift content streaming from Choruses fibre to their proposed 5G network.

Boop boop de do
Marilyn

[mcdongle]

Probably end up using ZTE......LOL

[Marilyn Munroe]

From the Chorus Q2 FY19 Connections Update;

Total fixed line connections decreased by 21k to 1,486,000 in Q2

Should shareholders be worried?

Boop boop de do
Marilyn

[Bobdn]

No, I don't think so. I was heartened by the 22 per cent increase in 1 gb fibre connections.

Btw, I bought back in at 4.64. Just 5000 shares. I didn't like not owning any Chorus, I felt out of sorts.

[Aaron]

My understanding is limited but 5G wireless, I wonder if the radiation will turn out to be a problem in the future. Spark obviously has no interest in finding out. Although 5G will be advertised as a new wireless utopia.

https://www.youtube.com/watch?v=H_f9gpg4t6c

https://www.youtube.com/watch?v=MC_Sfkh5-zQ

Billions already invested. new waves, shorter waves and higher frequencies. Needs lots more transmitters.

[Bobdn]

"Chorus kicking off "ultra ultra fast broadband trial".

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12200673

[Jay]

Can someone tell me this - How do they control the fibre speed for each connection, e.g I might be on a plan with Spark that they limit to a max speed of 200, whereas my next door neighbour has a plan with say Trust Power on 1000
Does the data go at the fastest possible speed to the various 'green' boxes around the suburb and from there you have your own piece of fibre strand to your house??

[dobby41]

Can someone tell me this - How do they control the fibre speed for each connection, e.g I might be on a plan with Spark that they limit to a max speed of 200, whereas my next door neighbour has a plan with say Trust Power on 1000
Does the data go at the fastest possible speed to the various 'green' boxes around the suburb and from there you have your own piece of fibre strand to your house??

Speed is limited by Chorus at egress to the ISP via shapers.
Chorus probably have a rate limiter at the first switch after the fibre conversion.
Also limited on ingress to ISP (the Hand over Link (HoL)) by rate limiters.
Both limits are to the plan that you have brought - hopefully. Works 99.99% of the time.

So yes - full speed through the fibre part.

[nzspeak]

Hey Guyz, I see Chorus is on an absolute tear at the moment. Is this related to several factors? or is something in particular driving this? I don't live in New Zealand anymore so I miss out on some news. Thanks in advance.

[Marilyn Munroe]

Hey Guyz, I see Chorus is on an absolute tear at the moment. Is this related to several factors? or is something in particular driving this? I don't live in New Zealand anymore so I miss out on some news. Thanks in advance.

The weekend saw the first netcast of a major sporting event. Spark netcast the Melbourne Formula One GP.

According to the geeks on geekzone.co.nz it all went remarkably well. Netcasting major sporting events over Chorus fibre looks to be a thing.

Boop boop de do
Marilyn

[couta1]

Current price is pure insanity and the PE is nuts.Lol

[Jay]

Spark would prefer if you viewed it via their wireless internet! No discount or let off of your data use if you are a spark customer either

[winner69]

WOW ...Chorus still very undervalued

http://www.sharechat.co.nz/article/1b6418a0/chorus-shares-extremely-undervalued-says-biggest-shareholder.html?utm_medium=email&utm_campaign=Chorus%20shares%20extremely%20underva lued%20says%20biggest%20shareholder&utm_content=Chorus%20shares%20extremely%20underval ued%20says%20biggest%20shareholder+CID_b3526a07caa 9ee91c7c0246d81c0a038&utm_source=Email%20marketing%20software&utm_term=httpwwwsharechatconzarticle1b6418a0chorus-shares-extremely-undervalued-says-biggest-shareholderhtml

[couta1]

WOW ...Chorus still very undervalued

http://www.sharechat.co.nz/article/1b6418a0/chorus-shares-extremely-undervalued-says-biggest-shareholder.html?utm_medium=email&utm_campaign=Chorus%20shares%20extremely%20underva lued%20says%20biggest%20shareholder&utm_content=Chorus%20shares%20extremely%20underval ued%20says%20biggest%20shareholder+CID_b3526a07caa 9ee91c7c0246d81c0a038&utm_source=Email%20marketing%20software&utm_term=httpwwwsharechatconzarticle1b6418a0chorus-shares-extremely-undervalued-says-biggest-shareholderhtml A typical Aussie ramping company, PE of 36, what a comedy.Lol

[Joshuatree]

Its a good read and makes sense looking longer term Download Document 996.85KB (https://hotcopper.com.au/documentembed?id=uOMxKKzFkiWRTLKhOROKAxjvSTYP4g25z BKZrOR%2Fke92GA%3D%3D)

 Chorus is the monopoly owner of the new fibre network across most of New Zealand (81%) and also owns 100% of the monopoly copper network. Chorus has spent 10 years and NZ$6b building one of the world’s best & fastest fibre networks (up to 10 times faster than Australia’s NBN).

 Capex for the fibre rollout peaks this year and we believe free cashflow available for dividends will soon surge. Chorus share price rallied 60% in the past year due to:



 New legislation that will see Chorus’ fibre assets form a regulated asset base (RAB) = more stable earnings & enables higher gearing

[bung5]

A typical Aussie ramping company, PE of 36, what a comedy.Lol


PE is a very bad way to value Chorus. As the bulk of its investment spend is done for what could be a 50 year asset the deprecation on NPAT doesn't really matter anymore.
Chorus will be valued on free cashflow just like the power companies currently are.

[Jerry]

$6.23 down to $5.87 in one hit today. It's not even ex-div day. I see they have announced they have issued CIP securities. I suppose this means we have all just been diluted? It's more like a game of snakes and ladders than I realised. :(

[couta1]

$6.23 down to $5.87 in one hit today. It's not even ex-div day. I see they have announced they have issued CIP securities. I suppose this means we have all just been diluted? It's more like a game of snakes and ladders than I realised. :( If it had dropped to $3.87 you might have cause to worry, $5.87 still wildly overpriced. PS-The CNU share price is more mysterious than the construction of the Pyriamids.

[Marilyn Munroe]

Prediction, especially about the future is difficult but I'm not going to let that stop me.

One of the things preying on the markets view of Chorus is the competition threat from a 5G cellular roll out. 5G is something Spark is very gung-ho about and they have a history of trying to bypass Chorus with their wireless internet offerings.

My prediction is 5G will turn out to less of a threat than many imagine. One overseas commentator explained if you want saturation 5G coverage of an area you would need to install a 5G base station on every third roadside pole because of the short range of the radio frequencies 5G uses. This would be a courageous move for a telecommunications provider where there is already fiber to the premises installed.

The push back by the oligarchical hegemony against the leading 5G equipment supplier because of it's association with a marxist despotic govermment will blunt the impact of 5G.

My guess is that 5G would only make sense where there is a large congregation of people and their phones like airport terminals, sports stadiums, and shopping malls.

Boop boop de do
Marilyn

PS I am including the key word < Tiananmen Square > to see if this post makes it past my Huawei optical network terminator.

[waikare]

If it had dropped to $3.87 you might have cause to worry, $5.87 still wildly overpriced. PS-The CNU share price is more mysterious than the construction of the Pyriamids.

Closed today at $5.78, a gain of 33.9% (NZX) for the last 12 months

[couta1]

Closed today at $5.78, a gain of 33.9% (NZX) for the last 12 months Yep as I was saying very mysterious. Lol

[Aaron]

http://www.stuff.co.nz/business/industries/86061442/spark-unrepentant-after-chorus-accuses-it-of-errors

Didn't think much of Spark a month or so ago they rang to ask if I wanted a better internet connection and I could keep my number but it would be attached to a mobile number or something of the sort. Part way through the conversation I realized they were selling me a deal to use their wireless network and ditch the copper. Once I worked that out I told them to f**k off and stop wasting my time but I would imagine plenty of people wouldn't have a clue what was really being offered. Chorus could lose a lot of business from rural folk switching to Sparks wireless network. The sales person just said I would get more data and the internet would work better, I only twigged what was being offered because I took an interest in chorus a while back. It doesn't worry me too much as I didn't invest in chorus but it upset me that the marketing for the switch to wireless is sort of deceptive from Spark. I am sick of b*lls**t and deception fobbed off as clever marketing trying to confuse people to sell **** is a sad state of affairs.

Chorus is a bit slow in my opinion.
https://www.stuff.co.nz/business/113418141/chorus-deeply-uncomfortable-with-spark-homephone-sales-move

I still reckon most people would not know the difference between fibre and a wireless network. I wonder if Chorus hands are tied by their monopoly status and legislation or if chorus management thinks they can just roll out fibre and wait for the profits to roll in while they sit around with their finger up their date. Wireless is competing with copper and fibre if Chorus has a better product they need to tell the masses and ensure Spark doesn't continue to profit from peoples ignorance.

[stealthmaster]

Lots of securities issued?

[smartbomb]

https://www.intelligentinvestor.com.au/chorus-a-yield-stock-in-hiding-1915721

It seems we are getting more excited about CNU this side of the Tasman than you all seem to be.

[couta1]

https://www.intelligentinvestor.com.au/chorus-a-yield-stock-in-hiding-1915721

It seems we are getting more excited about CNU this side of the Tasman than you all seem to be. Maybe you guys get excited about watching paint dry more than us, stock is basically no growth on a massive PE and average divvy yield.

[Sideshow Bob]

https://www.nzx.com/announcements/342317

New CEO announced

[Aaron]

Does anyone know how many copper connections Chorus has in Northpower, Ultrafast and Enable areas?

In theory if everyone switches to fibre they will lose all these copper connections.

I guess we have been seeing some of this over the last couple of years as well as the snakes from Spark switching people to their wireless network.

[Independent Observer AUNZ]

https://www.nzx.com/announcements/342317

New CEO announced

Background with NBN (what a cluster**** that is) doesn't bode well, but hard to read much more in to it at this stage. Interesting to see if the shares bounce a little.

[smartbomb]

https://www.intelligentinvestor.com.au/recommendations/chorus-a-step-closer/146424

Still some love for Chorus over the Tasman.

[Bobdn]

And here in Wellington, NZ. Well played Chorus.

https://hyperfibre.chorus.co.nz/

[couta1]

Lol, punters buying this must be eating magic mushrooms or something similar, the PE ratio looks absurd unless they are selling A2 milk as a sideline.

[ratkin]

https://www.intelligentinvestor.com.au/chorus-a-yield-stock-in-hiding-1915721

It seems we are getting more excited about CNU this side of the Tasman than you all seem to be.

Bought a few when read that back in November. Up nearly 20% since then so thx for bringing to my attention

[smartbomb]

I just wish I had followed up my own lead back then.

[Joshuatree]

I read it too but couldnt find any other research agreeing with it and moved on. Win some lose some.

[smartbomb]

https://cdn-blob.investsmart.com.au/reports/II_SR_Mini_income_portfolio__31_Jan_2020%5B1%5D.pd f

CNU is only one of 6 stocks mentioned in this Intelligent Investor update but will do the CNU SP no harm on ASX.

[kiwico]

CNU is only one of 6 stocks mentioned in this Intelligent Investor update but will do the CNU SP no harm on ASX.

Thanks but very likely a breach of copyright.

[Joshuatree]

Any tech boffins out there care to comment on this below re whether Sparks 5 G is a threat to Chorus's fibre. Thanks in advance

"One concern remains mobile broadband. Spark Telecom, NZ’s equivalent of Telstra, is building a 5G network and many suggest that 5G will take market share from the UFB, potentially decimating returns for Chorus. We think that unlikely .Data travels far more efficiently, and cheaply, along fibre than on radio waves and fibre will always be cheaper and capable of carrying more data. The UFB is a globally competitive fibre network; 5G won’t worry Chorus."

https://cdn-blob.investsmart.com.au/...020%5B1%5D.pdf (https://cdn-blob.investsmart.com.au/reports/II_SR_Mini_income_portfolio__31_Jan_2020%5B1%5D.pd f)

[Joshuatree]

Found this but this technophobe cant verify whether its up to date and accurate

"The spectrum characteristics of 5G mean it will need receivers in the home to be effective in delivering large data volumes. Someone would have to come to residences one by one, install external antennas, run internal wiring and complete the setup manually. Early adopters in the US have suggested that it costs about US$4,000 per connection to set up a wireless broadband service that way. For all its flaws, the NBN remains the best option for home broadband."


An investor’s guide to 5G).

[clip]

My feeling is for certain demographics, yes it may take away some customers or stop new sign ups. The main benefit will be not needing to use home wifi for streaming video. However, it will all come down to data caps and pricing, typically for $80-100 you get unlimited fiber, unlimited 4g is upwards of that. Vodafone are building a 5g network too so there will be some competition. If 5g unlimited plans are priced below current UFB plans I would see it as a risk.

IMO only - I don't work in telecoms, but do work in technology

[dobby41]

Any tech boffins out there care to comment on this below re whether Sparks 5 G is a threat to Chorus's fibre. Thanks in advance

"One concern remains mobile broadband. Spark Telecom, NZ’s equivalent of Telstra, is building a 5G network and many suggest that 5G will take market share from the UFB, potentially decimating returns for Chorus. We think that unlikely .Data travels far more efficiently, and cheaply, along fibre than on radio waves and fibre will always be cheaper and capable of carrying more data. The UFB is a globally competitive fibre network; 5G won’t worry Chorus."

https://cdn-blob.investsmart.com.au/...020%5B1%5D.pdf (https://cdn-blob.investsmart.com.au/reports/II_SR_Mini_income_portfolio__31_Jan_2020%5B1%5D.pd f)




Mobile broadband is already a threat to fibre so anything that gives them more capacity isn't good for Chorus.

[peat]

even 4g has been attacking Chorus revenue. so yeh 5g even more so Ive been saying this for ages. Price went up tho!
true that there will probably always be benefits to fixed wires to some degree even if its only stability.

[Marilyn Munroe]

Any tech boffins out there care to comment on this below re whether Sparks 5 G is a threat to Chorus's fibre. Thanks in advance


See my post #2563 (28/05/2019) on this thread.

Boop boop de do
Marilyn

[850man]

Any tech boffins out there care to comment on this below re whether Sparks 5 G is a threat to Chorus's fibre. Thanks in advance

"One concern remains mobile broadband. Spark Telecom, NZ’s equivalent of Telstra, is building a 5G network and many suggest that 5G will take market share from the UFB, potentially decimating returns for Chorus. We think that unlikely .Data travels far more efficiently, and cheaply, along fibre than on radio waves and fibre will always be cheaper and capable of carrying more data. The UFB is a globally competitive fibre network; 5G won’t worry Chorus."

https://cdn-blob.investsmart.com.au/...020%5B1%5D.pdf (https://cdn-blob.investsmart.com.au/reports/II_SR_Mini_income_portfolio__31_Jan_2020%5B1%5D.pd f)




Wireless data (4G and 5G) is a shared data path meaning that everyone attached to the cell site share it's data throughput capacity. Even though that might be 10Gb that may be shared by numerous parties. Fibre is unshared and uncontended so if you have a 1Gb or soon greater plan then you get all of that all the time. Where this difference is most noticeable is with streaming - watching movies, sports where you will likely get buffering or be downshifted to a lower resolution image. Thats fine if you're watching on a cellphone but streaming 4K content to a big screen is unlikely to work well over 5G especially if you're in an urban location with a hundred others trying to do the same on the single cell site you're all connected to.

[676767]

Wireless data (4G and 5G) is a shared data path meaning that everyone attached to the cell site share it's data throughput capacity. Even though that might be 10Gb that may be shared by numerous parties. Fibre is unshared and uncontended so if you have a 1Gb or soon greater plan then you get all of that all the time. Where this difference is most noticeable is with streaming - watching movies, sports where you will likely get buffering or be downshifted to a lower resolution image. Thats fine if you're watching on a cellphone but streaming 4K content to a big screen is unlikely to work well over 5G especially if you're in an urban location with a hundred others trying to do the same on the single cell site you're all connected to.

Unfortunately not, NZ's Fibre infrastructure is GPON based meaning it is shared infrastructure. Its less affected by contention, but its not safe from it.
Around 24 houses can be added to a single splitter to share a single fiber back to the OLT, although the number of connections is usually lower.
Per OLT port (note, not the new 10G capable ones) there is around 2.4Gbps download and 1.2 Gbps upload total to be shared.

Luckily no one is usually using that much data all the time, and Chorus are usually pretty good at finding and re balancing splitters should they get overutilized.

[Timesurfer]

Once Elon’s satellite trains have fully polluted the sky I am guessing the wireless network will experience less of a throttling effect.

[dobby41]

Wireless data (4G and 5G) is a shared data path meaning that everyone attached to the cell site share it's data throughput capacity. Even though that might be 10Gb that may be shared by numerous parties. Fibre is unshared and uncontended so if you have a 1Gb or soon greater plan then you get all of that all the time. Where this difference is most noticeable is with streaming - watching movies, sports where you will likely get buffering or be downshifted to a lower resolution image. Thats fine if you're watching on a cellphone but streaming 4K content to a big screen is unlikely to work well over 5G especially if you're in an urban location with a hundred others trying to do the same on the single cell site you're all connected to.

Backhaul capacity is relatively easy to augment, radio capacity isn't.
This is where 5G provides the avantage over 4G.
There are many, many people who don't want or need 1G connections (or even 10G coming up) and will happily pay less for less via radio.

[Snoopy]

My experience then, is that the cost of fiber deployment is so high that the provider has to have significantly higher prices than were experienced in the market before. This creates an umbrella for legacy service prices to be raised. Which then results in more folks dropping their landline, etc. In the states we are experiencing folks dropping cable for the first time ever (in total). It does not help that Verizon makes me click off an ad before I can watch tv - they are hungry for revenues anyway they can get it.


The above quote is from six years ago, talking about the US market for fibre. Over there I am not sure they have the retail wholesale split we have in New Zealand.

Something rather unusual happened to me in the same week in two different centres concerning two quite different houses that I am responsible for looking after.

The first was in Christchurch where the man from 'Enable' knocked on my door. Now for those who don't know, 'Enable' is the Christchurch Council owned broadband infrastructure company. They do what Chorus does in most other parts of the country.

"Was I thinking of getting fibre broadband?"

"We are probably going to be rolling it onto your land (I am on a cross lease with two other properties)."

After I said no

"Should we contact you again in six months? Do you think you might change your mind?"

It was quite a hard sell from a man whose opening gambit was:

"I haven't come to sell you anything."

The odd thing about this is that I can't become a customer of 'Enable'. They would have to refer me to a retail broadband seller.

In the Wellington district I got a letter from Chorus:

"Connect with fibre and we will load $200 onto the enclosed pre-paid mastercard".

Now I do know that the neighbours recently connected to fibre and the Chorus truck was in the street for several hours setting it all up. So maybe they are thinking.

"We have done all the hard work in this location. Let's see if we can sign up some neighbouring customers."

But once again I cannot become a customer of Chorus. I would have to go through a third party retail broadband supplier. I won't be taking up this second offer either. But it did get me wondering. Why was I approached by wholesale broadband network builders at all? Anyone else been approached in this way? What does it all mean for Chorus?

SNOOPY

[Jay]

I think we had a letter/leaflet or two from Chorus when Fibre was being put in the street, but no one directly from Chorus knocking on the door, and it saying to contact you current telco or words to that effect, who then in turn tried to sell me Wireless braodband, which I tried for a month or so but it didn't do what they said it would do, one thing was alarm monitoring, something about the cell network could/would not connect to it so I could not turn it off/on etc remotely via their app - it could send out so the montoring company gets the signal etc, but I could not connect to it outside of my home wireless network. Anyway switched over to Fibre for no additional costs.

[Snoopy]

I think we had a letter/leaflet or two from Chorus when Fibre was being put in the street, but no one directly from Chorus knocking on the door, and it saying to contact you current telco or words to that effect,


Yes I remember the same thing when fibre rolled out past the front entrance to the driveway in Christchurch. We got a letter in the post from Enable. However it was definitely an information drop rather than any kind of hard sell.



....who then in turn tried to sell me Wireless broadband....


I have gone over to fixed mobile wireless broadband by Spark and find it excellent for my purposes. Spark no longer has to pay a monthly fee to Chorus if a customer elects to go 'fixed wireless'. So there is a big incentive for Spark to promote fixed wireless.

The latest letter offer from Chorus means I have to sign up for my MasterCard 'Cash Card' first to get the $200 incentive, THEN contact my chosen broadband provider. Doing it this way means it heads off any counter offer of fixed wireless mobile from Spark. If I ring Spark first, then I lose the $200 fibre sign up bonus from Chorus.

I wonder if this 'Chorus card' offer is real evidence that 'Spark Fixed Mobile Broadband' and 'Spark/Vodaphone Mobile Broadband' is seen as a real threat to Chorus, particularly now that Mobile 5G is available in some centres? What I don't get though is that even mobile broadband uses fibre (i.e the Chorus network) once the signal gets to the cell towers. So Chorus is still involved even if they aren't getting paid by the end line customer. Or have I got that last bit wrong?

SNOOPY

[Marilyn Munroe]

Snoopy raises issues, wireless V fibre internet.

SNOOPY

It depends on your use case Snoopy.

If all you require is internet for web browsing and email and are within range of A spark tower wireless internet is OK and may have a price advantage.

If you have a household of teenagers, like streaming media such as Netflix and want a cheap landline using voice over IP then fibre is the way to go.

No father can resist his nest of little starling chicks sceeching "fix the internet, fix the internet".

Boop boop de do
Marilyn

[Jay]

It depends on your use case Snoopy.

If all you require is internet for web browsing and email and are within range of A spark tower wireless internet is OK and may have a price advantage.

If you have a household of teenagers, like streaming media such as Netflix and want a cheap landline using voice over IP then fibre is the way to go.

No father can resist his nest of little starling chicks sceeching "fix the internet, fix the internet".

Boop boop de do
Marilyn

I do have 2 up coming teenagers, that use enough bandwidth now with some of the games they play

[ratkin]

Just checking my portfolio for anything that might overly suffer in the slowdown. What potential problems could Chorus encounter?

[couta1]

Just checking my portfolio for anything that might overly suffer in the slowdown. What potential problems could Chorus encounter? Lol with a PE of 52 it should already be suffering by having at least $2 shaved off its current share price.

[ratkin]

Lol with a PE of 52 it should already be suffering by having at least $2 shaved off its current share price.

It is well positioned to bring that PE down quite quickly. Just wondering if the virus will throw any spanners in the works. Could the actual fibre rollout be hit? No idea where the installers get all their parts etc from, but China a likely source?

[percy]

I use Spark wireless and have had no viruses.
Perhaps they are more likely to be spread on Chorus's copper wires.?

[ratkin]

Chorus increases EBITDA guidance following strong halfFY20 half year result by the numbers
•Net profit after tax $31m (HY19: $30m)
• EBITDA $332m (HY19: $318m
• Operating revenue of $483m (HY19: $489m)
• Interim dividend of 10 cents per share
• EBITDA guidance range increased to $640 to $655 million
• 99,000 fibre installations since 30 June 2019
• 13% of fibre connections on 1 gigabit plans

Rollout of fibre coming to end, time to reap the benefits was the gist of the commentary. No mention of virus related concerns, and as they have increased guidance have to assume they are not expecting any.

Market seems happy with it, so far

[peat]

I use Spark wireless and have had no viruses.
Perhaps they are more likely to be spread on Chorus's copper wires.?
;)
Made me chuckle.
But you're wrong Percy coz the virus is air transmissible


[*=left]Via respiratory droplets produced when an infected person coughs or sneezes.



so copper wires aren't to blame.

[Aaron]

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12334906

Not sure if this is behind the pay wall. Chorus boss wondering where all the customers are. They are all on Spark and Vodafone's wireless networks as Chorus has done a **** job of educating and advertising the benefits of fibre. Also they need to tell potential customers that when they contact their telecommunications provider that they want a fibre connection that they need to insist and not be side tracked by offers to join their providers wireless network.

For me Chorus has provided a ****ty copper network with regular disconnections and very little investment in infrastructure from what I can tell. So I am happily signing up for fibre, with Northpower.

That said this post is not based on any facts like actual numbers signing up for fibre but is based on me being pissed off with Chorus and looking forward to getting off their unreliable network.

[Marilyn Munroe]

The dumping by the United Kingdom Government of Huawei as an approved 5G supplier as part of the US jihad against the company leaves New Zealand as an outlier.

The realpolitik hoo-ha is likely to delay Sparks 5G roll out. The market thinks 5G is a threat to Chorus's fibre network, well if it is it has dipped further below the event horizon.

Boop boop de do
Marilyn

[dobby41]

The dumping by the United Kingdom Government of Huawei as an approved 5G supplier as part of the US jihad against the company leaves New Zealand as an outlier.

The realpolitik hoo-ha is likely to delay Sparks 5G roll out. The market thinks 5G is a threat to Chorus's fibre network, well if it is it has dipped further below the event horizon.

Boop boop de do
Marilyn

GCSB hasn't allowed Spark to use Huawei so they have gone elsewhere (for now).
So where is the outlier?
5G is on a role now that there is spectrum.

[RTM]

Visited my Mum recently and had a look at her SPARK bill. Ooops. So went into the shop to see what can be done. Updated her plan but also her hardware. She now has a 4G Modem. Her "land - line" plugs into that. So no reliance at all on the copper network. All seemed quite ok. Netflix, YouTube etc all seemed to run fine.

This rang some warning bells for me with respect to CHORUS.
Disc: Not holding.

[Marilyn Munroe]

RTM, I agree your mothers mobile broadband use case in a valid alternative to Chorus.

However Spark were promoting 5G as the equivalent of bringing a machine gun to a knife fight. It remains a knife fight.

Boop boop de do
Marilyn

[RTM]

RTM, I agree your mothers mobile broadband use case in a valid alternative to Chorus.

However Spark were promoting 5G as the equivalent of bringing a machine gun to a knife fight. It remains a knife fight.

Boop boop de do
Marilyn

What I was surprised by is that it did not even need 5G .....4G was more than good enough.

[dobby41]

What I was surprised by is that it did not even need 5G .....4G was more than good enough.

5G allows them to do more of it within a given site and frequency allocation.
4G is limiting - good but will suffer capacity issues.
So, in that way, 5G is a bit of a downer for Chorus.

[bull....]

on fire , has been for a while. must be those juicy doubling of dividends they were talking about

[Davexl]

on fire , has been for a while. must be those juicy doubling of dividends they were talking about

What a load of BULL. Final div has gone up 1/2 cent from last years, 14c now. Must have a load of Chorus shares already eh?



CNU (https://www.nzx.com/instruments/CNU)
14 Sep 2020
Final
14.000c
Supp. 2.471c

Imput. 5.444c

12 Oct 2020
NZD

[bull....]

What a load of BULL. Final div has gone up 1/2 cent from last years, 14c now. Must have a load of Chorus shares already eh?

your not up with the play are you , they are forecasting a possibility doubling of divs by 2025

[Davexl]

your not up with the play are you , they are forecasting a possibility doubling of divs by 2025

Have you got a link Bull, can't find anything on the NZX? Your earlier comments implied divs in the short term to me - thanks.

[bull....]

Have you got a link Bull, can't find anything on the NZX? Your earlier comments implied divs in the short term to me - thanks.

Chorus says fatter dividends on the way, unless regulator has other ideas. Analysts are sharpening their pencils after Chorus confirmed once it puts the capital-intensive UFB rollout behind it in a couple of years, free cash flow will increase - and the majority of it paid out.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12358896


this was also highlighted a few mths ago thats why shares have been in demand they just reiterted it again this week

[iceman]

Chorus says fatter dividends on the way, unless regulator has other ideas. Analysts are sharpening their pencils after Chorus confirmed once it puts the capital-intensive UFB rollout behind it in a couple of years, free cash flow will increase - and the majority of it paid out.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12358896


this was also highlighted a few mths ago thats why shares have been in demand they just reiterted it again this week

I agree with bull. This was the main reason I bought CNU back in March

[Davexl]

Chorus says fatter dividends on the way, unless regulator has other ideas. Analysts are sharpening their pencils after Chorus confirmed once it puts the capital-intensive UFB rollout behind it in a couple of years, free cash flow will increase - and the majority of it paid out.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12358896


this was also highlighted a few mths ago thats why shares have been in demand they just reiterted it again this week

Thanks Bull - looks like I need a Herald subscription damn it...

[nztx]

I agree with bull. This was the main reason I bought CNU back in March

Saw that too .. likewise adding

[bull....]

yep if you got in some where between 5 - 6$ at the start of the current trend and if the dividends pan out as they say around the 45c - 50c depending on the regulator could be a 8 - 10% gross dividend gee be roughly 13 - 15% gross maybe if you got in at $4 odd. sometimes i wish i held stuff long term lol

[bull....]

on fire last 2 days

[RGR367]

on fire last 2 days

Yeah. Can't resist the price they're buying so I sold a bundle at the highest I can get today. My remaining CNU shares are now what I would call book-value negative. Others fondly call them free shares :t_up:

[Nor]

I'm wondering how to work out an average price given that telecom gave me my first free when cnu was spun out. Doesn't really matter though as I have no intention to sell.

[Jaa]

Yeah. Can't resist the price they're buying so I sold a bundle at the highest I can get today. My remaining CNU shares are now what I would call book-value negative. Others fondly call them free shares :t_up:

I know its popular but I always struggle with this approach. Do you have better places to put the capital or is it a risk mitigation thing?

[winner69]

Yeah. Can't resist the price they're buying so I sold a bundle at the highest I can get today. My remaining CNU shares are now what I would call book-value negative. Others fondly call them free shares :t_up:

'book value negative' sounds rather cool .....more descriptive than .free.

[RGR367]

I know its popular but I always struggle with this approach. Do you have better places to put the capital or is it a risk mitigation thing?

If you can't find stocks where to put your money then you've not diversified enough. And logic dictates that it's always a winning move if you can make your stocks become book-value negative first so you can really sleep well.

[couta1]

A very puzzling stock on a ludicrous PE ratio which cant be explained.

[RRR]

PE ratio is not the right way to value Chorus - capex is still high, but will end in the next 1-2 years, depreciation (non-cash) is high and increasing, and this diminishes the E. Free cash flow will increase substantially once the capex ends

Discl - recently invested

[couta1]

PE ratio is not the right way to value Chorus - capex is still high, but will end in the next 1-2 years, depreciation (non-cash) is high and increasing, and this diminishes the E. Free cash flow will increase substantially once the capex ends

Discl - recently invested Each to their own, I dont invest in stocks where I dont see value nowdays, $9 odd with a low dividend yield doesnt look at all appealing, future divvy potential is just that.

[nztx]

A very puzzling stock on a ludicrous PE ratio which cant be explained.

Similar comment could apply to NPH, but then CNU will probably reward Shareholders far more generously
as they have repeatedly hinted at..

[bull....]

PE ratio is not the right way to value Chorus - capex is still high, but will end in the next 1-2 years, depreciation (non-cash) is high and increasing, and this diminishes the E. Free cash flow will increase substantially once the capex ends

Discl - recently invested

yep correct. thats why people paying the premium now for those future cash flows

[iceman]

PE ratio is not the right way to value Chorus - capex is still high, but will end in the next 1-2 years, depreciation (non-cash) is high and increasing, and this diminishes the E. Free cash flow will increase substantially once the capex ends

Discl - recently invested

That's the way I see it too. Large CAPEX on the UFB roll out coming to an end in the next 1-2 years and a resulting huge increase in free cash flow from less CAPEX and high depreciation charges. Most forecasts showing dividends doubling from current 24c to 50-60c by 20023-2024.

Of course there are downside risks from wireless broadband and potentially 5G. Also potentially a big overhang from Crown Infrastructure Partners should they want to exit their stake post UFB completion.

Discl:
A small holding for current and future dividends

[dobby41]

What I don't get with Chorus is that they play up the increasing data use on the fibre network as a good thing.
They don't get paid on data throughput - in fact increased data means that they have to upgrade parts of their network to avoid congestion = more cost.
They get paid on connections and Spark, at least, is trying to reduce the number of those they use.

[Zaphod]

What I don't get with Chorus is that they play up the increasing data use on the fibre network as a good thing.
They don't get paid on data throughput - in fact increased data means that they have to upgrade parts of their network to avoid congestion = more cost.
They get paid on connections and Spark, at least, is trying to reduce the number of those they use.

There's a few ways that increased data utilisation on the network is assisting their yields, but you're right that it would be relatively small. Perhaps they're using this as a platform to get more customers on the fibre bandwagon? Be quick, you're missing out!

The managed connections with higher CIR's are much better yielding, judging by the current costs being charged, and increased congestion from household traffic will probably assist those yields. Chorus can also assist in multicast solutions for video delivery etc. so there's a other ways that they can derive revenue from the network, potentially outside of the highly regulated framework. This is much the same way lines companies are attempting to extract additional value from their businesses.

[bull....]

hitting new highs again today

[Jay]

Yeah good eh - making up for my lower gain on SKT:) Goes ex div on Monday

[bull....]

new highs again and just paid the div as well ... how lovely

[iceman]

new highs again and just paid the div as well ... how lovely

Gone XD correct but not paid for another month yet !!

[bull....]

Gone XD correct but not paid for another month yet !!

wrong language yes meant as good as in the bank

[winner69]

This for nztx who couldn't find thread

Search not working that well - so i'll forgive him

nztx said -

HY Results:

https://www.nzx.com/announcements/367917

Not wishing to kick sacred cows too badly (as many by default will have landed some CNU out of Telecom)

but weren't Chorus promising some fairly good things just last year ?

It looks like they are still going to have to dig deeper to make those good things some more ..

[nztx]

This for nztx who couldn't find thread

Search not working that well - so i'll forgive him

nztx said -

HY Results:

https://www.nzx.com/announcements/367917

Not wishing to kick sacred cows too badly (as many by default will have landed some CNU out of Telecom)

but weren't Chorus promising some fairly good things just last year ?

It looks like they are still going to have to dig deeper to make those good things some more ..



Thanks heaps - Winner .. it must have been hiding between the pages or playing hide n seek .. :)

[Aaron]

I couldn't find the thread this morning either.

I recall discussing this a long time ago but don't Crown Fibre Holdings (CFH) start getting repaid after 2025 and also that may take the form of shares so dividends would be expected to be diluted a lot in 4-5 years time.

No one really answered my question last time. It could be that I am so far off it was not worth replying.

Half year report summary shows a drop in income and for some important metrics. Fibre connections up but Vodafone pushing its 5G network. Chorus not really competing with the advertising for the connections and Spark has shown it is happy to put customers on its wireless network ahead of recommending fibre. Probably a steady infrastructure company but could someone tell me if I am right about dilution once CFH starts being repaid?

[nztx]

I couldn't find the thread this morning either.

I recall discussing this a long time ago but don't Crown Fibre Holdings (CFH) start getting repaid after 2025 and also that may take the form of shares so dividends would be expected to be diluted a lot in 4-5 years time.

No one really answered my question last time. It could be that I am so far off it was not worth replying.

Half year report summary shows a drop in income and for some important metrics. Fibre connections up but Vodafone pushing its 5G network. Chorus not really competing with the advertising for the connections and Spark has shown it is happy to put customers on its wireless network ahead of recommending fibre. Probably a steady infrastructure company but could someone tell me if I am right about dilution once CFH starts being repaid?


Yeah - good points there.. Chorus may have been dreaming in 2020 about their thoughts of huge possible gains
eventuating & rewards arising from that being dished out to holders .. ;)

4G & 5G wireless are where things are headed now IMO ..

[Zaphod]

5G Wireless provides higher yields for the telco's, so no doubt they will continue to steer as many as possible towards that solutions, however fibre still has massive advantages over wireless for most applications particularly data-intensive ones. I do wonder whether the government will keep a keen eye on the telco behaviour with wireless technologies in order to protect the crown's investment.

[Aaron]

I couldn't find the thread this morning either.

I recall discussing this a long time ago but don't Crown Fibre Holdings (CFH) start getting repaid after 2025 and also that may take the form of shares so dividends would be expected to be diluted a lot in 4-5 years time.

No one really answered my question last time. It could be that I am so far off it was not worth replying.

Half year report summary shows a drop in income and for some important metrics. Fibre connections up but Vodafone pushing its 5G network. Chorus not really competing with the advertising for the connections and Spark has shown it is happy to put customers on its wireless network ahead of recommending fibre. Probably a steady infrastructure company but could someone tell me if I am right about dilution once CFH starts being repaid?

Guess I'll have to do the work myself. I found a summary, so my understanding is that the $929mill funding from CFI is split 50/50 with debt and equity securities.
The debt half is interest free but gets repaid 2025 2030 2033 and 2036 18.5% 18.5% 27.7% 35.4% of the debt.

The equity securities aren't the great dilution I had surmised, they are preference shares with no voting rights so more like a debt security, but the dividend rate on the CFH1 Equity Securities (when payable) is equal to a reference rate (based on the 180 day bank bill rate in New Zealand) plus a margin of 6% per annum. So probably 6% or less depending on interest rates going negative or not. Dividends are payable six-monthly in advance, and the dividend payment dates will be aligned with the dividend payment dates for Chorus Shares.
The number of CFH1 Equity Securities on which the dividend is payable at any date will be reduced by the number of CFH1 Equity Securities which have been redeemed by Chorus up to that date (the redemption terms are described below).
The table below shows the number of CFH1 Equity Securities that will attract dividends
(unless redeemed earlier):
30-Jun 30-Jun
2025 2030 2033 2036 2025 2030 2033 2036
Equity on which
dividends become
payable $86m $172m $300m $465m 18.5% 36.9% 64.6% 100%

Sorry the last table doesn't show well but I guess it is a matter of going back and seeing whether the interest on the preference shares will significantly impact cashflow or not. 2036 is a long way away.

[Marilyn Munroe]

5G Wireless provides higher yields for the telco's, so no doubt they will continue to steer as many as possible towards that solutions, however fibre still has massive advantages over wireless for most applications particularly data-intensive ones. I do wonder whether the government will keep a keen eye on the telco behaviour with wireless technologies in order to protect the crown's investment.

Someone on the internet posing as a telecommunications expert was dismissive of universal roll-out of 5G.

While it has high data rates it restricted by a small range. He claimed while it was a natural fit for high usage areas such as shopping malls, airport terminals and sports stadiums it would require a cell base on every second power pole to deploy in a suburban setting.

He also predicted 5G would struggle in areas with installed fiber.

While predictions especially about the future are difficult I found his ideas credible.

Boop boop de do
Marilyn

[macduffy]

A bit of licence taken with the graphics in the company's Letter to Investors. The 2021 numbers for broadband connections, fixed copper connections etc are shown in comparison with the previous year's numbers. 2021 numbers are more prominently drawn in larger spheres - the only problem is that some of them are actually smaller numbers!

[Snoopy]

Don't Crown Fibre Holdings (CFH) start getting repaid after 2025 and also that may take the form of shares so dividends would be expected to be diluted a lot in 4-5 years time.

Probably a steady infrastructure company but could someone tell me if I am right about dilution once CFH starts being repaid?



Guess I'll have to do the work myself. I found a summary, so my understanding is that the $929mill funding from CFI is split 50/50 with debt and equity securities.

The debt half is interest free but gets repaid.



Repayment Year2025203020332036Total


Percentage to Repay18.5%18.5%27.7%35.4%100%



The equity securities aren't the great dilution] I had surmised, they are preference shares with no voting rights so more like a debt security, but the dividend rate on the CFH1 Equity Securities (when payable) is equal to a reference rate (based on the 180 day bank bill rate in New Zealand) plus a margin of 6% per annum. So probably 6% or less depending on interest rates going negative or not. Dividends are payable six-monthly in advance, and the dividend payment dates will be aligned with the dividend payment dates for Chorus Shares.

The number of CFH1 Equity Securities on which the dividend is payable at any date will be reduced by the number of CFH1 Equity Securities which have been redeemed by Chorus up to that date (the redemption terms are described below).

The table below shows the number of CFH1 Equity Securities that will attract dividends (unless redeemed earlier):



Repayment Year2025203020332036


Cumulative CFH Equity on which dividends become payable$86m$172m$300m$465m


Cumulative CFH Equity %ge on which dividends become payable18.5%36.9%64.6%100%



It is a matter of going back and seeing whether the interest on the preference shares will significantly impact cashflow or not. 2036 is a long way away.


I have taken the liberty of reformatting your tabulated information Aaron, so hopefully you will tell me if I haven't done it correctly.

I am surprised you are the only one who has brought up the issue of Crown Fibre Holdings debt repayment. You say 2036 is a long way away. But 2025 isn't so far into the future. And the reduced discount rates that lower interest rates bring means that the shadow of those future repayments looms ever larger. I would be interested where you pulled your numbers from. I have had a cursory look and can't find the figures you have documented. However, I shall assume your figures are correct and carry on. I am particularly interested in those debt repayments because they cannot be deferred. Reading between the lines, I think that if the debt is not repaid then CFH has the right to convert that debt into Chorus shares. So this future debt repayment schedule should be something that demands serious attention from Chorus shareholders.

For Chorus, I would judge a 5.5% discount rate on future cashflows to be about right. The debt and equity components of the Crown Fibre Holdings funding is equally split, so $465m of CFH debt must be repaid.



Repayment Year2025203020332036Total


Percentage to Repay18.5%18.5%27.7%35.4%100%

big
Dollars to Repay$86m$86m$129m$165m$465m


Discount Rate Divisor: 5.5% discount rate (FY2020 perspective)1.2391.6191.9012.232


PV Dollars to Repay (FY2020 perspective)$69m$53m$68m$74m$264m



At EOFY2020 there were 444.492m Chorus shares in issue. So to work the future CFH capital repayments into today's Present value of Chorus shares, you have to reduce the value of Chorus shares by:

$264m / 444.492m = 59cps

Is that the quantifiable result of what you are saying Aaron?

SNOOPY

[Snoopy]

I have taken the liberty of reformatting your tabulated information Aaron, so hopefully you will tell me if I haven't done it correctly.
I would be interested where you pulled your numbers from. I have had a cursory look and can't find the figures you have documented.


No need to reply Aaron. I have found your referenced repayment schedule in the 'Share in Two Journeys' booklet published way back on 13th September 2011, just before Spark (it was Telecom then) and what was to become Chorus, split. The information is on page 140 of that document.

CFH1 Bond Repayment Schedule



Repayment Year2025203020332036Total


Percentage to Repay18.5%18.5%27.7%35.4%100%




CFH1 Equity Dividend Repayment Schedule

The table below shows the number of CFH1 Equity Securities that will attract dividends (unless redeemed earlier):

The dividend rate on the CFH1 Equity Securities (when payable) is equal to a reference rate (based on the 180 day bank bill rate in New Zealand) plus a margin of 6% per annum. So probably 6% or less depending on interest rates going negative or not ;-P. Dividends are payable six-monthly in advance, and the dividend payment dates will be aligned with the dividend payment dates for Chorus Shares.



Repayment Year2025203020332036


Cumulative CFH Equity on which dividends become payable$86m$172m$300m$465m


Cumulative CFH Equity %ge on which dividends become payable18.5%36.9%64.6%100%



There is nothing about these repayment schedules in the Annual Reports. Most likely half of all today's shareholders were still at school when this information was published. Perhaps Chorus management just hoped that shareholders would forget about it. Just as well that you didn't Aaron!

SNOOPY

[Snoopy]

The gravitational pull of gross dividend yields consistently and long term much higher than bank deposit interest rates and unreliable finance companies deposit rates which have no capital gain. And backed by Government financing and guarantees and assistance.


I have taken this thread back to its root and this post from 'The Major' which really sums up why we are all here. Ok maybe not 'all'. I, for instance, am a Chorus shareholder that has never bought a single Chorus share. Chorus were spun out of what was then Telecom ten years ago and that is where my Chorus shares came from. This was a time of fast changing internet technology: ADSL, VDSL, Fibre and the mobile networks making their own independent challenge into the internet space. It was very difficult to see where everything would end up. And investing in such a fast changing space was not something I was comfortable with. So my Chorus shares went into the bottom drawer and have had a pretty wild ride in the last decade. Yet ultimately it seems that something quite simple -dividend yield-, or should I say 'prospective future dividend yields ' has driven the share price up to the stratospheric PE ratios (on an historical basis) we see today.

The acceptance of fibre broadband has been way above what the government of ten years ago expected. The goal was to have a minimum 20% of households sign up to fibre running past their front gate. The actual figure today is close to 65%. Despite the existence of competing technologies, in particular wireless broadband (which still uses Chorus for their back haul operations anyway once the signal cellphone gets to the network), I am going to call fibre broadband 'the winner'. With a somewhat more mature market outlook that ten years ago, Chorus has now become investible, at least potentially.

Contrary to popular belief, the roll out of fibre has only been partially and transiently funded by the government. Note 13 of AR2019 suggests that the total budget to roll out UFB1 (which covers the major towns and cities) followed by UFB2 and UFB2+ will cost $2.3b to $2.4b by the end of FY2022. Of that $548m to $568m is the cost of UFB2 and UFB 2+ going out to smaller towns (note 13 AR2020). By simple subtraction then, the cost of rolling out UFB1 alone must be between $1.732b and $1.852b. The total government funding for Chorus's share of UFB1 is $959m (forecast, Note 5 AR2012), or about half the cost of building the network. But from 2025 half of that funding becomes due by progressive repayment. In a similar time-frame, the other half of that funding becomes a preference share with what by today's standard will be a startlingly high interest rate (something north of 6, probably 8%). So it will make sense to refinance and repay that as well. By 2036 all of the crown funding, most likely, will have been repaid.

Capital spending will not stop after FY2022. But it will be a step change down from the hundreds of millions of dollars of recent years.



Operational YearFY2016FY2017FY2018FY2019
FY2020
FY2021FY2022FY2023FY2024


Capital Expenditure Fibre$486m$503m$620m$664m$548m (3)$560m-$590m (1)$399.9m (2)$333.2 (2)$295.9m (2)



Notes

1/ Forecast from HY2021 presentation: Slide 20
2/ These are the forecast 'Fibre Fixed Line Access Services' FFLAS 'Capital expenditure Proposals' as outlined in the 17th December 2020 market release on the 'Price Quality Expenditure Proposal Overview', Slide 10
3/ For FY2020, $186m of the total Capex for the year of $663m was defined as 'sustaining' (Full Year Result presentation, 24-08-2020, slide 25)

Potentially we have a very significant drop in CAPEX coming through, notwithstanding the fact that UFB2 and UFB2+ and the Rural Broadband Initiative (in partnership with Vodaphone) are still rolling out. FY2023 and FY2024 look like they will become comparatively sweet years for Chorus, before a very heavy debt repayment schedule disrupts things. It strikes me that with such a systematic change coming onto the horizon, a Buffett type analysis of Chorus today will be more an historical curiosity, rather than a forecasting tool for the future. But let's do it anyway :-)

SNOOPY

[Snoopy]

I have taken the liberty of reformatting your tabulated information Aaron, so hopefully you will tell me if I haven't done it correctly.

I am surprised you are the only one who has brought up the issue of Crown Fibre Holdings debt repayment. You say 2036 is a long way away. But 2025 isn't so far into the future. And the reduced discount rates that lower interest rates bring means that the shadow of those future repayments looms ever larger. I would be interested where you pulled your numbers from. I have had a cursory look and can't find the figures you have documented. However, I shall assume your figures are correct and carry on. I am particularly interested in those debt repayments because they cannot be deferred. Reading between the lines, I think that if the debt is not repaid then CFH has the right to convert that debt into Chorus shares. So this future debt repayment schedule should be something that demands serious attention from Chorus shareholders.

For Chorus, I would judge a 5.5% discount rate on future cashflows to be about right. The debt and equity components of the Crown Fibre Holdings funding is equally split, so $465m of CFH debt must be repaid.



Repayment Year2025203020332036Total


Percentage to Repay18.5%18.5%27.7%35.4%100%


Dollars to Repay$86m$86m$129m$165m$465m


Discount Rate Divisor: 5.5% discount rate (FY2020 perspective)1.2391.6191.9012.232


PV Dollars to Repay (FY2020 perspective)$69m$53m$68m$74m$264m



At EOFY2020 there were 444.492m Chorus shares in issue. So to work the future CFH capital repayments into today's Present value of Chorus shares, you have to reduce the value of Chorus shares by:

$264m / 444.492m = 59cps

Is that the quantifiable result of what you are saying Aaron?


I notice in the 'UBS Australia virtual conference' on 17th November 2020, the Chorus CIF debt repayment schedule has been updated to include repayments from the UFB2 roll out (slide 43). I have revised my table accordingly



Repayment Year2025203020332036Total


Percentage to Repay15%18.5%29.4%37.1%100%


Dollars to Repay$85.3m$104.7m$166.7m$210.2m$566.9m


Discount Rate Divisor: 5.5% discount rate (FY2020 perspective)1.2931.6191.9012.232


PV Dollars to Repay (FY2020 perspective)$69m$65m$88m$94m$316m


Discount Rate Divisor (corrected): 5.5% discount rate (FY2020 perspective)1.3071.7082.0062.355


PV Dollars to Repay (FY2020 perspective, corrected)$65m$61m$83m$89m$298m



Note

I have preserved my uncorrected calculations because other posts further down in this thread now reference those (wrong) figures. It would be confusing if those sent back to look at this post could not find the wrong figures the subsequent posts have referenced.

At EOFY2020 there were 444.492m Chorus shares in issue. So to work the future CFH capital repayments into today's Present value of Chorus shares, you have to reduce the value of Chorus shares by:

$316m / 444.492m = 71cps

Corrected Calculation: $298m / 444.492m = 67cps

This is the amount that must be taken off the value of CNU based on earnings potential to adjust for the debt repayment schedule.

SNOOPY

[Snoopy]

Potentially we have a a very significant drop in CAPEX coming through, notwithstanding the fact that UFB2 and UFB2+ and the Rural Broadband Initiative (in partnership with Vodaphone) are still rolling out. FY2023 and FY2024 look like they will become comparatively sweet years for Chorus, before a very heavy debt repayment schedule disrupts things. It strikes me that with such a systematic change coming onto the horizon, a Buffett type analysis of Chorus today will be more an historical curiosity, rather than a forecasting tool for the future. But let's do it anyway :-)


Chorus is the largest builder and operator of the fibre broadband telecommunications network in New Zealand. Of the 33 identified 'build regions', Chorus has the contract to build 24 of them. Fibre broadband networks not being built by Chorus include:

1/ Greater Christchurch being built by 'Enable' (a wholly owned subsidiary of the Christchurch City Council)
2/ Whangarei and Kaipara being built by 'Northpower' (Northpower is owned by consumers connected to Northpower's Electricity network).
3/ Hamilton, Cambridge, Te Awamutu, Tauranga, Tokoroa, Hawera, New Plymouth and Whanganui already built by 'Ultra Fast Fibre' (owned by Australian firm 'First Sentier Investments')

All of the above are part of a 'Regulatory Asset Base' (RAB) for NZs partially government funded Fixed Fibre Local Access Service (FFLAS).

Chorus is also the owner operator of the legacy copper telecommunications network which is present over the whole country. Chorus is a regulated wholesaler of telecommunications services for many retail partners including Vodaphone, Spark, 2degrees, Vocus, Trustpower and Sky.

By FY2023 Chorus will have made the transition from being a 'builder of broadband' and an 'operator of telecommunications fixed networks' to a 'fully regulated operator of networks'. Despite being a legislated monopoly network provider, Chorus continues to roll out an innovation program for their customers. Over FY2020 they launched:

1/ The new 'Hyperfibre' service. This is new network technology that allows 2Gbps or 4Gbps symmetric connection speeds.
2/ A new streamlined fault restoration service, instigated for small business.
3/ A streamlined connection service to connect widely dispersed customers at a single network handover point, which will improve customer management for retailers.
4/ A WiFi service that does not require retailer supplied routers.

Looking further out, Chorus are considering the implementation of 'Wi Fi 6', which is expected to deliver a big step up in performance in speed and latency. 'Wi Fi 6' is an effective prospective rival to mobile network 5g services.

Conclusion: As a monopoly fibre broadband provider, that is expected to maintain a bandwidth and latency edge of competing fixed mobile offerings from Spark and Vodaphone (both minor players in terms of market share) , this test result is a PASS

SNOOPY

[Snoopy]

Earnings per share are calculated by taking the normalised net profit after tax and dividing that by the number of shares on issue at the end of the financial year.

FY2016: ($91m + 0.72( $3m+$9m )) / 400.800m = 24.9cps

FY2017: ($113m + 0.72( $6m+$3m+$11m+$6m )) / 411.002m = 32.0cps

FY2018: ($85m + 0.72( $5m+$5m+$7m)) / 429.641m = 22.6cps

FY2019: ($53m + 0.72( $1.5m+$2m+$3m+$3m+$6m+$2m )) / 439.288m = 14.9cps

FY2020: ($52m + 0.72( $2m+$6m+$5m+$2m+$1m+$5m+$2m )) / 444.492m = 15.4cps

Notes

1/ To normalise the FY2016 result, remove a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap. The interest rate exposure is only partially hedged, explaining the need for a reset. (ref AR2017 p20). A further $9m interest charge relating to the part amortisation of a now defunct (from 9th December 2013) hedge residual, was added back

2/ Normalised FY2017 result adds back $6m in incremental Consultancy fees spent on strategic review of the regulatory framework and Chorus itself. Removed a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). Further interest charges of $11m + $6m, based on the ineffectiveness of the EMTN cashflow hedge have been added back.

3/ Normalised FY2018 result removes a $5m labour restructuring charge, removed a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). A further interest charge of $7m, based on the amortisation of the ineffectiveness of the EMTN cashflow hedge (closed out on 9 December 2013), has been added back.

4/ Normalised FY2019 removes $1,5m of labour restructuring costs, $2m of consultants fees investigating the forthcoming regulatory regime, and $3m from a set aside implementation charge to get the new regulatory framework in place. Removed a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). A further interest charge of $6m, based on the ineffectiveness of the EMTN cashflow hedge has been added back. A $2m one off expense for restructuring two forward dated interest rate swaps has also been removed.

5/ Normalised FY2020 removes a combined $2m Covid-19 relief payment for both Fibre and Copper broadband customers, a $6m increase in Covid-19 staff leave provisions and contractors to help make the transition to the new regulatory framework, a $5m payment to contracted service companies to help them through the lock-down periods, an incremental $2m increase in consultancy fees related to the regulatory transition, a $1m one off expense for restructuring forward dated interest rate swaps, Removed a $5m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). A final further interest charge of $2m, based on the ineffectiveness of the EMTN cashflow hedge has been added back, and at EOFY2020 and, this 9 December 2013 transaction, was finally 'closed out' of the account books.

Lots of adjustments made to gather a normalised result free from one offs and loan adjustments that have nothing to do with the underlying operational performance of the company. The result is that Chorus has performed 'better than you think'. Nevertheless there have been more downs that ups in the NPAT earnings per share trend, which, if anything is down. Warren would not be impressed!

Conclusion: FAIL TEST

SNOOPY

[Snoopy]

Normalised profit is divided by shareholders equity at the end of the financial year


FY2016: $99.6m / $871m = 11.4%

FY2017: $131.7m / $944m = 14.0%

FY2018: $97.2m / $1,022m = 9.5%

FY2019: $65.6m / $979m = 6.7%

FY2020: $68.6m / $927m = 7.4%

At no time over the last five years has 'Return On Equity' exceeded 15%

Conclusion: FAIL TEST

[Snoopy]

'Net Profit Margin' is the 'Normalised Net Profit After Tax' divided by 'company sales' over the financial year


FY2016: $99.6m / $1,008m = 9.9%

FY2017: $131.7m / $1,040m = 12.7%

FY2018: $97.2m / $990m = 9.8%

FY2019: $65.6m / $970m = 6.8%

FY2020: $68.6m / $959m = 7.2%

Is there an explanation for what appears to be a 'peak value' in FY2017? This was the first year when every region (except Gisborne and Kapiti) exceeded the government's long term connection target of having more than 20% of customers who had a fibre broadband line cut across their driveway sign up. One could argue that a certain 'economy of scale' balancing off new income and expenditure rolling out new cable came to fruition. It was also a year where the net total number of lines under management went up (more fibre was being connected than copper disconnected). So why has the revenue continued to track down in subsequent years, even though the penetration of broadband internet continues to rise? The answer is that when a customer upgrades their 'copper line based internet' to fibre, or to a fixed mobile plan, those customers become 'unattached' to the Chorus laid fibre network, and so cease being Chorus customers. Thanks to the success of the other monopoly sanctioned fibre broadband suppliers: 'Enable' in greater Christchurch and 'Ultra fast Fibre' in Hamilton and Tauranga in particular; and Spark and Vodaphone pushing 'fixed mobile', there are a lot of customers to lose during the upgrade process. So to keep the nationwide picture moving forwards for Chorus, future 'upselling' opportunities to the retail customers that Chorus do retain will be necessary. So far there is no evidence that the amount of upselling (putting customers on faster plans with more data for example) is making up for the decline in copper line customers.

Conclusion: FAIL TEST

SNOOPY

[Snoopy]

A cursory assessment of Chorus would suggest this is the place to put your money. The internet is the growth engine of the 21st century. Fibre is the best fast technology and Chorus is a monopoly provider of fibre. What is there not to like?

A closer Buffett style inspection tells a very different story. Underlying 'earnings per share' have roughly halved over the last three years. If you believe the company's own cost of capital assessment, earnings now barely cover its cost of capital. And net profit margins remain under intense pressure. We have to bear in mind that Buffett assessments are not friendly towards capital intensive companies. So it is no surprise that under the spotlight of the Buffett criteria, Chorus sings a woeful song.

Chorus last traded on market at a price of $7.76. Based on FY2020 normalised earnings, this is an historical PE ratio of 46.7. That seems incongruous with a low growth company with margins under pressure. Is this evidence that 'Mr Market' truly has gone mad? The hindsight of history may yet prove this to be true. At these prices, you would have to assume that Warren Buffett would be looking at a different home for his investment cash.

Conclusion: Warren would give Chorus the big 'thumbs down' as an investment prospect

P.S. There is a postscript to the Chorus story. It is a company in transformation that is not reflected in this 'historical' Buffett style analysis. Roll out of the fibre cable nationwide is nearing completion. With future calls on capital drastically reduced, but depreciation on the network assets remaining high, from FY22 we will transition to a dividend policy based on a window emerging where cashflow will greatly exceed profitability. In Chorus's own words from the FY2021 result presentation, Slide 21:

"From FY22 we will transition to a dividend policy based on a pay-out range of free cash flow▪free cash flow will be defined as net cash flows from operating activities minus sustaining capex."

It is the expectation of significantly increased dividends well above sustainable declared profits that has investors salivating. What kind of dividends might shareholders expect from FY2022 onwards? The answer to that question will drive the direction in which my 'Chorus' research will now head.

SNOOPY

[FTG]

Very interesting analysis Snoopy. Thank you for making the time to taking this look under the bonnet.

[Snoopy]

P.S. There is a postscript to the Chorus story. It is a company in transformation that is not reflected in this 'historical' Buffett style analysis. Roll out of the fibre cable nationwide is nearing completion. With future calls on capital drastically reduced, but depreciation on the network assets remaining high we have a from FY22 we will transition to a dividend policy based on a window emerging where cashflow will greatly exceed profitability. In Chorus's own words from the FY2021 result presentation, Slide 21:

"From FY22 we will transition to a dividend policy based on a pay-out range of free cash flow▪ free cash flow will be defined as net cash flows from operating activities minus sustaining capex."
A company that is to remain a going concern must generally match their 'capital expenditure' to their 'depreciation charges'. This will ensure that as their capital equipment wears out, new equipment is brought into the 'production line' (in the most general sense) to ensure that the company can continue to operate their services indefinitely into the future. However, there are occasions where this 'rule' can be broken. In the case of new and long life assets, there may be several years where depreciation of the equipment, on paper, greatly exceeds the capital expenditure required to maintain it.
It is the expectation of significantly increased dividends well above sustainable declared profits that has investors salivating. What kind of dividends might shareholders expect from FY2022 onwards? The answer to that question will drive the direction in which my 'Chorus' research will now head.


A company that is to remain a 'going concern' must generally match their 'capital expenditure' to their 'depreciation charges'. This will ensure that as their capital equipment wears out, new equipment is brought into the 'production line' (in the most general sense) to ensure that the company can continue to operate their services indefinitely into the future. However, there are occasions where this 'rule' can be broken. In the case of new and long life assets, there may be several years where depreciation of the equipment, on paper, greatly exceeds the capital expenditure required to maintain it. With the fibre broadband network largely rolled out, and completion scheduled over FY2022, this is the situation that Chorus finds itself in. A future benefit to shareholders is that Chorus have indicated that from FY2022, they will be in a position where they can pay out some of this 'surplus cashflow' to shareholders in the form of increased dividends. But by how much might dividends increase? An investigation into the changing Depreciation and Capex balance at Chorus might provide a clue.

A clear distinction between 'sustaining' capital expenditure and 'growth' capital expenditure will give a better indication of 'free cashflow' payout potential. FFLAS (Fixed Fibre Local Access Services) is the main area of growth expenditure as Fibre Broadband is rolled out throughout the country. There is little growth expenditure in the legacy Copper wire based network. This is being run down in favour of more modern technology (Fibre and Mobile- the latter not operated by Chorus).

Over time I would expect the depreciation of the fibre network to go slightly higher as the final assets in that network are completed. Likewise I would expect depreciation in the Copper legacy network to reduce as parts of the network are retired. However, in my forecast years I have not attempted to guess what these depreciation changes will be. Instead I expect my underestimated fibre depreciation ( I am modelling unchanged depreciation) will be close to being cancelled out by an overestimated copper network depreciation figure (which I have modelled as unchanged).



Operational Year (F suffix means forecast)FY2016FY2017FY2018FY2019
FY2020FY2021FFY2022FFY2023FFY2024F








Overall Revenue$1,008m$1,040m$990m$970m$959m$?m$?m$?m$?m


Fibre Revenue (5)$133m$202m$276m$368m$468m$592m$715m$735m$755m








Total Depreciation$263m$274m$283m$303m$319m$?m$?m$?m$?m


Depreciation: Fibre, Ducts, Manholes, Poles, Network Electronics$163m$178m$185m$198m$219m$219m$219m$219 m$219m


less Crown Funded Depreciation($15m)($21m)($22m)($25m)($27m)($27m)($ 27m)($27m)($27m)


equals Net Fibre Depreciation$148m$157m$163m$173m$192m$192m$192m$19 2m$192m








Total Gross Capital Expenditure$593m$639m$810m$804m$663m$690m (6)$514.9m (6)$448.2m (6)$410.9m (6)

202m
Total Capital Expenditure FFLAS$486m$503m$620m$664m$548m (3)$575m (1)$399.9m (2)$333.2 (2)$295.9m (2)


less Sustaining Capital Expenditure FFLAS (4)$72m$72m$72m$72m$72m


equals Net CAPEX FFLAS for growth {A}$476m$503m$327.9m$261.2m$223.9m


Total Capital Expenditure Copper$67m$79m$132m$81m$55m$55m$55m$55m$55m


less Sustaining Capital Expenditure Copper (4)$54m$54m$54m$54m$54m


equals Net CAPEX Copper for growth {B}$1m$1m$1m$1m$1m


Total Capital Expenditure BackOffice$40m$57m$58m$59m$60m$60m$60m$60m$60m


less Sustaining Capital Expenditure BackOffice (4)$60m$60m$60m$60m$60m


equals Net CAPEX BackOffice for growth {C}$0m$0m$0m$0m$0m


Total CAPEX for growth {A}+{B}+{C}$477m$504m$328.9m$262.2m$224.9m


Total Sustaining CAPEX $186m$186n$186m$186m$186m



Notes

1/ Forecast from HY2021 presentation: Slide 20
2/ These are the forecast 'Fibre Fixed Line Access Services' FFLAS 'Capital expenditure Proposals' as outlined in the 17th December 2020 market release on the 'Price Quality Expenditure Proposal Overview', Slide 10
3/ For FY2020, $186m of the total Capex for the year of $663m was defined as 'sustaining' (Full Year Result presentation, 24-08-2020, slide 25)
4/ From HY2021 presentation, Slide 19. 'Sustaining Capital Expenditure' excludes 'fibre connections', 'greenfield growth', 'customer retention payments' and 'UFB Communual' (the expansion and enhancement of the fibre network).
5/ Forecast revenue from 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2021 and FY2023 values interpolated).
6/ These totals are added from the constituent components comprising company estimates and my assumptions also in this table.

Potentially we have a a very significant drop in CAPEX coming through, notwithstanding the fact that UFB2 and UFB2+ and the Rural Broadband Initiative (in partnership with Vodaphone) are still rolling out. Yet consummate with this, on the incoming cashflow side, a fall in revenues is predicted. So what is the net effect of these two changes?

Chorus have not provided any forecast as to where they expect their non-fibre revenue to go over the next few years. I have inspected the five year revenue trends for 'copper connected revenue' and 'field services, value add network services and infrastructure' as two groups. The latter group I am forecasting constant revenue of $120m over FY2021 to FY2024 inclusive. The 'copper connected revenue', comprising 'copper based broadband', 'copper based voice' and 'data services copper' have over HY2021 already declined on an annualised basis (that means no further deterioration over FY2021) of $70m. So I am forecasting an $80m decline over FY2021, $70m over FY2022, $60m over FY2023 and $50m over FY2024. The diminishing decline rate I am modelling to take account of a slowing trend as easy conversions to fibre have happened already. My table of forecast 'total change of revenue' over the period of inetrest is as follows.



FY2021FFY2022FFY2023FFY2024F


Fibre Revenue$592m$715m$735m$755m


Non-Fibre Revenue$409m$339m$279m$229m


Total Revenue$1,001m$1,054m$1,014m$984m





Operational Year (F suffix means forecast)FY2016FY2017FY2018FY2019
FY2020FY2021FFY2022FFY2023FFY2024F





Overall Revenue {G}$1,008m$1,040m$990m$970m$959m$1,001m$1,054m$1,0 14m$984m



Total Gross Capital Expenditure {H)$593m$639m$810m$804m$663m$690m$514.9m$448.2m$41 0.9m


{G}-{H)$415m$401m$180m$166m$296m$311m$539m$566m$573m



The dividend guidance for FY2021 has already been announced: 25cps is to be expected (PRHY2021 Slide 21), The compares favourably to the two previous dividends of 10cps and 14cps, which sum to 24c, the payout relating to the previous year , FY2020. If a payout of at least 25cps is planned for FY2021, and that still allows Chorus to retain enough cashflow to run the business, then investors might consider that any incremental future cashflow might be available to boost dividends going forwards. If we consider that FY2021 forms a 'base' dividend rate year, and there are 444.401m Chorus shares on issue, then the incremental dividends over that base year we might expect from Chorus over FY2022, FY2023 and FY2024 are as follows:

FY2022: ($539m - $311m) / 444.041m = 51cps

FY2023: ($566m - $311m) / 444.041m = 57cps

FY2024: ($573m - $311m) / 444.041m = 59cps

I have rounded down those numbers to the nearest cent to take account of the fact that, in practise, the number of shares on issue may have increased as a result of the dividend reinvestment plan.

FY2023 and FY2024 look like they could become comparatively sweet dividend years for Chorus, before a very heavy debt repayment schedule disrupts things.

SNOOPY

[mikelee]

Is 5G really going to make much difference to Chorus' bottom line? Or would Spark benefit more from its uptake?

[Snoopy]

Is 5G really going to make much difference to Chorus' bottom line? Or would Spark benefit more from its uptake?


Interesting the way you phrased your question mikelee. You write as though 5G is a goal in itself, rather than a tool to achieve a task. I think that Chorus sees any task that requires 5G can equally well be matched in speed and local portability by Wi Fi capable terminals installed in homes and businesses, in a way that retailers no longer need put their own routers in a physical location to grab the end line customers' business. IOW Chorus are offering a locally portable service like 5G ('anything they can do we can do better') with superior peak time capacity and latency. Take that 5G providers!

As to where 5G itself is in the market, you may find the following comments from Chorus's AR2020 p9 of interest:

"Vodaphone NZ announced an intention to invest in 5G capability. 5G coverage was switched on in parts of Auckland, Wellington, Christchurch and Queenstown in December 2019. Vodaphone has said it hopes 25% of its broadband customers will migrate to its fixed wireless network and it will provide 5G fixed wireless services later in 2020. Using its 4G network, it offers fixed wireless plans in datacap tiers up to 600GB in major cities and urban regional centres,"

"Spark launched 5G in five provincial townships in late 2019. with fixed wireless broadband plans sold in three datacap tiers.: 'up to 60GB', 60GB to 120GB and 'more than 120GB'. In Auckland, Spark offers plans of up to 600GB on its 4G network. Spark announced the launch of 5G mobile and fixed wireless services in Palmerston North in July 2020, with four more centres to follow."

I don't know if Spark will look to emulate Vodaphone and get 25% of their customers onto '5G fixed mobile', but I don't see why they wouldn't want that. If one quarter of NZ's broadband business migrates to mobile, this surely will have a big effect in Chorus - but even that scenario wouldn't be terminal. Even mobile data services use Chorus for the back-haul part of any messages communication journey. Exactly how much Chorus charges for these back-haul services, on a per customer basis, I would love to know!

The likes of Spark and Vodaphone will surely benefit from the saving of any wholesale fees they don't have to pay to Chorus. But I guess there will be a point when the number of customers on one 'fixed wireless broadband' node will degrade the service so much that many end line customers will consider moving back to Chorus. Where that point is, I guess, will depend on the usage patterns of those end line customers. The problem for the likes of Spark and Vodaphone is that what 5G level of service is regarded as 'acceptable' will very likely be a moving target.

SNOOPY

[Snoopy]

A very puzzling stock on a ludicrous PE ratio which cant be explained.


PE ratio is not the right way to value Chorus - capex is still high, but will end in the next 1-2 years, depreciation (non-cash) is high and increasing, and this diminishes the E. Free cash flow will increase substantially once the capex ends

Discl - recently invested

Time to demystify the Chorus share price for Couta, and quantify what free cashflow benefits we shareholders might see for RRR.



Note: This quoted post is from 2655 which I have subsequently reassessed and reworked. However, I have kept my original estimates of the potential increase in dividends here as even though I now believe these to be too low, I could be wrong, and it is interesting to look at another point of view.

A company that is to remain a 'going concern' must generally match their 'capital expenditure' to their 'depreciation charges'. This will ensure that as their capital equipment wears out, new equipment is brought into the 'production line' (in the most general sense) to ensure that the company can continue to operate their services indefinitely into the future. However, there are occasions where this 'rule' can be broken. In the case of new and long life assets, there may be several years where depreciation of the equipment, on paper, greatly exceeds the capital expenditure required to maintain it. With the fibre broadband network largely rolled out, and completion scheduled over FY2022, this is the situation that Chorus finds itself in. A future benefit to shareholders is that Chorus have indicated that from FY2022, they will be in a position where they can pay out some of this 'surplus cashflow' to shareholders in the form of increased dividends. But by how much might dividends increase?



Operational Year (F suffix means forecast)FY2016FY2017FY2018FY2019
FY2020FY2021FFY2022FFY2023FFY2024F








Overall Revenue {G}$1,008m$1,040m$990m$970m$959m$857m$755m$735m$71 5m


Total Gross Capital Expenditure {H)$593m$639m$810m$804m$663m$690m$514.9m$448.2m$41 0.9m


{G}-{H)$415m$401m$180m$166m$296m$167m$240.1m$286.8m$30 4.1m



The dividend guidance for FY2021 has already been announced: 25cps is to be expected (PRHY2021 Slide 21), The compares favourably to the two previous dividends of 10cps and 14cps, which sum to 24c, the payout relating to the previous year , FY2020. If a payout of at least 25cps is planned for FY2021, and that still allows Chorus to retain enough cashflow to run the business, then investors might consider that any incremental future cashflow might be available to boost dividends going forwards. If we consider that FY2021 forms a 'base' dividend rate year, and there are 444.401m Chorus shares on issue, then the incremental dividends over that base year we might expect from Chorus over FY2022, FY2023 and FY2024 are as follows:

FY2022: ($240.1m - $167m) / 444.041m = 16cps

FY2023: ($286.8m - $167m) / 444.041m = 26cps

FY2024: ($304.1m - $167m) / 444.041m = 30cps

I have rounded down those numbers to the nearest cent to take account of the fact that, in practise, the number of shares on issue may have increased as a result of the dividend reinvestment plan.

FY2023 and FY2024 look like they could become comparatively sweet dividend years for Chorus, before a very heavy debt repayment schedule disrupts things.


One party that is about to come to an end for Chorus shareholders is fully imputed dividends. The last couple of years have seen dividend payouts far higher than underlying earnings. Over FY2020, dividends amounted to 13.5cps + 10cps = 23.5cps, verses underlying earnings of 16.6cps. Full imputation has been able to be maintained so far because in previous years Chorus built up a surplus of imputation credits. The latest reported imputation credit balance was $74m (AR2020 p56). This $74m represents tax already paid on:

$74m / 0.28 = $264m of earnings

In 'earnings per share' terms this is: $264m / 444.041m = 59cps

That means there are certainly enough imputation credits to cover FY2021 dividends, and maybe even dividends for FY2022. But if the level of dividends really ramps up, then it won't take long to empty the imputation credit piggy bank.

I don't know exactly what track dividends will take under the new distribution policy. What we do know is (from PRHY2021 slide 21):

"From FY22 we will transition to a dividend policy based on a pay-out range of free cash flow ▪free cash flow will be defined as net cash flows from operating activities minus sustaining capex"

Note there is no commitment to pay out 100% of free cashflow like the power companies. Unlike the power companies there will be a need to keep up with technological developments, plus there is the first tranche of a big debt repayment coming in FY2025 ($85.3m or $85.3m/444.041m = 19.2cps). My judgement would be a good meaningful increase of dividend of 10cps, bringing annual dividends to 35cps from FY2022 onwards. However based on three years of such dividend payouts (FY2022, FY2023 and FY2024), I am predicting the dividend imputation rate will fall from 100% to just 50%.

For a long life asset like the fixed broadband network, which carries some technology and regulatory risk, and taking into account the current low interest rate environment, I would judge a gross dividend yield of 5% to be an acceptable 'Mom & Dad' investor return, Consider that my forecast 35c dividend will be paid only half imputed. This implies a 'fair value' Chorus share price of:

( 17.5/0.72 + 17.5 ) / SP = 0.05 <=> SP = (24.31 + 17.5) / 0.05 => SP = $8.36

Such a dividend would still allow enough cashflow to pay down that first tranche of FY2025 debt and still have 7.8cps ( or 0.078 x 444m = $35m) available for 'network enhancement investment' without affecting company debt levels. On Friday the Chorus share price closed at $7.30, which is 12% below my 'fair value' price based on the revised dividend outlook. My accumulation target is normally 20% below fair value for these utility type shares. Should the CNU share price fall below $6.70, I would suggest that might be a good accumulation point for income investors.

SNOOPY

[Snoopy]

Guess I'll have to do the work myself. I found a summary, so my understanding is that the $929mill funding from CFI is split 50/50 with debt and equity securities.
The debt half is interest free but gets repaid 2025 2030 2033 and 2036 18.5% 18.5% 27.7% 35.4% of the debt.

The equity securities aren't the great dilution I had surmised, they are preference shares with no voting rights so more like a debt security, but the dividend rate on the CFH1 Equity Securities (when payable) is equal to a reference rate (based on the 180 day bank bill rate in New Zealand) plus a margin of 6% per annum. So probably 6% or less depending on interest rates going negative or not. Dividends are payable six-monthly in advance, and the dividend payment dates will be aligned with the dividend payment dates for Chorus Shares.
The number of CFH1 Equity Securities on which the dividend is payable at any date will be reduced by the number of CFH1 Equity Securities which have been redeemed by Chorus up to that date (the redemption terms are described below).
The table below shows the number of CFH1 Equity Securities that will attract dividends
(unless redeemed earlier):




Repayment Year2025203020332036


Cumulative CFH Equity on which dividends become payable$86m$172m$300m$465m


Cumulative CFH Equity %ge on which dividends become payable18.5%36.9%64.6%100%



I guess it is a matter of going back and seeing whether the interest on the preference shares will significantly impact cashflow or not. 2036 is a long way away.


Somehow I am expecting interest rates to have risen above zero by FY2025 Aaron! If they rise to 2%, that would equate to a rate that Chorus has agreed to pay of 6% + 2% = 8%
On $86m worth of 'preference shares', that equates to a payment of:

0.08 x $86m = $6.88m or $6.88m / 444.041m = 1.5cps

That sounds affordable to me, although with borrowing rates as low as they are, it would make sense to replace the Crown Financed preferences share, with borrowed money at a much lower interest rate than 8%!

SNOOPY

[Snoopy]

As a result of LLU and regulation in general the only winners with Telco's these days are consumers. We demand newer and better products ($billions of capex) and don't want to pay much for it (less EBITDA) and don't want to be contracted (no switching costs).


There was a shock to the CNU share price on Friday as it fell from $7.49 to $7.30, a drop of 2.5%. I thought this might be connected with going ex a 10.5 dividend but no, that happened on 15th March. What did happen on Friday was this:

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/CNU/369756/343108.pdf

I have to admit I find the flow on effects of these regulatory decisions, or potential regulatory decisions difficult to comprehend.

I think what this report is saying is that Chorus Assets have an underlying value of $5.5b to $6b. But due to proposed price controls, the value of the network will be reduced to only $4b because of regulatory constrained earnings. The report represents this as the company potentially having a $1.5b 'financial loss asset' on the books. If Chorus has to declare a $1.5 billion dollar loss because of regulatory price controls on the fibre network assets, it won't put the company at risk because it is "non cash". Nevertheless, such a loss will have to be shown 'on the books', and the interesting thing is how it flows through (Slide 5 of the presentation).

The copper network is immediately written down from $300m to zero. The phasing out of the copper network is not an unexpected thing to happen. But if Chorus need to write it down to zero, does this mean the remaining copper will be ripped up as soon as possible? If Chorus is 'revenue constrained', I think what they are saying is that they will no longer be able to afford any expenditure on the copper network. Ironically, the network being written down to zero will correspond with price controls being taken off copper. So are Chorus saying that there is no level of price access that will make copper viable, even in a phase out transition sense? IOW Chorus will be disbanding their 'fix-it' crews and allowing the copper network to fall apart?

Even the replacement fibre network is potentially being hit with a $200m write down for the glass wires alone. All in all it seems that regulatory pricing has a flow on effect to Chorus's assets that may particularly effect Chorus's copper customers going forwards. Have I got that right?

SNOOPY

[BlackPeter]

The copper network is immediately written down from $300m to zero. The phasing out of the copper network is not an unexpected thing to happen. But if Chorus need to write it down to zero, does this mean the remaining copper will be ripped up as soon as possible? If Chorus is 'revenue constrained', I think what they are saying is that they will no longer be able to afford any expenditure on the copper network. Ironically, the network being written down to zero will correspond with price controls being taken off copper. So are Chorus saying that there is no level of price access that will make copper viable, even in a phase out transition sense? IOW Chorus will be disbanding their 'fix-it' crews and allowing the copper network to fall apart?

Even the replacement fibre network is potentially being hit with a $200m write down for the glass wires alone. All in all it seems that regulatory pricing has a flow on effect to Chorus's assets that may particularly effect Chorus's copper customers going forwards. Have I got that right?

SNOOPY

It is my understanding that Chorus is obliged to maintain their copper network for any customer who does not have access to fibre, i.e. as long as the fibre rollout is not completed there will be parts of the copper network Chorus must maintain - and I suppose that these remaining parts of the copper network will as well generate revenue.

I assume as well that any price control is only taken off from copper for customers who have the option to go fibre ...

However - if & when the fibre roll out is completed and every customer had a chance to swap over to fibre than yes, I think your assessment is correct.

[LaserEyeKiwi]

Interesting the way you phrased your question mikelee. You write as though 5G is a goal in itself, rather than a tool to achieve a task. I think that Chorus sees any task that requires 5G can equally well be matched in speed and local portability by Wi Fi capable terminals installed in homes and businesses, in a way that retailers no longer need put their own routers in a physical location to grab the end line customers' business. IOW Chorus are offering a locally portable service like 5G ('anything they can do we can do better') with superior peak time capacity and latency. Take that 5G providers!

As to where 5G itself is in the market, you may find the following comments from Chorus's AR2020 p9 of interest:

"Vodaphone NZ announced an intention to invest in 5G capability. 5G coverage was switched on in parts of Auckland, Wellington, Christchurch and Queenstown in December 2019. Vodaphone has said it hopes 25% of its broadband customers will migrate to its fixed wireless network and it will provide 5G fixed wireless services later in 2020. Using its 4G network, it offers fixed wireless plans in datacap tiers up to 600GB in major cities and urban regional centres,"

"Spark launched 5G in five provincial townships in late 2019. with fixed wireless broadband plans sold in three datacap tiers.: 'up to 60GB', 60GB to 120GB and 'more than 120GB'. In Auckland, Spark offers plans of up to 600GB on its 4G network. Spark announced the launch of 5G mobile and fixed wireless services in Palmerston North in July 2020, with four more centres to follow."

I don't know if Spark will look to emulate Vodaphone and get 25% of their customers onto '5G fixed mobile', but I don't see why they wouldn't want that. If one quarter of NZ's broadband business migrates to mobile, this surely will have a big effect in Chorus - but even that scenario wouldn't be terminal. Even mobile data services use Chorus for the back-haul part of any messages communication journey. Exactly how much Chorus charges for these back-haul services, on a per customer basis, I would love to know!

The likes of Spark and Vodaphone will surely benefit from the saving of any wholesale fees they don't have to pay to Chorus. But I guess there will be a point when the number of customers on one 'fixed wireless broadband' node will degrade the service so much that many end line customers will consider moving back to Chorus. Where that point is, I guess, will depend on the usage patterns of those end line customers. The problem for the likes of Spark and Vodaphone is that what 5G level of service is regarded as 'acceptable' will very likely be a moving target.

SNOOPY

What exactly do you mean by rolling out wifi6? My understanding is that wifi 6 is a router technology that improves wifi speeds within a household or business, but is still being served by a fibre connection. In that regards it is not competing with fixed wireless broadband at all, which also offers a wifi router for a household or business (but bypasses a Chrous supplied fibre connection).

[Snoopy]

What exactly do you mean by rolling out wifi6? My understanding is that wifi 6 is a router technology that improves wifi speeds within a household or business, but is still being served by a fibre connection.


I think your understanding is correct LEK. But if I may turn into a Chorus parrot for a moment, From p7 of AR2020

"With our new Wi-Fi capable fibre terminals installed in a growing number of homes and businesses, we've taken a new approach and co-developed a Wi-Fi service based on the detailed input from our retailers. The proposed new service will remove the need for retailers to dispatch their own routers to customers and enable customers to get their broadband up and running almost straight away. This could in turn reduce the retail cost of broadband for short term customer connections, because retailers would no longer need to recover the cost of a router over a short time-frame."

"We're taking a close interest in the release of the new Wi Fi standard Wi Fi 6. Wi Fi 6 capable devices , like routers and mobile phones , are now available and can deliver a big step up in WiFi performance with enhanced speed and reduced latency. As well as enabling better home broadband performance, Wi Fi 6 is being seen as a potent alternative to 5G in enterprise and other private environments, where cost effective capacity and support for a large number of devices is important. We're exploring the different roles Wi Fi 6 might play in complementing the unlimited capacity provided by our fibre access products."

I imagine the kind of thing Chorus are talking about here might be if you have a large organisation like a hospital, and staff are here and there attending to different patients, Chorus offers the ability to link to a series of individuals mobile phones, wherever they might be in a scrambling megalopolis of hospital buildings. Likewise the medical staff member has in effect a mobile internet connection to the medical scanning department, blood analysis department and specialist consultant all at once, with those on 'the other end of the line' spread somewhere else throughout the hospital complex at their fingertips. No mobile phone backhaul technology is used, but our medical person still has the convenience of their own mobile phone interface.



In that regards it is not competing with fixed wireless broadband at all, which also offers a wifi router for a household or business (but bypasses a Chrous supplied fibre connection).


The Chorus quote would suggest the wi fi router is built into the Chorus on site circuits (unlike fixed wireless broadband). However, Chorus aren't talking about competing with fixed broadband here with WiFi. Instead Chorus is looking to compete with the mobile side of the mobile business by offering a faster service between mobile phones with less latency, albeit within a limited geographical area. That's how I read what Chorus is saying about Wi Fi 6.

SNOOPY

[Zaphod]

My interpretation of that statement is that they are integrating their ONT with their own Wi-Fi 6 capable router, instead of relying upon the RSP supplying the router. Phones would still primarily use cellular connections outside of the office/home, but use Wi-Fi 6 back in the office/home instead of relying purely on 5G (but let's face it, who would use 5G 100% of the time anyway? Most homes/offices provide Wi-FI).

Mobile providers could in theory use VoWiFi for calls if they support it (e.g. 2DM). Although most hospitals & businesses provide their own distributed & fiinely tuned Wi-Fi network whose design is vastly superior to anything that would be provisioned by an integrated ONT/Router in a single location.

In summary, this doesn't appear to be anything different from what is already used, just Chorus providing the Wi-Fi router instead of the RSP.

[Snoopy]

My interpretation of that statement is that they are integrating their ONT with their own Wi-Fi 6 capable router, instead of relying upon the RSP supplying the router. Phones would still primarily use cellular connections outside of the office/home, but use Wi-Fi 6 back in the office/home instead of relying purely on 5G (but let's face it, who would use 5G 100% of the time anyway? Most homes/offices provide Wi-FI).

Mobile providers could in theory use VoWiFi for calls if they support it (e.g. 2DM). Although most hospitals & businesses provide their own distributed & fiinely tuned Wi-Fi network whose design is vastly superior to anything that would be provisioned by an integrated ONT/Router in a single location.

In summary, this doesn't appear to be anything different from what is already used, just Chorus providing the Wi-Fi router instead of the RSP.


I think the important qualifying comment is:

"where cost effective capacity and support for a large number of devices is important."

Wi Fi 6 is not offering anything that 5G Mobile cannot do. Chorus are just hinting that there is a limitation of 5G, and that is it is relatively capital intensive when you want a large number of connections,or a smaller number of connections sharing huge amounts of data. Chorus are saying that in these circumstances Wi Fi 6 will be faster than 5G and provide a two way signal with superior latency to 5G.

I don't know if a hospital is a good example to use. I imagined that scans could be data intensive and there would be many personnel on one site, but distributed around that site, which is why I chose it as an example. You may be right and that the typical hospital have already designed their own superior on site communication network that is just as good as Wi Fi 6. However, even if I am wrong with my particular example, the underlying Wi Fi 6 advantages are still there. I am sure you can imagine workplaces where Wi Fi 6 would offer real advantages over 5G.

The counterpoint big disadvantage is as you mentioned: no service outside the greater confines of 'the office'.

SNOOPY

[Snoopy]

My interpretation of that statement is that they are integrating their ONT with their own Wi-Fi 6 capable router, instead of relying upon the RSP supplying the router. the RSP.


There are quire a few buzzwords in this industry that makes it hard for outsiders to read through the tech talk.

For those that don't know, and I admit I didn't, ONT stands for 'Optical Network Terminal'. This device connects the fibre that has been wired to the outside of your house, to your modem. The ONT is a small white plastic box (180mm x50mm x 120mm) that will be placed on your internal wall.

RSP stands for 'Retail Service Provider' (I did know that one).

A couple of other phrases that keep coming up in the Chorus reports that I was a little vague about are 'Layer 1' and 'Layer 2' equipment. These are not explained in the Glossary at the back of the Annual Report. So for those that came in late:

Network Layer 1: Passive fibre optic network infrastructure – the physical fibre network assets which are essentially the unlit pipeline or pathway that the electronics use to transmit, otherwise known as dark fibre. These assets include ducting and optical fibre. Projected equipment life for depreciation purposes: 20 – 50 years

Network Layer 2: The electronics necessary to light the optical fibre or the means by which communication occurs down the Layer 1 pathway. These assets are located in central offices, points of interconnect and in the premises of end users. Projected equipment life for depreciation purposes: 5 – 12 years

SNOOPY

[zspoon]

There was a shock to the CNU share price on Friday as it fell from $7.49 to $7.30, a drop of 2.5%. I thought this might be connected with going ex a 10.5 dividend but no, that happened on 15th March. What did happen on Friday was this:

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/CNU/369756/343108.pdf

I have to admit I find the flow on effects of these regulatory decisions, or potential regulatory decisions difficult to comprehend.

I think what this report is saying is that Chorus Assets have an underlying value of $5.5b to $6b. But due to proposed price controls, the value of the network will be reduced to only $4b because of regulatory constrained earnings. The report represents this as the company potentially having a $1.5b 'financial loss asset' on the books. If Chorus has to declare a $1.5 billion dollar loss because of rgulatory price controls on teh fibre network assets, it won't put the company at risk because it is "non cash". Nevertheless, such a loss will have to be shown 'on the books', and the interesting thing is how it flows through (Slide 5 of the presentation).

The copper network is immediately written down from $300m to zero. The phasing out of the copper network is not an unexpected thing to happen. But if Chorus need to write it down to zero, does this mean the remaining copper will be ripped up as soon as possible? If Chorus is 'revenue constrained', I think what they are saying is that they will no longer be able to afford any expenditure on the copper network. Ironically, the network being written down to zero will correspond with price controls being taken off copper. So are Chorus saying that there is no level of price access that will make copper viable, even in a phase out transition sense? IOW Chorus will be disbanding their 'fix-it' crews and allowing the copper network to fall apart?

Even the replacement fibre network is potentially being hit with a $200m write down for the glass wires alone. All in all it seems that regulatory pricing has a flow on effect to Chorus's assets that may particularly effect Chorus's copper customers going forwards. Have I got that right?

SNOOPY

You’re quite off the mark on a lot of this Snoopy. Key aspect being confusing accounting books from the regulatory price setting process.

The financial loss asset represents an attempt to place a value on what Chorus has theoretically ‘unrecovered’ losses from building and operating the UFB network before demand/supply were more stable. The loss asset calculated becomes part of the RAB, which Chorus are able to make a return on (refer to the building blocks aka BBM methodology structure down the bottom).

Copper network has nil value in the PQ RAB because the PQ RAB is based on the concept of a regulated fibre service. Wholly copper assets do not flow into the RAB, because they are not calculating regulated allowable revenue on them as part of this process. Similarly, elements of the fibre network not presented in the RAB represent the fact that some ‘fibre’ assets support copper assets.

Any amounts not flowing in the RAB do not represent items that will be written down in the financial statements.

Would recommend looking at other NZ BBM regulated utilities to understand the structure of how the regulated return under BBM works - but recognise there are some concepts that are Chorus-unique, and for these you might need to sift back through previous announcements and commentary to better understand.

Edit: Also worth having a read through ComCom material on fibre regulation (warning: very dense material).

[Snoopy]

Would recommend looking at other NZ BBM regulated utilities to understand the structure of how the regulated return under BBM works - but recognise there are some concepts that are Chorus-unique, and for these you might need to sift back through previous announcements and commentary to better understand.

Edit: Also worth having a read through ComCom material on fibre regulation (warning: very dense material).


I have ferreted out the reference below:

https://comcom.govt.nz/__data/assets/pdf_file/0012/225012/Fibre-information-disclosure-and-price-quality-regulation-Proposed-process-and-approach-for-the-first-regulatory-period-15-September-2020.PDF



You’re quite off the mark on a lot of this Snoopy. Key aspect being confusing accounting books from the regulatory price setting process.

The financial loss asset represents an attempt to place a value on what Chorus has theoretically ‘unrecovered’ losses from building and operating the UFB network before demand/supply were more stable. The loss asset calculated becomes part of the RAB, which Chorus are able to make a return on (refer to the building blocks aka BBM methodology structure down the bottom).


p20 of my above referenced paper confirms you are correct:

"The initial PQ RAB (Price Quality Regulated Asset Base) will reflect the historical costs of investments incurred in providing FFLAS (Fixed Fibre Local Access Services), as well as a financial loss asset reflecting the value of ‘accumulated unrecovered returns’ in providing UFB FFLAS for the period starting on 1 December 2011 and ending on the close of the day immediately before the implementation date (the pre-implementation period)."

I do find this rather startling though. Chorus knew they were getting into a long term project. They knew it would be initially unviable in the sense that the infrastructure had to be rolled out before the demand caught up with it. In recognition of this the government in effect provided a very large interest free loan in the form of CIP debt and CIP preference shares for which no repayments of any kind were required until 15 years after the fibre roll out started. Granted this loan only covered about half the real cost of the roll out. But countering this was that Chorus were allowed to keep all income earned on the fibre network they only half paid for along the way. They also got to keep the profits from the legacy copper network, which will ultimately be superseded by fibre.

Effectively Chorus have an indefinite license to operate their fixed broadband network into the future, when it is at its most profitable.. And now we find they are to be further compensated for losses incurred in the establishment phase when they were fully aware of the kinds of risks they were taking at the beginning? That doesn't seem right.




Copper network has nil value in the PQ RAB because the PQ RAB is based on the concept of a regulated fibre service. Wholly copper assets do not flow into the RAB, because they are not calculating regulated allowable revenue on them as part of this process. Similarly, elements of the fibre network not presented in the RAB represent the fact that some ‘fibre’ assets support copper assets.

Any amounts not flowing in the RAB do not represent items that will be written down in the financial statements.


What you are saying is that the earnings capability of the Regulated Asset Base are a separate thing to the value of those assets in the financial statements. I am not sure I can accept that as true. For example, are you aware that 'Enable' - who have the job of doing what Chorus has done for much of the country - in Christchurch, regularly evaluate the value of its broadband network book value based on future earnings capacity? See Enable AR2020 Note 3 on Property Plant & Equipment:

"The UFB network Layer 1 and 2 assets, together with the Central Offices (collectively described as UFB network assets) were revalued to fair value as at 30 June 2020 based on a range provided by independent valuers Deloitte. Deloitte are considered to have the appropriate qualifications and experience in the fair value measurement of such assets. Deloitte considered that the discounted cash flow (DCF) methodology was the most appropriate method of valuation,"

Over FY2020, the underlying net profit at Enable of $11.320m, was boosted by $66.424m net of tax because of that (See Statement of Comprehensive Income). And yes that extra equity found its way onto the Enable balance sheet.

SNOOPY

[zspoon]

I have ferreted out the reference below:

https://comcom.govt.nz/__data/assets/pdf_file/0012/225012/Fibre-information-disclosure-and-price-quality-regulation-Proposed-process-and-approach-for-the-first-regulatory-period-15-September-2020.PDF

p20 of my above referenced paper confirms you are correct:

"The initial PQ RAB (Price Quality Regulated Asset Base) will reflect the historical costs of investments incurred in providing FFLAS (Fixed Fibre Local Access Services), as well as a financial loss asset reflecting the value of ‘accumulated unrecovered returns’ in providing UFB FFLAS for the period starting on 1 December 2011 and ending on the close of the day immediately before the implementation date (the pre-implementation period)."

I do find this rather startling though. Chorus knew they were getting into a long term project. They knew it would be initially unviable in the sense that the infrastructure had to be rolled out before the demand caught up with it. In recognition of this the government in effect provided a vey large interest free loan in the form of CIP debt and CIP preference shares for which no repayments of any kind were required until 15 years after the fibre roll out started. Granted this loan only covered about half the real cost of the roll out. But countering this was that Chorus were allowed to keep all income earned on the network they only half paid for along the way. They also got to keep the profits from the legacy copper network, which will ultimately be superseeded by fibre.

Effectively Chorus have an indefinite license to operate their fixed broadband network into the future, when it is at its most profitable.. And now we find they are to be further compensated for losses incurred in the establishment phase when they aware fully aware of the kinds of risks they were taking at the beginning? That doesn't seem right.

What you are saying is that the earnings capability of the Regulated Asset Base are a separate thing to the value of those assets in the financial statements. I am not sure I can accept that as true. For example, are you aware that 'Enable' - who have the job of doing what Chorus has done for much of the country - in Christchurch regularly evaluate the value of its broadband network book value based on future earnings capacity? See Enable AR2020 Note 3 on Property Plant & Equipment:

"The UFB network Layer 1 and 2 assets, together with the Central Offices (collectively described as UFB network assets) were revalued to fair value as at 30 June 2020 based on a range provided by independent valuers Deloitte. Deloitte are considered to have the appropriate qualifications and experience in the fair value measurement of such assets. Deloitte considered that the discounted cash flow (DCF) methodology was the most appropriate method of valuation,"

Over FY2020, the underlying net profit at Enable of $11.320m, was boosted by $66.424m net of tax because of that (See Statement of Comprehensive Income'. And yes that extra equity found its way onto the Enable balance sheet.

SNOOPY

The factors you referred to are all valid - it’s also worth noting it is not just Chorus with a financial loss asset as part of their RAB. Ultimately the ComCom will determine what a ‘fair’ return is for the other LFCs and Chorus - and they are able to consider all of the points above in making this determination. They ultimately could have said ‘sorry buddies, tough luck for you, no loss assets for any of the network builders’.

In terms of financial statement carrying amounts, you need to realise that Chorus carry their assets at cost. They could move to fair value, and would be able to revalue on a similar basis to Enable, thought noting there would be a range of different valuation techniques that an infrastructure provider could use to determine fair value and a DCF is just one of these options.

But what you need to understand is that Chorus is more complicated than Enable in that they provide a range of copper services (both broadband and voice), in addition to the fibre services.

The RAB does not represent Chorus’ entire asset base - just the assets that support their regulated services (or FFLAS as you identified above), hence it being the Regulated Asset Base. As part of any exercise to revalue the entirety of the asset base, assets not supporting fibre services (for example wholly copper services) would not be nil at fair value because they will, at least for the moment, continue to generate revenue. But this revenue is not subject to PQ regulation - this is the reason why these items are zero in the RAB.

It’s speculation as to what Chorus shifting to fair value would do to the carrying value of their whole asset base - but in any event it’s key to understand that Chorus’ fibre RAB represents a subset of their total asset base.

[Snoopy]

In terms of financial statement carrying amounts, you need to realise that Chorus carry their assets at cost. They could move to fair value, and would be able to revalue on a similar basis to Enable, though noting there would be a range of different valuation techniques that an infrastructure provider could use to determine fair value and a DCF is just one of these options.

But what you need to understand is that Chorus is more complicated than Enable in that they provide a range of copper services (both broadband and voice), in addition to the fibre services.

It’s speculation as to what Chorus shifting to fair value would do to the carrying value of their whole asset base - but in any event it’s key to understand that Chorus’ fibre RAB represents a subset of their total asset base.


I find it interesting that in a regulated industries, such as power and broadband delivery, there are perfectly acceptable alternative accounting methods for reporting how these businesses run. On the one hand we have the likes of 'Mercury Energy' and 'Enable Networks' who have a policy of revaluing their networks annually. OTOH we have 'Contact Energy' and 'Chorus' that both use historical cost. While acknowledging that even in their respective industry groups, neither pair is precisely comparable, there is enough common ground to make me wonder why the respective boards of directors have ended up taking such different reporting paths.

In the energy sector, the practical effect of the difference is startling. Mercury has been able to build new power stations without resorting to shareholders for more capital. Contact has green lighted two new power stations in the last ten years and has required a capital raise for each. Mercury is able to offer fully imputed dividends for shareholders. Contact Energy is not.

In fibre network operations, Chorus has been able to offer fully imputed dividends so far,. But given the new cashflow based dividend policy, this won't be able to continue for much longer. In the case of Enable, it has been loss making until just two years ago. So the dividend policy (bearing in mind that all dividends go to CCHL the fully owned commercial arm of the Christchurch City Council) hasn't been a forefront of the mind issue.

Superficially though, it would appear the revaluing of assets annually (provided they keep going up in value), produces far superior results than keeping assets on the books at cost. I would argue that by not revaluing asserts, both Contact and Chorus offer 'hidden value' that is not apparent in the accounts. If these businesses were sold, this hidden value would be converted into cash. However, given it is highly unlikely that either Contact or Chorus will ever divest their core assets (and why would they?) this hidden value looks to be locked up forever.

Nevertheless in an old 'value hunting hound' way, I currently feel like I am buying more value in purchasing either Chorus or Contact at todays market prices rather than the alternatives (and yes I do realise that a stake in Enable for a private individual is not for sale - but I do own a house in Christchurch so think of myself as an Enable shareholder).

SNOOPY

[Aaron]

Somehow I am expecting interest rates to have risen above zero by FY2025 Aaron! If they rise to 2%, that would equate to a rate that Chorus has agreed to pay of 6% + 2% = 8%
On $86m worth of 'preference shares', that equates to a payment of:

0.08 x $86m = $6.88m or $6.88m / 444.041m = 1.5cps

That sounds affordable to me, although with borrowing rates as low as they are, it would make sense to replace the Crown Financed preferences share, with borrowed money at a much lower interest rate than 8%!

SNOOPY

Sorry I haven't responded sooner, had to think first which takes time. Thanks for the analysis, I did make the effort to read the 2020 financial statements but wonder at note 6 CIP Securities it states UFB1 is rolled out 31/12/2019 and they received $924mill of the $929 allowed although CIP securities are only $461mill in the accounts. This is probably a silly question but if they have drawn down $924mill for UFB1 shouldn't that be what is owing. Where is the other $463mill or has it already been repaid? hard to jump in when you haven't been following the company's progress.

Points of interest for me are

1/connections are their business since 30/06/2015 connections have dropped 21% from 1,794,000 to 1,415,000 although turnover has only dropped by 5%. I guess inflation and more profitable connections. Definitely not a growth company but I wonder what sort of stable dividend can be provided in the future then your buy share price could be based off your desired yield.

2/ margins have been maintained but interesting to see "Customer retention assets" pop up in the Statement of Financial Position in 2018. This appears to be a way of taking marketing costs out of EBITDA and adding them into Depreciation and amortization. Financial massaging for the benefit of who financiers/investors? Probably a realization that wireless networks are real competition and they need to get off their ar**s and promote fibre. Spark had it all over them trying to move people off chorus's fixed line networks to their wireless network. I suspect marketing will need to be a bigger part of their business than they imagined and should be treated as a regular cost of business.

3/ What is the expected dividend per share now that the rollout is over.

I have tried to read and understand the annual report a bit, mostly the financial section but I just get more confused and more questions get raised as I realise how little I understand.

[Snoopy]

Sorry I haven't responded sooner, had to think first which takes time. Thanks for the analysis, I did make the effort to read the 2020 financial statements but wonder at note 6 CIP Securities it states UFB1 is rolled out 31/12/2019 and they received $924mill of the $929 allowed although CIP securities are only $461mill in the accounts. This is probably a silly question but if they have drawn down $924mill for UFB1 shouldn't that be what is owing. Where is the other $463mill or has it already been repaid? hard to jump in when you haven't been following the company's progress.


You are right about the accounts not being the easiest to follow. I am currently looking through the 'Enable' Annual Reports ('Enable' is responsible for the broadband roll out in Christchurch) to give me an alternative perspective on how others use this government subsidised broadband roll out model.

For those who don't know, and I didn't, 'Crown Fibre Holdings' (CFH) has now been renamed 'Crown Infrastructure Partners' (CIP). So when you see historical references to CFH they are one and the same as today's CIP.

The result of this renaming is that the government funded CIP Securities are the same thing as what used to be called the government funded CIF securities. If you remember back then Aaron, the UFB1 roll out amounted in an equal number of CIF (now CIP) debt securities and CIF (now CIP) equity securities being generated as the broadband roll out moved past more and more front gates. The equity securities were in the form of preference shares, not ordinary shares. Now it is more realistic to think of both the 'CIP debt' and 'CIP equity' together as part of a 'total debt package'. I think you will find the 'missing' $463m you asked about is because you haven't counted the so called 'CIP Equity' in the overall debt package.

The other point your post brings up is about the $461m debt securities not matching the 'missing' $463m of what I believe to be still on the books preference shares. During the supplementary UFB2 and UFB2+ roll outs there was some optionality on what mix of what CIP debt and CIP equity Chorus chose to take. I don't understand why the funding deal changed between UFB1 and UFB2. But my guess is that this is why the 'CIP debt' and 'CIP equity' (which is accounted for on the books as debt, despite the name) no longer match in dollar terms.

SNOOPY

[Aaron]

If you look at note 6 it shows both debt and equity securities represented by the $461mill in the Balance Sheet. My understanding that for every dollar of debt they also got a dollar of equity up to $929mill so they should match. As $461mill is roughly half of $924 it sounds like I have missed something.

Equity has been increasing but I think this was the DRP. I also don't think the CIP equity funding will show as equity until 2025?

Maybe some got paid back early or they include crown funding which reads like it was a gift from the NZ taxpayer being written off through depreciation.

maybe I am reading it wrong. Crown funding and CIP funding are combined on the statement of cashflows.

UFB1 build was completed in December 2019 to a total value of $924 million funding received. This was slightly below the $929 million allowed for under the programme,

[Snoopy]

If you look at note 6 it shows both debt and equity securities represented by the $461mill in the Balance Sheet.


Yep, my mistake. It looks like you are correct Aaron.



My understanding that for every dollar of debt they also got a dollar of equity up to $929mill so they should match. As $461mill is roughly half of $924 it sounds like I have missed something.


Like I said before. The UFB1 funding has a 1:1 match between loan money and preference share money. The UFB2/UFB2+ roll out has a slightly more flexible arrangement between the two which I think is the reason that the loan to preference share ratio is no longer quite 1:1.



Equity has been increasing but I think this was the DRP.


The 'Statement of Changes in Equity' (AR2020 p37) shows equity down from $979m to $927m over the year. The DRP did make a positive contribution of + $28m, as of course did the earnings + $52m. But those were more than wiped out by the total dividends paid of $104m (twice earnings for the year).



I also don't think the CIP equity funding will show as equity until 2025?


The way I read the arrangements with the preference shares, there is an option to convert those to ordinary shares from 2025. But the other option is simply to repay them, or perhaps more likely take on alternative debt at lower prevailing interest rates. I would suggest the latter is more likely.



Maybe some got paid back early or they include crown funding which reads like it was a gift from the NZ taxpayer being written off through depreciation.

maybe I am reading it wrong. Crown funding and CIP funding are combined on the statement of cashflows.

UFB1 build was completed in December 2019 to a total value of $924 million funding received. This was slightly below the $929 million allowed for under the programme,


That cashflow statement reads as though the CIP funding was only part of the Crown Funding. I thought the only crown funding that Chorus received was CIP! Maybe it is!

Note 7 shows how the Crown Funding is offset against Depreciation. But even if you take last years offset of $27m (AR2020 p51) and multiply it by ten (which will overestimate the total depreciation adjusted figure) that does not match the $463m of 'missing funding'. So something else must be going on.

If you refer back to AR2020 Note 6 p50, there is a sentence that says:

"The fair value (of CIP securities) has been calculated using discount rates from market rates at balance date and using Level 2 of the fair value hierarchy as described in note 20."

I have never heard of capital debt obligations being 'discounted' before. But I wonder if this is the missing piece of the disappearing debt puzzle?

SNOOPY

[Snoopy]

Points of interest for me are

1/connections are their business since 30/06/2015 connections have dropped 21% from 1,794,000 to 1,415,000 although turnover has only dropped by 5%. I guess inflation and more profitable connections. Definitely not a growth company but I wonder what sort of stable dividend can be provided in the future then your buy share price could be based off your desired yield.

3/ What is the expected dividend per share now that the rollout is over.


The drop in connections is, I believe, largely due to people swapping out copper broadband to fibre broadband in areas where the fibre has not been rolled out by Chorus, (like in Christchurch where the fibre broadband was rolled out by Enable). Chorus still owns and runs the copper network in Christchurch. So anyone in Christchurch who upgrades their broadband to fibre is lost to Chorus as a customer.

Chorus has now joined the same dividend game as the power companies, distributing dividends to shareholders coming from cashflows rather than profits. You can read about my dividend expectations for the future in post 2658. Whether you agree with my reasoning and whether I turn out being right is another matter!

SNOOPY

[Snoopy]

Points of interest for me are

2/ margins have been maintained but interesting to see "Customer retention assets" pop up in the Statement of Financial Position in 2018. This appears to be a way of taking marketing costs out of EBITDA and adding them into Depreciation and amortization. Financial massaging for the benefit of who financiers/investors? Probably a realization that wireless networks are real competition and they need to get off their ar**s and promote fibre. Spark had it all over them trying to move people off chorus's fixed line networks to their wireless network. I suspect marketing will need to be a bigger part of their business than they imagined and should be treated as a regular cost of business.


Personally I think this 'customer retention asset' regime that transfers what used to be business expenses into 'assets' is a little dodgy. The electricity retailers do it too, so it isn't unique to Chorus. I think it was enabled by a change in accounting standards. It wasn't a trick thought up by the Chorus board. I would be interested if anyone on the forum has something positive to say about it!

SNOOPY

[zspoon]

Personally I think this 'customer retention asset' regime that transfers what used to be business expenses into 'assets' is a little dodgy. The electricity retailers do it too, so it isn't unique to Chorus. I think it was enabled by a change in accounting standards. It wasn't a trick thought up by the Chorus board. I would be interested if anyone on the forum has something positive to say about it!

SNOOPY

I think rather than ‘enabled’ you might want to use the word ‘required’ by the accounting standards (specifically the new revenue standard) - as there’s no accounting policy choice to not present in this way.

The concept is good - where an expense is an incremental cost incurred in obtaining a customer contract, it’s expensed systematically over the length of the customer relationship - rather than taking it all up front. This also theoretically means that the expense is more closely matched to the revenue earned from the customer acquired.

[LaserEyeKiwi]

Market update by chorus:

https://www.nzx.com/announcements/370164


Chorus reduces indicative Maximum Allowable Revenue range

6/4/2021, 8:30 am MKTUPDTESTOCK EXCHANGE ANNOUNCEMENT
6 April 2021

Chorus reduces indicative Maximum Allowable Revenue range

Chorus is today providing an update to the indicative maximum allowable revenue (MAR) range of $715 million to $755 million per annum included in its Initial Asset Value presentation update of 26 March, to a reduced range of $680 million to $710 million per annum for the first regulatory period.

Chorus is continuing to refine, and perform assurance over, its MAR model, which we expect to provide to the Commission in May. As this process continues MAR estimates may change and we will update the market if required.

As part of this process, two significant assumptions have been updated and one error has been corrected. The changes relate to indexation (negatively impacting MAR) and risk-free rate assumptions (positively impacting MAR). The indexation changes are net present value neutral because the Regulated Asset Base is also inflated by CPI annually.

The key changes are:

1. Inflation assumptions in 2022 and the first half of 2023 updated to reflect the latest Reserve Bank Monetary Policy Statement forecast, issued in February 2021. The previous range was based on the November 2020 forecast.
2. The risk-free rate assumption updated from 0.30% to the current spot rate of 0.51%.
3. Inflation assumptions in the second half of 2023 and 2024 corrected to reflect the long-term Reserve Bank forecast required by the Input Methodologies. The previous assumption was incorrectly based on the quarterly inflation forecast. Chorus apologises for this error.

The effect of the changes is that the revised revenue range for the first regulatory period is further below Chorus’ forecast fibre revenues, as depicted on the attached slide. However, we expect MAR outcomes for the first regulatory period to improve as Chorus works through the remaining aspects of the Commerce Commission’s process, including the Commission’s consideration of our revenue modelling alongside the Initial Asset Valuation Model and expenditure proposals.

Chorus notes that today’s updated revenue range is based on a conservative starting Regulated Asset Base (RAB) of $5.5 billion. As noted in our 26 March release, alternative cost allocation methodologies, which more accurately reflect the structural separation requirements of our public-private partnership produce a starting RAB of $6 billion. The Commission also has tools at its disposal that can be used to ensure regulatory settings deliver on the policy goal of a smooth transition for consumers and investors.

“We hold the strong view that the MAR should be set above forecast fibre revenue to maximise the socio-economic benefits of the investment we and the government have made in the Chorus fibre network. As we’ve said previously, poor outcomes for consumers could arise if the revenue cap constrains our natural expected rate of growth and perversely incentivises Chorus to constrain fibre uptake and investment,” said Chorus CFO David Collins.

The inflation/indexation rates reflected in Chorus’ updated MAR modelling are:

2022: 1.46% (previously 0.90%)
2023: 1.85% (previously 0.90%)
2024: 2.06% (previously 0.90%)

Final Price-Quality decisions on revenue will be updated for Consumer Price Index data for the quarter ended 31 March and inflation forecasts from the May 2021 Monetary Policy Statement. The final risk-free rate will be set based on the average over the three months ending 31 May 2021.

Authorised by:
David Collins
Chief Financial Officer

[Snoopy]

The financial loss asset represents an attempt to place a value on what Chorus has theoretically ‘unrecovered’ losses from building and operating the UFB network before demand/supply were more stable. The loss asset calculated becomes part of the RAB, which Chorus are able to make a return on (refer to the building blocks aka BBM methodology structure down the bottom).


Interesting announcement to the market from Chorus today:

https://www.nzx.com/announcements/370164

"Chorus is today providing an update to the indicative maximum allowable revenue (MAR) range of $715 million to $755 million per annum included in its Initial Asset Value presentation update of 26 March, to a reduced range of $680 million to $710 million per annum for the first regulatory period."

That doesn't sound good to me. The revenue is going to be further constrained but there is no mention of lower costs to offset that. For reference total fibre revenue over FY2020 was $393m (Fibre Broadband) + $73m (Fibre Premium) = $466m.

Currently Chorus charges a regulated price per user that is passed through to the retailer. But under the new regime total revenue is to be regulated. Presumably this means that when the fibre network reaches a certain level of utilisation, Chorus will be forced to reduce charges across the board? That of course will be good for consumers, at least initially. But Chorus are forecasting a downside to this policy.

" “We hold the strong view that the MAR should be set above forecast fibre revenue to maximise the socio-economic benefits of the investment we and the government have made in the Chorus fibre network. As we’ve said previously, poor outcomes for consumers could arise if the revenue cap constrains our natural expected rate of growth and perversely incentivises Chorus to constrain fibre uptake and investment,” said Chorus CFO David Collins."

I think Chorus have confirmed what I just said. Namely, right now, the projected increase in future cashflows is still below the regulated cap. But as that regulated cap reduces, the point of cutting prices to retailers, and hence consumers, approaches. Once the revenue per customer reduces, the incentive to enhance the network reduces. At least I think that is what Chorus is saying. Happy to be corrected.

Yet midway through the press release, Chorus are saying it is probably only a temporary 'potential blip' for potential earnings.

"However, we expect MAR outcomes for the first regulatory period to improve as Chorus works through the remaining aspects of the Commerce Commission’s process, including the Commission’s consideration of our revenue modelling alongside the Initial Asset Valuation Model and expenditure proposals."

Is this some kind of psychological playing of shareholders? Giving investors 'bad news' today, while hinting that within the month there may be some counterbalancing good news to restore the status quo? What say you LEK?

SNOOPY

P.S. CNU closed for the day at $6.76, down 19c or 2.7%

[Snoopy]

Contrary to popular belief, the roll out of fibre has only been partially and transiently funded by the government. Note 13 of AR2019 suggests that the total budget to roll out UFB1 (which covers the major towns and cities) followed by UFB2 and UFB2+ will cost $2.3b to $2.4b by the end of FY2022. Of that $548m to $568m is the cost of UFB2 and UFB 2+ going out to smaller towns (note 13 AR2020). By simple subtraction then, the cost of rolling out UFB1 alone must be between $1.732b and $1.852b. The total government funding for Chorus's share of UFB1 is $959m (Note 5 AR2012), or about half the cost of building the network.




If you look at note 6 it shows both debt and equity securities represented by the $461mill in the Balance Sheet. My understanding that for every dollar of debt they also got a dollar of equity up to $929mill so they should match. As $461mill is roughly half of $924 it sounds like I have missed something.

Maybe some got paid back early or they include crown funding which reads like it was a gift from the NZ taxpayer being written off through depreciation.

maybe I am reading it wrong. Crown funding and CIP funding are combined on the statement of cashflows.

UFB1 build was completed in December 2019 to a total value of $924 million funding received. This was slightly below the $929 million allowed for under the programme, ( From AR2020 p49)


This 'missing' $924m - $461m = $463m in Crown Funding for the Fibre Broadband roll out on the Chorus balance sheet that Aaron has highlighted has been bothering me. If you look at the note on 'Crown Funding' (Note 7 in AR2020), then you will see a table entry labelled "Additional Funding Recognised at Fair Value". I wondered what would happen if I took this total in each respective annual report then added them together.

In a similar way in the same AR note, I recorded the amortised total of crown funding each year (which is offset against depreciation on the books), and recorded the multi year cumulative total of that.



Crown Funding
FY2012FY2013FY2014FY2015FY2016
FY2017FY2018FY2019FY2020


Additional Crown Funding
$45m$196m$208m$107m$131m
$80m$82m$89m$86m


sums to Cumulative Crown Funding {A}
$45m$241m$419m$556m$687m
$767m$849m$938m$1,024m


Crown Funded Depreciation
$1m$4m$8m$12m$15m
$21m$22m$25m$27m


sums to Cumulative Crown Funded Depreciation {B}
$1m$5m$13m$25m$40m
$61m$83m$108m$135m


{A}-{B}
$44m$236m$406m$531m$647m
$706m$766m$830m$889m



So what to make of this? The Cumulative Total of Crown funding of $1,024m is somewhat close the the $924m figure referenced in AR2020 p49. My cumulative total will also contain some UFB2/UFB2+ funding (not yet fully rolled out) which helps explain why my 'Cumulative Crown Funded Total' is the higher figure. However, both of these figures are much higher than the $461m of Crown funding recorded on the balance sheet (AR2020 p36).

I wondered if the difference could be explained by taking off the amortised crown funding, that money set aside to offset depreciation. However, as you can see in the above table, taking away this 'amortised depreciation allowance' does not account for the difference.

The only other explanation I can come up with is that with the crown CIP debt recorded at 'fair value', there must be some other factor that has reduced 'book value' to a 'fair value' that is below 'book value'. But this would involve shrinking a debt on the balance sheet well below a face value that is ultimately required to be repaid. That explanation does not seem credible to me. Anyone else with ideas?

SNOOPY

[Nor]

Aren't companies required to issue comprehensible sets of accounts?

[Snoopy]

Aren't companies required to issue comprehensible sets of accounts?


No, it is the duty of any company accountant to fulfill all legal reporting requirements, but make their company accounts largely incomprehensible to outsiders. You can confirm this by looking at their qualifications: Almost all are members of the nefarious group 'Accountants Creating Ambiguity', even if they rarely admit this is what ACA stands for.

This way, there is plenty of work for those non company accountants to gain employment - untangling it all for those willing to pay. Who says accountants don't look after their own :-)

SNOOPY

[Ferg]

This 'missing' $924m - $461m = $463m in Crown Funding for the Fibre Broadband roll out on the Chorus balance sheet that Aaron has highlighted has been bothering me.
Hey Snoopy

I think you (or we) need to further untangle the numbers. The $461m includes accrued interest which should be removed. Secondly, per note 7 the total additional funding is $1,016m (close to what you derived) but I think you need to remove RBI & Others. I haven't read historical documents but I suspect RBI will be completely different to UFB1 contractually and financially. Note the value of $707m for UFB also includes UFB2 in the past 2 years per the notes. I too am curious why the CIP debt does not equal CIP equity - a quick search of comprehensive income and reserves did not reveal anything obvious. Lastly, I suspect not all funding for the $924m ended up in the CIP debt & equity.

My thoughts are : $924m - $360m (p6) = $564m. This $564m is possibly included in the $707m per page 7. $707m - $564m implies $143m of UFB2 + possible contract variations to UFB1...maybe?

[Nor]

Yeah it used to annoy me that you can't go to almost any company's accounts and find a detailed breakdown of what exactly they own. But I know better now.

[Snoopy]

I think you need to remove RBI & Others.

I haven't read historical documents but I suspect RBI will be completely different to UFB1 contractually and financially.




That cashflow statement reads as though the CIP funding was only part of the Crown Funding. I thought the only crown funding that Chorus received was CIP! Maybe it is!


Clearing up a couple of points:

1/ On 'other' crown funding. From AR2012 page F9

"Chorus is able to recover the cost of other capital spend in certain circumstances. This includes replacing network damaged by third parties or instances where central or local government authorities ask Chorus to relocate or rebuild existing networks. A total of $3m was received in the current financial period and is included as part of crown funding given its modest size."

2/ On funding RBI. Again from AR2012 page F9

"Rural Broadband Initiative (RBI) funding: The Crown is contributing grant funding of about $236m towards Chorus Layer 0 and Layer 1 capital spend over the five year Rural Broadband Initiative. The grant is payable on completion of build work and will vary each year subject to the agreed build programme and the grantable network that is built. For the seven months to 30 June 2012 $18m was received."

My interpretation of this is that neither of these alternative crown funding categories are carried on the Chorus balance sheet. They are simply grants to defray specific expenses. So there are no adjustments to be made to CIP preference shares or debt. The CIP debt and CIP equity (preference shares) on the books are there purely from the USB1/USB2/USB2+ fibre roll out programmes.

SNOOPY

[Ferg]

My interpretation of this is that neither of these alternative crown funding categories are carried on the Chorus balance sheet. They are simply grants to defray specific expenses. So there are no adjustments to be made to CIP preference shares or debt. The CIP debt and CIP equity (preference shares) on the books are there purely from the USB1/USB2/USB2+ fibre roll out programmes.

Note 7 AR2020 has the numbers you are trying to work out, broken into UFB + RBI + Others. UFB is $707m, RBI is $242m and others is $67m for a total of $1,016m on the Balance Sheet under the liability "Crown Funding" (the liability in this sense is more like deferred revenue in that it has been banked but not yet released to the P&L).

Edit: to clarify, the $1,016m is the total "crown funding" funding received to date which is not part of the CIP debt/equity balance, and of the $1,016m there has been $135m released to the P&L to date, leaving a liability (i.e. deferred revenue) on the Balance Sheet of $881m as detailed in note 7 and disclosed on the Balance Sheet under current and term liabilities.

[Ferg]

Per page 51 AR2020: "The difference between funding received and the fair value of the securities is recognised as Crown funding. Over time, the CIP debt and equity securities increase to face value and the Crown funding is released against depreciation and reduces to nil."
It appears the full value of $924m is not yet recognised under the CIP heading, with the balance sitting in "Crown Funding". This makes sense in that CNU would receive funds or account for expected funding, which would sit in Crown Funding until certain criteria were met. Once the criteria were satisfied, funds would then be treated as CIP debt+equity. In other words, not all crown funding qualifies as CIP debt+equity (e.g. RBI) and not all CIP debt+equity has yet been recognised (per the quoted note).

So I wonder if there are transfers from Crown Funding to CIP that are not being shown in the accounts. For instance, there was total Crown Funding receipts in FY20 of $162m per the cash flow. This may have all gone into the Crown Funding "bucket". During the year $77m met the criteria for CIP debt+equity and was subsequently transferred from the Crown Funding "bucket" to CIP debt + equity. The transfer in/out of $77m of qualifying receipts within the Crown Funding disclosure has been netted to zero, leaving $86m disclosed per Note 7 (when maybe it should be receipts of $162m and transfers to CIP of -$77m). Just a thought.

[Snoopy]

Hey Snoopy

Per note 7 the total additional funding is $1,016m (close to what you derived) but I think you need to remove RBI & Others. I haven't read historical documents but I suspect RBI will be completely different to UFB1 contractually and financially. Note the value of $707m for UFB also includes UFB2 in the past 2 years per the notes.

I think you are right Ferg. I have the historical documents handy. So I have re-presented the table removing the 'Rural Broadband Initiative' and 'Other' funding from it. The amortisation section of the table I have likewise adjusted.



Crown Fibre Funding
FY2012FY2013FY2014FY2015FY2016
FY2017FY2018FY2019FY2020


Additional Crown Fibre Funding
$13m$94m$120m$80m$94m
$73m$77m$80m$79m


sums to Cumulative Crown Fibre Funding {A}
$13m$107m$227m$307m$401m
$474m$551m$631m$710m


Crown Funded Fibre Depreciation
$0m$1m$3m$6m$8m
$11m$12m$15m$18m


sums to Cumulative Crown Funded Fibre Depreciation {B}
$0m$1m$4m$10m$18m
$29m$41m$56m$74m


{A}-{B}
$13m$106m$223m$297m$383m
$445m$510m$515m$636m



Note 7 of AR2020 says fair value on initial recognition of crown funding for the UFB roll out alone is $707m, close to the $710m that I derived, As you have pointed out, the last two years also include some UFB2 and UFB2+ funding. Yet if the total of $707m/$710m is correct, it falls well short of the $924m that has been handed out to Chorus for UFB1 funding alone (AR2020 p49). What gives?

SNOOPY

[Snoopy]

This 'missing' $924m - $461m = $463m in Crown Funding for the Fibre Broadband roll out on the Chorus balance sheet that Aaron has highlighted has been bothering me.

The $461m of Crown funding is the figure recorded on the balance sheet (AR2020 p36).



Hey Snoopy

I think you (or we) need to further untangle the numbers. The $461m includes accrued interest which should be removed.


Are you sure about that? The 'CIP debt' is interest free until 2025 (AR2020 p50). If the debt is repaid like I imagine it will be (even if it is not repaid from operational profits, it would make sense for the company to re-finance this debt at low prevailing interest rates), then no CIP interest will be due. Likewise the 'CIP Equity' (Preference Shares) have an initial dividend requirement (which is in effect an interest payment) that kicks in from 2025 too. But if the Preference shares are repaid, or refinanced, before 'dividend time', then no 'CIP dividend' will ever become due. Accordingly, I can't see why you say that the $461m on the Chorus Balance Sheet for FY2020, under the collective label of CIP securities, contains 'accrued interest', when in fact no interest is currently contractually payable on either the 'CIP debt' or 'CIP equity' instruments - as I read it.

I see Note 6 p50 talks about 'notional interest'. I wish when I had a debt due where I could just pay 'notional interest'! This term suggests to me that 'notional interest' is some kind of accounting construct. I do not understand 'notional interest' and doubt that it represents any real payment. I say this because I don't see any 'real interest' as falling due.

Note, my post 2648 contains the 'CIP debt' repayment schedule.

For the 'CIP Equity' dividend requirements, my post 2646 lists those. Post 2659 shows that in the first phase of preference share interest from 2025 to 2029 inclusive, my estimate of the total 'dividend' required by the crown. In this initial period at least, potential payments don't seem that arduous.



Lastly, I suspect not all funding for the $924m ended up in the CIP debt & equity.

My thoughts are : $924m - $360m (Note 6 p50) = $564m. This $564m is possibly included in the $707m per Note 7. $707m - $564m implies $143m of UFB2 + possible contract variations to UFB1...maybe?


p50 talks about 'fair value on initial recognition' of the 'CIP debt' and 'CIP equity' (preference share debt) facilities. This is the bit I am having trouble understanding. I thought a debt of $X was a debt of $X and couldn't be reduced in value on the balance sheet because it does not have to be paid back until some time in the future. But reading this page 50 (AR2020) suggests to me that I am wrong about this?



Note 7 AR2020 has the numbers you are trying to work out, broken into UFB + RBI + Others. UFB is $707m, RBI is $242m and others is $67m for a total of $1,016m on the Balance Sheet under the liability "Crown Funding" (the liability in this sense is more like deferred revenue in that it has been banked but not yet released to the P&L).


If you are referring to:

1/ the crown funding being gradually 'released' as it is amortised away AND
2/ The amortised amount of the crown funding being used to offset depreciation.

THEN I can understand how you see the crown funding as 'deferred revenue'. But what about the portion of crown funding that has to be paid back? That surely cannot be seen as deferred revenue, even though it resides in the same 'crown funding' pot cooking away on the balance sheet that the 'amortised funding depreciation credit' was released from.



Edit: to clarify, the $1,016m is the total "crown funding" funding received to date which is not part of the CIP debt/equity balance, and of the $1,016m there has been $135m released to the P&L to date, leaving a liability (i.e. deferred revenue) on the Balance Sheet of $881m as detailed in note 7 and disclosed on the Balance Sheet under current and term liabilities.


All of the content of the above quote is in AR2020 under Note 7 titled 'Crown Funding'. $135m is laid out as the portion of the $1,016m of total crown funding that has been amortised to date, Thus the net amount of crown funding on the Balance Sheet that remains is:

$1,016m - $135m = $881m = $855m (non-current) plus $26m (current)

I now turn to the Balance Sheet and see the non current portion of this crown funding, $855m of non-current crown funding is listed separately alongside $461m of CIP funding (also non-current). It is the CIP funding that is closely tied to UFB1/UFB2/UFB2+ fibre rollout. This would suggest you are right Ferg. The whole of Note 7 titled 'Crown Funding', specifically excludes the separate 'crown funding ' that is the 'CIP debt' and 'CIP equity' (preference shares) taken out by Chorus to help fund the fibre roll out. This would be 'case closed' on the disambiguation of the various categories of crown funding taken up by Chorus, except for one point. If the CIP funding is the crown contribution towards rolling out fibre broadband, then why does the 'other' crown funding also specifically include $707m of funding specifically allocated to rolling out UFB 'Ultra Fast Broadband' (fibre by any other name)?

SNOOPY

[zspoon]

Are you sure about that? The 'CIP debt' is interest free until 2025. If the debt is repaid like I imagine it will be (even if it is not repaid from operational profits, it would make sense for the company to re-finance this debt at low prevailing interest rates), then no interest will be due. Likewise the 'CIP Equity' (Preference Shares) have a dividend requirement (which is in effect an interest payment) that kicks in around the same time. But if the Preference shares are repaid, or refinanced, before 'dividend time', then no 'dividend' is due. Accordingly, I can't see why you say that the $461m on the Chorus Balance Sheet for FY2020, under the collective label of CIP securities, contains 'accrued interest', when in fact no interest is contractually payable on either the 'CIP debt' or 'CIP equity' instruments - as I read it..

Note, my post 2648 contains the 'CIP debt' repayment schedule.

For the 'CIP Equity' dividend requirements, my post 2646 lists those. Post 2659 shows that in the first phase of preference share interest from 2025 to 2029 inclusive, my estimate of the total 'dividend' required by the crown. In this initial period at least, payments don't seem that arduous.

SNOOPY

Note 6, shows how balance includes notional interest.
Note 20, contractual cash flows showing >5 year ultimate cash flows equals the current carrying value of the liability - which includes accumulated notional interest.

[Snoopy]

Note 6, shows how balance includes notional interest.
Note 20, contractual cash flows showing >5 year ultimate cash flows equals the current carrying value of the liability - which includes accumulated notional interest.

I see the CIP securities (that is the sum of CIP debt and CIP preference shares) of $461m listed as 'contractual cashflows' on p65 of Note 20, AR2020. But weirdly this $461m is not classified as a debt that must start being repaid starting in 5 years time (FY2020 perspective), which is what I understand the situation to be. This same $461m is listed on p63 of Note 20 as an interest repricing risk 5 years into the future (which does seem right).

Yet doesn't Chorus have the option of simply paying off these debts by refinancing the whole CIP securities balance at prevailing much lower interest rates? And if these debts are either refinanced or repaid, does this not mean that any 'notional interest' associated with these CIP securities disappears completely?

SNOOPY

[Nor]

Good grief. Don't some say that you should never invest in anything you don't understand? Luckily that's not my investment position.

[Snoopy]

Good grief. Don't some say that you should never invest in anything you don't understand? Luckily that's not my investment position.


Theresa enabled my Chorus shareholding to fall into my lap all those years ago. So I am in the unusual position of having a modest CNU shareholding, yet I have never bought a single Chorus share. I haven't been interested in buying more shares until now, as I perceived the take up rate of fibre broadband to be too uncertain. However, Covid-19 has brought 'working from home' and a more normalised use of the internet in all warps everyday life into sharp focus.

When an investment is complicated (broadband is simple, but the complexity arises in the delivery process, the workings under the Chorus hood) it pays to focus on the prize at the end. In the case of Chorus, the prize is the long term income stream from a utility that all homes and businesses will need, irrespective of the business cycle. Certainty implies returns going forward are likely relatively low (increasing new investors getting on board drives up the price and lowers the yield), but likewise so is the risk lower. I know there are some investors out there that might think that my targeted investment gross return of 5% for Chorus is not worth getting out of bed for. But I am thinking of Chorus as a kind of 'fixed interest substitute'. And when you go to the bank and they offer you a term deposit starting with a '1', then 5% sounds pretty good. Personally I do see bank interest rates rising in the near future. But to be offered a term deposit starting with a 5? I won't be holding my breath for the next ten years.

Now we know where we are going with the prize, we have the incentive to solve 'the problem'. 'The problem' in the case of Chorus is the funding model which has resulted from the government tipping in a lot of money up front (good, the CIP funding) but ultimately wanting it back from 2025 onwards. This is the bit I am trying to get my head around. The government is subsidising fibre roll out by issuing CIP debt with no interest repayments required. Yet the government still wants their capital back.

The 'Crown Funding Balance' (AR2020 Note 7) is partially amortised each year. That amortisation is transferred as an offset to depreciation, which boosts Chorus's profits each year. Yet it appears that if you follow the CIP repayment schedule, the crown do -eventually- want all of their money back after all. So is this amortisation of CIP funding only a temporary relief? I don't understand what is going on here.

Some would say that the CIP funding amortisation is a government subsidy. Yet from what I can see the crown still wants all of their CIP loan money back, and in the case of the CIP preference share component, they want interest too. So is it really a subsidy when the CIP funding is not forgiven?

Some would say use of CIP funding 'interest free' for ten or more years is a subsidy. But that would be a retrospective analysis. Roll back the clock to the birth of Chorus as a separate entity in FY2012. The revenue stream that Chorus was expecting from their 'paying broadband customers' to offset this CIP backing, which we have to remember only funded half the roll out - alongside equal amounts Chorus's own shareholder capital-, was far from certain. In effect Chorus signed up to quite a risky business plan as a condition of getting free use of crown capital for up to 15 years. This wasn't a free lunch from Chorus's 2012 perspective, and so I would argue CIP funding wasn't a subsidy.

SNOOPY

[Nor]

I got my free ones and bought the same again and then a few. It will be interesting to know if you conclude it is a buy at these levels which are still quite high historically. I find it difficult to know what to buy on nzx. The small pool of shares seems to comprise mainly dogs and too highly priced gems.

[Snoopy]

I haven't read historical documents but I suspect RBI will be completely different to UFB1 contractually and financially.


Just to clear up how the RBI funding worked for Chorus

From: AR2012 page F21

"Chorus receives Crown funding from the Ministry of Economic Development (MED) for capital expenditure incurred under the Rural Broadband Initiative.

Chorus is entitled to claim payment for the grantable costs attributable to the relevant milestones for deploying the rural link or rural cabinets. MED will pay Chorus one dollar of funding for each dollar of grantable costs incurred by Chorus up to a maximum of about $236m. In addition MED reimburse Chorus for all capital expenditure attributable to school lead ins."

The RBI initiative was finished during FY2016. Here is what was said on its completion.

From AR2016 page 2

"Rural areas also benefitted during the year with the final phase of the RBI extending fibre to our upgraded broadband cabinets and new Vodaphone tower sites. The five year roll out was completed at the lower end of our initial capital expenditure guidance range of $280m to $295m.and we delivered more coverage than originally contracted by the government.

We deployed about 3,500km of fibre to rural schools and hospitals and enhanced our broadband coverage to approximately 110.000 rural homes and businesses."

SNOOPY

[Ferg]

Note 7 of AR2020 says fair value on initial recognition of crown funding for the UFB roll out alone is $707m, close to the $710m that I derived, As you have pointed out, the last two years also include some UFB2 and UFB2+ funding. Yet if the total of $707m/$710m is correct, it falls well short of the $924m that has been handed out to Chorus for UFB1 funding alone (AR2020 p49). What gives?


This would be 'case closed' on the disambiguation of the various categories of crown funding taken up by Chorus, except for one point. If the CIP funding is the crown contribution towards rolling out fibre broadband, then why does the 'other' crown funding also specifically include $707m of funding specifically allocated to rolling out UFB 'Ultra Fast Broadband

Bear with me but I will answer your post with quotes from the AR, a worked example and your own workings from post 2648.

What gives is that Crown funding received is $707m per Note 7 plus CNU also received CIP debt+equity funding of $360m per Note 6 giving total funding received of $1,013m for UFB1 + UFB2. Assuming the full $924m has been booked/received for UFB1, this implies UFB2 funding received is $89m. As has already noted (and I think we are now in agreement), the "Crown Funding" balance includes additional funding for RBI & Others. In fact your amended table deriving A-B of $636m in post 2688 has proved the first column in Note 7 where the total without rounding differences is $633m.


{Re my (Ferg's) statement that interest should be excluded} Are you sure about that? The 'CIP debt' is interest free until 2025 (AR2020 p50). [...snip...] Accordingly, I can't see why you say that the $461m on the Chorus Balance Sheet for FY2020, under the collective label of CIP securities, contains 'accrued interest'

Absolutely yes it should be excluded if we are seeking to understand the funding received to date. But that answer changes to No if we want to know how much CNU owes. "Notional interest" is a book entry which is inflating the CIP debt+equity balances to $461m . Per note 6 total notional interest accrued to date is $101m. The annual interest accrual is confirmed if you look at the "reconciliation of movements of liabilities" statement on page 39 as being a book entry that is inflating the amount owing on CIP debt+equity.


I see Note 6 p50 talks about 'notional interest'. I wish when I had a debt due where I could just pay 'notional interest'! This term suggests to me that 'notional interest' is some kind of accounting construct. I do not understand 'notional interest' and doubt that it represents any real payment. I say this because I don't see any 'real interest' as falling due.

Accounting construct? Yes. It's not a real payment? Correct...for now. It is however showing as "payable" by virtue of being included in the balance of $461m being a liability, and it will eventually have to be repaid as part of the debt repayments of half of the $924m.

Think of it like this:

CNU receives debt funding of say $100m in 2021
CNU must repay $100m in 2023 (i.e. no interest)
IFRS accounting says that CNU did not receive $100m of principal, IFRS says CNU received $90m principal and $10m of notional interest (assuming a simplistic $5m p.a. interest)
At 2020 year end the debt owing is recorded as $90m
At 2021 year end the debt owing is recorded as $90m + $5m notional interest
At the end of 2022 $100m is repaid which is the $95m for last year end plus another $5m notional interest for 2022
So what happened to the other $10m that was banked in 2020? That is sitting in "Crown Funding" per the note I quoted on post 2687 ("The difference between funding received and the fair value of the securities is recognised as Crown funding" from AR2020 page 49).
The notional interest is not tax deductible per page 27: "The accounting interest and depreciation credit recognised in the Income statement in relation to CIP securities are non-taxable". This confirms it is an accounting construct and not real.


Per a note I quoted earlier in post 2687, page 49 of the 2020 AR (I previously quoted this as being from page 51; 51 is the pdf page number, whereas 49 is the report page number) of the 2020 AR: "Over time, the CIP debt and equity securities increase to face value and the Crown funding is released against depreciation and reduces to nil."

This "face value" part is crucial. I expect this means that when these financial arrangements mature in 2025*, only then will we see the $924m. It is not currently showing as $924m because the balance is sitting in Crown Funding. As each year passes additional notional interest will be added to the balance, until in 2025 the total balance of CIP debt+equity will be $924m.*

*Amending thinking: with differing debt maturity profiles we may never see the $924m given some tranches mature on different dates (your post 2648 made me amend my thinking) - more on this in my table at the bottom of this post.

In another post you point me to post 2648 which shows the repayment schedule and the PV of the debt repayments (very helpful thank you). Notice you had a total PV of $316m based on a discount factor of 5.5%. So you had the overall answer at your finger tips all along! I was only joining the dots.

​
p50 talks about 'fair value on initial recognition' of the 'CIP debt' and 'CIP equity' (preference share debt) facilities. This is the bit I am having trouble understanding. I thought a debt of $X was a debt of $X and couldn't be reduced in value on the balance sheet because it does not have to be paid back until some time in the future. But reading this page 50 (AR2020) suggests to me that I am wrong about this?

Yes the debt is reduced given it is "interest free" and not repayable for some years per my example of $100m above. Note your $316m PV on post 2648 is close to the "fair value" of $287m of CIP debt securities per the note on page 50 under the table of values. Note also page 50 talks about debt securities being split into senior and subordinated, and there are a range of discount rates smattered all over that page. Back-solving the $287m fair value into your debt repayment table per post 2648 implies an average discount rate of 5.88% (BTW I think the periodic divisors you used are short one period). 5.88% seems reasonable given the ranges presented on page 50 for the senior & subordinated debts. Note the splitting of the CIP debt into senior and subordinated further muddies the waters, but we have cut through that by using an average rate.

Below is a PV table using a discount factor of 5.88% and the debt repayment tranches you provided, to come up with the fair value of the CIP debt securities for each tranche and year (note this excludes the CIP equity component):



Avg. Disc. Rate =
5.88%

















Tranche:
2025
2030
2033
2036
TOTAL



Amount:
$85.3
$104.7
$166.7
$210.2
566.9











Periods
FY
Fair Values:


TOTAL



2020
$64.1
$59.1
$79.3
$84.3
$286.8


1
2021
$67.9
$62.6
$84.0
$89.2
$303.7


2
2022
$71.9
$66.3
$88.9
$94.5
$321.6


3
2023
$76.1
$70.2
$94.1
$100.0
$340.4


4
2024
$80.6
$74.3
$99.7
$105.9
$360.5


5
2025
$85.3
$78.7
$105.5
$112.1
$381.6


6
2026

$83.3
$111.7
$118.7
$313.7


7
2027

$88.2
$118.3
$125.7
$332.2


8
2028

$93.4
$125.3
$133.1
$351.8


9
2029

$98.9
$132.6
$140.9
$372.4


10
2030

$104.7
$140.4
$149.2
$394.3


11
2031


$148.7
$158.0
$306.7


12
2032


$157.4
$167.3
$324.7


13
2033


$166.7
$177.1
$343.8


14
2034



$187.5
$187.5


15
2035



$198.5
$198.5


16
2036



$210.2
$210.2




Can I say "case closed"?
:)

Regards, Ferg

[Snoopy]

Yes the debt is reduced given it is "interest free" and not repayable for some years.

Back-solving the $287m fair value into your debt repayment table per post 2648 implies an average discount rate of 5.88% (BTW I think the periodic divisors you used are short one period). 5.88% seems reasonable given the ranges presented on page 50 for the senior & subordinated debts. Note the splitting of the CIP debt into senior and subordinated further muddies the waters, but we have cut through that by using an average rate.

Can I say "case closed"?

Regards, Ferg


Outstanding Ferg. You have connected the dots in a way that I can understand. Granted you and I are are probably the only two reading into this thread this deep! There are many readers for which tables of numbers 'don't do it'. Nevertheless I feel as though I am finally able to answer Aaron's question -which I realise you have just done. But I intend to use your work to answer his question in a 'non -numerical way' for those that have read this far and are still lost.

On another topic, you picked up that in my post 2648, which was discounting to a 'present value', maturing Chorus debts a long way into the future (up to 2036), that I was one discount period short. So I have gone back to that post and corrected it. However, given you have referenced that post as it was, before correction, I have left the old uncorrected calculations in there as well. Otherwise if someone read your post that referenced 2648, and went back to look at 2648, the numbers you have referenced would be missing, a potential source of confusion!

Thanks again.

SNOOPY

[Snoopy]

Thanks for the analysis, I did make the effort to read the 2020 financial statements but wonder at note 6 CIP Securities it states UFB1 is rolled out 31/12/2019 and they received $924mill of the $929 allowed although CIP securities are only $461mill in the accounts. This is probably a silly question but if they have drawn down $924mill for UFB1 shouldn't that be what is owing. Where is the other $463mill or has it already been repaid?


To answer this question we have to go back to FY2012 when the 'Crown Infrastructure Funding' package came on stream. I take you back to a seemingly innocuous meeting between Mr Pointy Head, Chief Officer for the enforcement of New Zealand Accounting Standards and Andrew Carroll who was the Chief Financial Officer at Chorus at the time. Here is what out 'fly on the wall' microphone picked up from that meeting.

-----------

PH "All is looking good here Andrew. All your accounts are right up to date and meet the current accounting standards. I bid you good day! Wait a minute, what is that bucket in the corner of your office?"

AC "Oh that bucket is where I store all the crown funding that we are using to fund this Ultra Fast Broadband roll out that we are partnering up with the government to do. Stephen Joyce, the finance minister brought it in one day. He said help yourself to any money you need from that to help with the broadband build. It is free to use. We won't charge you any interest or anything so crass. Just make sure that in fifteen years time when I come to pick up the bucket that all the capital we lent to you is still in there. Very sporting of Stephen don't you think?"

PH "This is highly irregular Andrew. As the upholder of Accounting decency in New Zealand, we can't have you building a broadband network from a bucket in the corner of your office. Your accounts should reflect the full picture of your funding package, and frankly, having a secret bucket in the corner of your office is something your shareholders should know about. I am am afraid I am going to demand some changes."

AC "Look Pointy Head, Stephen has lent me a bucket of money and in fifteen years I will give it back to him. In the meantime a broadband network gets built. It seems very simple to me - no need to over complicate things."

PH: "Your bucket Andrew, will henceforth have to be split into two compartments. In one half will be the capital you have not yet touched. In the other half will be the capital you are using combined with the interest payments that you owe to the government for reaching into that bucket."

AC: "What interest payments Pointy Head? The capital that Stephen is lending us is interest free!"

PH: "We accounting standards people don't allow free lunches Andrew, and by any standards you are getting a big one here. So I think of you as paying 'notional interest' on that interest free loan of yours. Of course this 'notional interest' doesn't affect the amount of money that has to be in Stephen Joyce's bucket at the end. So to make up for the notional interest that you aren't paying, I am going to reduce the 'market value' of the capital you have borrowed. That way you still have the same amount of money in that loan bucket as before."

AC: "This is making things rather complicated Pointy Head. By telling me that I am paying 'notional interest', I now have to assess the risk of interest rates repricing according to market forces, which could affect the notional amount of interest that I am not paying."

PH: "Quite right Andrew. You also have to assess the transient liquidity risk of paying back your bucket of Stephen's money early."

AC: "You are talking about the same bucket that Stephen has said he is contractually not coming to pick up early?"

PH: "Yes that is the one."

AC: "Pointy Head, let me get this straight. You want me to compartmentalize my bucket into two. One part I label 'CIP debt' , which is the Crown Infrastructure Partners debt capital that I have to give back to Stephen. But as I use that debt I have to transfer Stephen's money into the other compartment of my bucket at which point that money splits into a reduced capital amount and a a notional amount of interest that nevertheless add up to the same amount of money I started with in the first place. By doing this Stephen's capital that he has lent me partially vanishes from the balance sheet. But then at the end of the broadband roll out, the notional interest that I haven't been paying reattaches itself to the reduced capital, and all of Stephen Joyce's loan bucket capital rematerialises on the books. At that point it is returned to the CIP compartment of the bucket ready to be repaid. That is the most ridiculous money go round I have ever heard of, and all along the same amount of money remains in the bucket! What is wrong with going to Stephen Joyce's office, asking for a bucket of money that will ultimately be repaid and and leaving it in the corner of my office? Any child could do that, and it would avoid all of your ridiculous rigmarole!

PH "Yes, any child could do that Andrew, and how much would you expect to pay them to do it? Now think, what salary are you on?"

AC "Ah Pointy Head, I am beginning to see your view with more clarity! If we want professional results we have to pay professionally for whatever sacrifice to the company that entails. I will implement your suggestion forthwith! And because the published accounts will be largely incomprehensible to the rest of our management team , the kudos I will receive will be immense. There are a few bright cookies on that 'Sharetrader' internet forum that might eventually figure out what a sham it all is. But I reckon it will take a few years for them to figure it out. I will be long gone from this CFO position by then, so it is all good. We will be in the clear."

PH "Andrew, I knew you would come around to my way of thinking. Must get back to the office. I am working on a new standard I am calling IFRS 16. We are really going to muck things around by dragging all leases onto every company's balance sheet!"

AC "Hah hah hah hah! Pull the other one Pointy Head! You will never get away with that! See you for a catch up next year!

------------



I have tried to read and understand the annual report a bit, mostly the financial section but I just get more confused and more questions get raised as I realise how little I understand.


You did good. Sitting in ignorance never earns many brownie points. Unless someone asks the right questions there is no path to finding the right answers.

SNOOPY

[nztx]

Didn't CNU promise some astoundingly good things for holders about 12 months so ago ? ;)

Have they delivered or just on the excuses ? ;)

[Ferg]

Well said Snoopy. IMO another nail in the coffin for IFRS accounting. My turn for a couple of (hopefully easy) questions.

I'm not currently an investor in CNU. Is this another dividend yield stock? Or is there room for some sort of growth over and above inflation?

[Snoopy]

Note the value of $707m for UFB also includes UFB2 in the past 2 years per the notes. I too am curious why the CIP debt does not equal CIP equity - a quick search of comprehensive income and reserves did not reveal anything obvious.


The above $707m number is pulled from Note 7 on 'Crown Funding' in AR2020. I think we are agreed that despite the title, this section on 'Crown Funding' does not contain any CIP (Crown Infrastructure Partners) money on loan to Chorus. The CIP funding leaks across into 'Crown Funding' and ultimately returns again to CIP funding. Yet the presented picture is muddled by the UFB1 and UFB2/UFB2 roll outs, and separate CIP funding for both (with different conditions) overlapping.

Consequently I thought it might be worth going back to FY2012, which was the very first year of CIP (or CFH as it was called then) funding for the second call of such funding taken on board by Chorus. Under Note 24 on "Post Balance date Events' we learn:

"Chorus issued a call notice on 17th August 2012 to CFH with an aggregate issue price of $13m. The component of the cash received will be allocated as follows. CFH debt securities $2m, CFH Equity Securities $1m and Crown Funding $10m."

Now we know that 'CIP debt' and 'CIP equity' (Preference Shares) are issued in equal capital amounts. So why even at this very early stage of UFB roll out are they so badly out of whack on relative value? Before I answer that question, I need to address why so much of the cash drawn down has gone straight to Crown Funding.

Back in 2012, interest rates were 5 percentage points higher than today. So I am going to take the implicit averaged discount rate you calculated for CIP funding of 5.88% and add another 5% to that making a total of 10.88%. The projected weighted average payback time from a 2012 perspective was 20 years. This means that $1,000 of interest free loan paid back in 20 years forward from the FY2012 draw down date has a present value today of:

$1,000 / 1.1088^20 = $127

I think that means that for each $1,000 drawn down from the CFH lending regime, $127 remains as capital and $873 (87.3%) becomes a 'notional interest' benefit that is transferred to 'crown funding' (for now). Thus the actual ratio of money transferred to 'crown funding' of $10m/$13m = 76.9% using the numbers referred to in my quoted text from AR2012 therefore comes as no surprise.

Returning to the question of the CFH debt being valued at only half that of the CFH equity. Despite the nominal dollar values of each being the same 'at creation', the equity portion carries a heavy associated payment burden reaching a peak of probably 7% of $959m = $67m per year (see my post 2646). Even though that 'annual bill' doesn't reach its peak until 2036 (24 years after this study point), the present day value of all those future interest bills must start to add up.

This is my explanation of why 'CFH Debt' and 'CFH Equity' are issued in a ratio of 1:1 but valued in a ratio of 1:2 . At least that is how it was back in FY2012!

SNOOPY

[Snoopy]

My turn for a couple of (hopefully easy) questions.

I'm not currently an investor in CNU. Is this another dividend yield stock? Or is there room for some sort of growth over and above inflation?


I am approaching Chorus as a 'yield share', with any growth that does amount being a bonus. Chorus is in a perplexing position in certain areas. If customers convert to fibre in those areas where someone else has built the fibre network other than Chorus, then Chorus lose their existing copper broadband customers entirely. Thus growth in fibre broadband on a national basis has some negative aspects for Chorus.

Where fibre has been laid, copper broadband comes out of price controls from 01/01/2022. So we might see Chorus dropping their copper broadband prices in Christchurch, for example, in an effort to slow down the loss of copper broadband customers to Enable's fibre network. Who knows, they may even win some Enable fibre customers back onto Chorus copper, as Chorus sweat some more value from their old school copper network! Looking further out, the ability to bring small niche retailers onto the Chorus network in a cost effective manner may open up new business opportunities that even Chorus cannot imagine. The ability to offer short term broadband, without using a mobile network, to a festival or something, at a cost effective price is coming. And there do seem to be potential applications for the new WiFi 6 standard devices, used in conjunction with fibre. These are three growth initiatives for the future. But how successful or significant they will be, no-one knows at this point.

If you look at my post 2658, I am picking a fair value for Chorus of $8.36 by 2023, using a capitalised future dividend approach. i am working on a 35cps annual dividend - my broker says 33cps. But to be fair, that is ignoring the very large debt repayment stream that will begin from 2025. In my post 2648, my corrected calculation shows you may need to take 67c off that target price for proposed debt repayments, which gives a fair value of $7.69. The share closed at $6.55 on Friday, some 15% below my $7.69 fair value figure. While not a supreme bargain, I would say that this is discounted enough for potential new shareholders to at least take a closer look.

SNOOPY

[Aaron]

Many thanks Snoopy & Ferg

I have skim read your notes but will have to come back to properly understand them.

Accounting standards seem to just make things harder to understand for the lay person. I guess the rules are required as CEOs try to deceive the investing public but they don't seem to help.

Why would you put a notional interest portion on an interest free loan?

Would it be easier to just expense marketing costs as you pay them? zspoon mentions they are trying to match expenses with income but is this any more accurate with estimates regarding the effectiveness of the advertising campaigns and how to spread the expense to match the income being very arbitrary. Something for the auditors to argue over I suppose to generate good fees.

Again Snoopy and Ferg appreciate the time taken to explain what is being presented in the annual report.

[Snoopy]

It is my understanding that Chorus is obliged to maintain their copper network for any customer who does not have access to fibre, i.e. as long as the fibre rollout is not completed there will be parts of the copper network Chorus must maintain - and I suppose that these remaining parts of the copper network will as well generate revenue.

I assume as well that any price control is only taken off from copper for customers who have the option to go fibre ...


From slide 25 of the November 17th presentation, reinforcing BlackPeter's points.

Copper –where fibre is not available:

1/ Copper remains regulated and TSO(*) applies
2/ Copper pricing capped at 2019 levels with CPI adjustments
3/ Commission required to review pricing framework no later than 31 December 2025

(*) TSO means 'Telecommunications Services Obligation': A universal service obligation under which Chorus must maintain certain coverage and service on the copper network.

SNOOPY

[Snoopy]

----------------

PH "Andrew, I knew you would come around to my way of thinking. Must get back to the office. I am working on a new standard I am calling IFRS 16. We are really going to muck things around by dragging all leases onto every company's balance sheet!"

AC "Hah hah hah hah! Pull the other one Pointy Head! You will never get away with that!

------------



As history has subsequently revealed, the 'Pointy Heads' got their way with IFRS 16.

Here is what Chorus said about it in AR2017 p34:

"NZ IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value. Accounting by lessors is unchanged under IFRS 16. A lessor continues to classify its leases as operating leases or finance leases, and to account for those types of leases differently. Management are in the process of finalizing the assets subject to lease agreements and the impact of these on the balance sheet and income statement. Management's process to date highlights the that the impact is expected to be material (greater than $20m), given Chorus's asset intensive nature. The agreements identified to date relate to poles, buildings, easements and IT equipment."

One year later, in AR2018 p37 we get this:

"Chorus has early adopted NZ IFRS 16 with a date of initial application of 1 July 2017, and has not restated comparative information.."

The 'Statement of Changes in Equity' (AR2018 p33) confirmed the $20m equity 'hit' predicted in AR2017 (at least it wasn't greater than $20m).

What is of particular interest to me is the effect of IFRS 16 on EBITDA, because that impacts banking covenants. While some effort has been made to show the effect of IFRS on assets (AR2018 Note 2 p40 $226m carrying value of 'Right of Use Assets') and liabilities (AR2018 Note 5 p45, An incremental $84m of 'Lease Liabilities'), I can't find any reported quantifiable analysis on the effect that adopting IFRS 16 has had on earnings,

I know that IFRS 16 introduces new interest costs to the business in the form of a 'lease interest' expense. This will boost EBITDA for a given NPAT as the interest total 'I' to be added back in increases. In the case of Chorus, lease interest over FY2018 totalled $18m (AR2018 p45).

Chorus have declared that EBITDA from FY2017 to FY2018 rose from $652m to $653m, (AR2018 p18) a rise of $1m. However if we adjust for IFRS 16 then EBITDA drops from $652m to $635m, a sizeable drop of $17m.

Slide 32 of the 17th November 2020 presentation shows the 'Net Senior Debt' / EBITDA ratio should be less than 4.75 times.

Yet, before the early adoption of IFRS 16 was announced on 1st July 2017, Chorus and their bankers had already announced revised banking syndicate arrangements on 25th May 2017.

"The facility has also been repriced to reflect current market rates and the covenants have been revised from 4.0 to 4.75 times debt to EBITDA and 3.0 to 2.75 times interest coverage, to better align with Chorus’ rating thresholds."

This means that within an historical period of two months, Chorus has let shareholders know that the amount of debt their company can hold can increase, in two jumps. Why the banks regard Chorus as suddenly more trustworthy in holding debt I am not sure. I guess the banks are just saying that as a 'big infrastructure company' with a 'good credit rating', we should have given you this much leash before?

SNOOPY

[Snoopy]

What is of particular interest to me is the effect of IFRS 16 on EBITDA, because that impacts banking covenants.

I know that IFRS 16 introduces new interest costs to the business in the form of a 'lease interest' expense. This will boost EBITDA for a given NPAT as the interest total 'I' to be added back in increases. In the case of Chorus, lease interest over FY2018 totalled $18m (AR2018 p45).

Chorus have declared that EBITDA from FY2017 to FY2018 rose from $652m to $653m, (AR2018 p18) a rise of $1m. However if we adjust for IFRS 16 then EBITDA drops from $652m to $635m, a sizeable drop of $17m.

Slide 32 of the 17th November 2020 presentation shows the 'Net Senior Debt' / EBITDA ratio should be less than 4.75 times.

Yet, before the early adoption of IFRS 16 was announced on 1st July 2017, Chorus and their bankers had already announced revised banking syndicate arrangements on 25th May 2017.

"The facility has also been repriced to reflect current market rates and the covenants have been revised from 4.0 to 4.75 times debt to EBITDA and 3.0 to 2.75 times interest coverage, to better align with Chorus’ rating thresholds."


Moving on to the numerator of banking covenant, I imagined it would be a straightforward process to simply pluck the relevant figures out of the balance sheet. However, after I had done this, I noticed Chorus themselves had done the calculation on the same 30th June 2020 balance date, and come up with a significantly different answer (Slide 41, November 17th 2020 Presentation).



Net Debt Nov 2020 Presentation (Chorus)Net Debt FY2020 Balance Sheet (Snoopy)


Borrowings$2,234m$2,327m


add PV of CIP debt securities (senior)$183m$461m


add Net Leases Payable$263m$263m


less Cash$0m$0m


equals Total Net Debt$2,680m$3,051m



The differences in the two calculations are outlined below:

Borrowings

Chorus Interpretation: (Refer Slide 42, November 2020 Presentation):

$30m (Long term bank facilities) + $5m (Overdraft) + $400m (NZ Bond) + $500m (NZ Bond) + $1,299m (European Medium Term Notes) = $2,234m (Total)

Snoopy Interpretation: (Refer Note 4 AR2020 and Balance Sheet for Overdraft):

$30m (Syndicated banking facilities) + $5m (Current Liability Overdraft)+ $400m (NZ Bond) + $500m (NZ Bond) +$1,410m (EMTN) -$18m (facility fees) = $2,327m (Total)

The EMTN Total by Chorus of $1,299m is described as "$NZ equivalent at hedged rates". Why would the figures in the balance sheet not be at $NZ equivalent hedged rates"?

Why do Chorus not count the 'facility fee', (an annual payment on account of their banking facilities) as part of their banking liabilities?

You can take it from those questions that I am backing my own interpretation of debt from the balance sheet, over that espoused by Chorus.


CIP Debt Facilities

Chorus have used the face value of the debt facilities issued (Slide 42, November 2020 Presentation) and used an 8.5% annual discount factor (AR2020 p50) to get their 'present value' of CIP debt:

$85m / 1.085^5 + $86m / 1.085^10 + $128m / 1.085^13 + $163m / 1.085^16 = $183m

The undiscounted value of that CIP debt is: $85m+$86m+$128m+$163m = $462m, equal to .the total value of the UFB1 debt. (Slide 42, November 2020 presentation), However, this may be a co-incidence, as why would the UFB2/UFB2+ funding be left out of the Chorus debt picture?

The total of $461m on the balance sheet represents both 'CIP equity' and 'CIP debt'. The 'CIP equity' is actually preference shares, which in my view are more closely classed as a form of debt (it is listed as a liability in the balance sheet after all). Nevertheless, this is a grey area and Chorus is not wrong to leave out 'CIP equity' as part of their debt load. But I would class the Chorus view as a favourable interpretation of the company's debt situation.

SNOOPY

[Snoopy]

Moving on to the numerator of banking covenant,



Net Debt Nov 2020 Presentation (Chorus)Net Debt FY2020 Balance Sheet (Snoopy)


Borrowings$2,234m$2,327m


add PV of CIP debt securities (senior)$183m$461m


add Net Leases Payable$263m$263m


less Cash$0m$0m


equals Total Net Debt$2,680m$3,051m







Chorus ViewSnoopy View


Total Net Debt$2,680m$3,051m


divided by EBITDA$648m$648m


equals 'Net Selected Debt' / EBITDA4.144.71



The number the banks are on the lookout for is anything over 4.75. Chorus would have you believe that they are doing really well. Anything under 4.2 ( Moody's ) and 4.25 ( S&P ) are the trigger ratings for a credit upgrade. I, however, consider that Chorus are within a whisker of breaking this banking covenant. Chorus won't go broke though. But it is very possible that in the future at least some preference shares could be converted to Chorus ordinary shares. That would be eps dilutive for existing shareholders, and not welcome!

SNOOPY

[Snoopy]

"The facility has also been repriced to reflect current market rates and the covenants have been revised from 3.0 to 2.75 times interest coverage, to better align with Chorus’ rating thresholds."




Snoopy View


EBIT$246m


divided by Net Interest Expense$114m


equals 'Interest Coverage'2.2



Notes

1/ For the interest bill I am using in this calculation (Ref AR2020 p47):

($185m -$12m) - $29m - $27m - $3m = $114m

I have removed from the net interest bill:

(i) $29m of CIP securities 'notional interest'
(ii) $21m of 'lease expense' interest and $5m amortisation from a swaps reset and $1m to restructure interest rate swaps.
(iii) $3m from the ineffective portion of a cashflow hedge.

This calc is telling me the 'Interest Coverage Ratio' is not greater than 2.75 and so is broken. Not good news!

SNOOPY

[Ferg]

The EMTN Total by Chorus of $1,299m is described as "$NZ equivalent at hedged rates". Why would the figures in the balance sheet not be at $NZ equivalent hedged rates"?

My guess is this is either CNU and the bankers giving the finger to IFRS and/or the debt covenants use a specific definition of debt that is not in accordance with IFRS. CNU give a reconciliation of the $1,299m (being $514m+$785m) and the $1,410m (being $527m+$883m) on the bottom of page 46 AR2020. My understanding (and I am not expert in this area) is that as interest rates change, then the fair value of the debt changes for IFRS accounting. However, in my experience with senior debt and covenants, it is unlikely long term covenant calculations of debt will bounce around based on short term fluctuations in interest rates, hence the differing values.


Why do Chorus not count the 'facility fee', (an annual payment on account of their banking facilities) as part of their banking liabilities?
Are you referring to the deduction of $18m per your calculation? If so, it is correct to not include that deduction as part of debt, as Chorus has done (in other words they are correct). Again that is an IFRS construct of spreading the cost of raising the debt over the term of loan and should be thought of as a prepayment. It doesn't reduce the debt obligation, rather it is an item on the Balance where the money has already been spent but it is to be expensed.


You can take it from those questions that I am backing my own interpretation of debt from the balance sheet, over that espoused by Chorus.
I respectfully caution against such an approach given debt covenants, especially of this magnitude, are set in stone after what are usually protracted and bloody negotiations between lawyers and analysts for both parties.



Chorus have used the face value of the debt facilities issued (Slide 42, November 2020 Presentation) and used an 8.5% annual discount factor (AR2020 p50) to get their 'present value' of CIP debt:

$85m / 1.085^15 + $86m / 1.085^10 + $128m / 1.085^13 + $163m / 1.085^16 = $183m

The undiscounted value of that CIP debt is: $85m+$86m+$128m+$163m = $462m, equal to .the total value of the UFB1 debt. (Slide 42, November 2020 presentation), However, this may be a co-incidence, as why would the UFB2/UFB2+ funding be left out of the Chorus debt picture?

Ah the penny drops. Previously I mentioned senior and subordinated CIP debt was muddying the waters but I think you have unpicked it. I believe UFB1 is the senior debt, UFB2 is the subordinated debt. The difference between the raw values you have above and those per the PV calculation we did earlier (being $85.3m + $104.7m + $166.7m + $210.2m) will be for UFB2. These will be the subordinated portions of the CIP debt (as opposed to senior).

Covenants usually only apply to senior debts and/or debts held by the senior banks. The subordinated debts are either lower ranking or held by banks that are not party to the contracted covenant, hence the reason they are excluded from the covenant calculations. Two words missing from the term "covenant calculation" will be "senior debt covenant calculation". Keep in mind senior refers to debts that are ranked higher than others, and sometimes banks who view themselves as more senior to others, i.e. usually local banks versus overseas banks (historically from Scotland).


The total of $461m on the balance sheet represents both 'CIP equity' and 'CIP debt'. The 'CIP Equity' is actually preference shares, which in my view are more closely classed as a form of debt (it is listed as a liability in the balance sheet after all). Nevertheless, this is a grey area and Chorus is not wrong to leave out 'CIP equity' as part of their debt load. But I would class the Chorus view as a favourable interpretation of the company's debt situation.

SNOOPY
I would not include the equity component, despite being classified under term liabilities for 2 reasons:

it is debt that will revert to equity, so it is equity but just not right now, and
more importantly, covenant calculations are very strict and not usually open to interpretation.


I cannot stress that last point enough - all I can point to is my experience in this area with some large NZ organisations with similar amounts of debt. I highly recommend you do not use your own version of debt for these calculations. Not only should you trust their process, but the bankers will be scrutinising these covenants every quarter. There is no (or very little) room for "favourable interpretations". I suggest you run with their values because the difference will be legitimate and the calculations are set in stone.

Edit: I see you have another post on senior debt coverage etc and debt ratings. I don't disagree with what you are doing there, the part I disagree with is recalculating their senior debt covenants.

[Snoopy]

My guess is this is either CNU and the bankers giving the finger to IFRS and/or the debt covenants use a specific definition of debt that is not in accordance with IFRS. CNU give a reconciliation of the $1,299m (being $514m+$785m) and the $1,410m (being $527m+$883m) on the bottom of page 46 AR2020. My understanding (and I am not expert in this area) is that as interest rates change, then the fair value of the debt changes for IFRS accounting. However, in my experience with senior debt and covenants, it is unlikely long term covenant calculations of debt will bounce around based on short term fluctuations in interest rates, hence the differing values.


Talking about the EMTN notes, my reading of what happens to the valuation of any debt on CNUs books is that the IFRS valuation of overseas denominated overseas debt is changing with the exchange rate, If the debt valuations changed with prevailing interest rates as you allege, then you would expect the New Zealand denominated debt would change in value from year to year as well. But if you look at the book valuation of the Fixed rate NZD bonds (AR2020 p46,p47) you will see that there is no change in the value of these from year to year.

Returning to EMTN and the bottom of page 59 (AR2020) we learn:

"Chorus designated the EMTN and cross currency interest rate swaps into three part hedging relationships for each issue: A fair value hedge of EUR benchmark interest rates, a cash flow hedge of margin and a cash flow hedge on the principal exchange."

Moving back to the bottom of page 46, I interpret the "impact of fair value hedge" of $5m and $12m to relate to the relative change of interest rates between what happened in NZ and Europe over the year. The 'cash flow hedge of margin' I presume must refer to the margin between NZ interest rates and EMTN interest rates at the point the loan was entered into? The annual payment to cover that difference when translated into NZ dollars would go up and down. To stabilize that you would have to hedge the exchange rate variations in that annual payment. Then once the loan finally expires, Chorus would have to pay back a European currency loan in New Zealand dollars. The estimate of that would change annually, requiring another hedge, the $8m and $86m on the bottom of page 46.

Having said all of that, the fact that these changes are not taken into the balance sheet suggests to me that by the time the loan has run its course they will all unwind and reverse. Or as you put in Ferg, the long term covenant calculations of debt do not change.

SNOOPY

[Snoopy]

Are you referring to the deduction of $18m per your calculation? If so, it is correct to not include that deduction as part of debt, as Chorus has done (in other words they are correct). Again that is an IFRS construct of spreading the cost of raising the debt over the term of loan and should be thought of as a prepayment. It doesn't reduce the debt obligation, rather it is an item on the Balance where the money has already been spent but it is to be expensed.


I am assuming that $18m of 'facility fees' (AR2020 p46) is connected to the 'Syndicated Bank Facilities' of $550m. This facility was not fully drawn down, with only $30m borrowed at balance date. It is not clear to me that these $18m facility fees do run over several years, If we go back to FY2019 the then $350m syndicated bank facility had facility fees of $17m. Back another year and the $350m syndicated loan had facility fees of $12m. The fact that these fees are of the same order every year would suggest to me that they are annual fees for the one year, apportioned to that year alone. Furthermore, if these facility fees are directly linked to the syndicated bank facilities in such a way that they would not exist if the syndicated bank facilities did not exist, then I feel they should be incorporated in the syndicated bank facility bank debt total.

The odd thing is the facility fees are reducing the debt, not increasing it. Could this be because a large facility fee was charged at some time in the past and was capitalised as a debt? As the years roll on, this capitalised fee is gradually being amortised away, hence the negative fee charge in AR2020?

SNOOPY

[zspoon]

Snoopy, with the greatest respect, I can see you generally disagree with a lot of how GAAP (in this case specifically IFRS works), but I really think your thinking time would be better spent understanding how IFRS requires the ‘commercial reality’ is presented to allow you to understand the underlying transactions. This may be the construct created by the ‘pointy heads’, but it’s the construct that defines how any large scale corporate reporting occurs. Therefore while you’re more than entitled to have your own views on what ‘feels right’ from an accounting presentation perspective, actually unpicking how the required accounting presentation works is going to be the best route to understand the underlying business mechanics.

Failing that, lobby the IASB for change.

[Snoopy]

Snoopy wrote
"You can take it from those questions that I am backing my own interpretation of debt from the balance sheet, over that espoused by Chorus."

I respectfully caution against such an approach given debt covenants, especially of this magnitude, are set in stone after what are usually protracted and bloody negotiations between lawyers and analysts for both parties.

I would not include the equity component, despite being classified under term liabilities for 2 reasons:

it is debt that will revert to equity, so it is equity but just not right now, and
more importantly, covenant calculations are very strict and not usually open to interpretation.


I cannot stress that last point enough - all I can point to is my experience in this area with some large NZ organisations with similar amounts of debt. I highly recommend you do not use your own version of debt for these calculations. Not only should you trust their process, but the bankers will be scrutinising these covenants every quarter. There is no (or very little) room for "favourable interpretations". I suggest you run with their values because the difference will be legitimate and the calculations are set in stone.


Chorus seems to have reduced their EMTN loan debt by valuing it at an intermediate point chosen (FY2020 balance date) from within the whole loan term. I don't doubt that if these loans were to be repaid early at balance date and those various hedges were unwound at balance date, then the value of NZD needed to extinguish those EMTN notes would be $NZ1,299m. Not the $NZ1,410m shown in the balance sheet. However, there is no intent or plan to terminate those loans at balance date. So while I am not doubting the accuracy of Chorus's net debt position in any ratio calculation, I am calling it out as conceptually irrelevant from my investment perspective. That extra $NZ1,410m - $NZ1,299m = $NZ111m of debt has not gone away. It has only gone away from a FY2020 balance date perspective and it will eventually have to be repaid.

On the subject of the classification 'preference share equity', I use the 'duck test'. The preference 'shares' have no voting rights. The 'dividend' associated with them has been predetermined as a percentage of the issued capital value of the preference shares. Yes there is a mechanism where these preference shares might be converted to ordinary shares later on. But IMO it is much more likely that they will be paid back. The ordinary share equity of Chorus will be unchanged, should that happen. The duck test tells me that if something looks like debt and behaves like debt, it very likely is a debt, despite what any accounting rules might tell you in the meantime.

SNOOPY

[Snoopy]

Snoopy, with the greatest respect, I can see you generally disagree with a lot of how GAAP (in this case specifically IFRS works), but I really think your thinking time would be better spent understanding how IFRS requires the ‘commercial reality’ is presented to allow you to understand the underlying transactions. This may be the construct created by the ‘pointy heads’, but it’s the construct that defines how any large scale corporate reporting occurs. Therefore while you’re more than entitled to have your own views on what ‘feels right’ from an accounting presentation perspective, actually unpicking how the required accounting presentation works is going to be the best route to understand the underlying business mechanics.

Failing that, lobby the IASB for change.


I think you have the wrong idea about where I am coming from with this zspoon. I am not doubting the validity of the information presented in the FY2020 annual report, or saying that accounting rules have not been followed correctly, or that I am trying to improve them for company reporting purposes. I am saying that from an investment perspective from 'today', I don't care what a company's financial balance sheet position is on any particular historical date.

I do care about company debt. Yet the fact that $NZ111m of EMTN debt has 'gone away' on 30th June 2020 (for example) is of no particular interest to me. Because I know at 'debt settle up time', that $NZ111m of 'temporarily absent debt' will be back. If the EMTN borrowings are planned to be cashed up early, then fair enough - the accounting treatment of 30-06-2020 should be respected. But Chorus has not given any indication that these borrowings will not run to full term.

SNOOPY

[Ferg]

I'm curious Snoopy - are you coming up with your own analyses or critiquing theirs? Fair enough if you are doing your own thing and if you are looking at total debt relative to other values, then go for it. However, it is misleading to present your covenant calculation beside theirs and claim "favourable interpretations" in the earlier post. Had an external person come to me and told me we were doing our covenant calculations incorrectly based on values in the annual report, I would have pointed them to the debt contract(s). Do not underestimate the work & scrutiny that goes into covenants or assume the covenant calculations are open to favourable interpretations. In post 2707 you refer to "senior debt" but your definition of "senior debt" differs to the contracted version of "senior debt" for the purposes of CNU covenant calculations. I sense you won't agree with me but I honestly cannot add anything more, so I apologise in advance for providing no further responses on this issue.
Regards, Ferg

[Snoopy]

I'm curious Snoopy - are you coming up with your own analyses or critiquing theirs? Fair enough if you are doing your own thing and if you are looking at total debt relative to other values, then go for it. However, it is misleading to present your covenant calculation beside theirs and claim "favourable interpretations" in the earlier post. Had an external person come to me and told me we were doing our covenant calculations incorrectly based on values in the annual report, I would have pointed them to the debt contract(s). Do not underestimate the work & scrutiny that goes into covenants or assume the covenant calculations are open to favourable interpretations.


Perhaps I should not have used the term 'favourable interpretations'. That phrase might imply that whoever calculated those banking covenants had the option to do it another way. I acknowledge what you say Ferg about Chorus's numbers being carefully put together and in accordance with the law and accounting standards. Nevertheless these banking covenants are drawn up for one underlying purpose: ensuring the banks get their money back.

If Chorus got into trouble and the banks get their money back while subordinated debt holders or even lower down the scale - the shareholders - did not, then the banking covenants have done their job. This is no real comfort to subordinated debt holders or shareholders though. It is in this sense that I used the phrase 'favourable interpretations'. The banks have set their own banking covenants with little regard to subordinated debt holders or shareholders. If they had drawn up banking covenants to take into account even just subordinated debt holders, then different covenant hurdles would apply.

I am not saying there is anything wrong with banks protecting their own patch. If I were a banker I would make darn sure I did just that! I am saying that shareholders who feel comforted by a company staying within their banking covenants may be in a false comfort zone. If a more embracing view ('a less favourable interpretation of the big picture') of debt due was taken, then shareholders and subordinated debt holders would have a better measure of their own likelihood of getting their capital back, should Chorus come under real stress.

My alternative presentation of the 'Debt' / EBITDA ratio and my labelling of both 'my selected debt' alongside 'Chorus's selected debt' with both labelled as 'Senior Debt' was sloppy. Labelling two different numbers as 'senior debt' does imply that one of those numbers is 'wrong'. So I have gone back to my post 2707 and relabeled both debt figures as 'selected debt', with the implication that I and Chorus can make different debt selections and come up with two different answers, one of which is suitable for banks (the Chorus figure) and the other (Snoopy's choice) more suitable for a low life scum shareholder, such as myself.

SNOOPY

[Ferg]

Fair enough and thanks for responding. I understand where you are coming from.
:cool:

[Snoopy]

Snoopy wrote:
"The undiscounted value of that CIP debt is: $85m+$86m+$128m+$163m = $462m, equal to .the total value of the UFB1 debt. (Slide 42, November 2020 presentation), However, this may be a co-incidence, as why would the UFB2/UFB2+ funding be left out of the Chorus debt picture?"

Ah the penny drops. Previously I mentioned senior and subordinated CIP debt was muddying the waters but I think you have unpicked it. I believe UFB1 is the senior debt, UFB2 is the subordinated debt. The difference between the raw values you have above and those per the PV calculation we did earlier (being $85.3m + $104.7m + $166.7m + $210.2m = $566.9m) will be for UFB2. These will be the subordinated portions of the CIP debt (as opposed to senior).

Covenants usually only apply to senior debts and/or debts held by the senior banks. The subordinated debts are either lower ranking or held by banks that are not party to the contracted covenant, hence the reason they are excluded from the covenant calculations.


No I haven't unpicked anything. Look at Slide 43 of the November 17th 2020 presentation. The series of numbers that you carefully discounted over a multi year period back in your post 2696 -that added up to $566.9m- are clearly labelled as the "Debt Securities Maturity Profile of UFB1 & 2"

If we go back to AR2020 page 50, the second paragraph talks about CIP debt existing in 'senior' and 'subordinated' debt, with the proportion of each a fluctuating fraction of the total. But subject to the constraint that the 'senior debt' and the 'subordinated debt' always added up to the total capital that was contracted to eventually be repaid.

"The initial value of the senior portion is the present value (using a discount rate of 8.5%) of the sum repayable on the CIP debt securities and the initial subordinated portion will be the difference between the issue price of the CIP debt security and the value of the senior portion."

This means that for all CIP debt, be it UFB1, UFB2 or UFB 2+, it 'starts off' on the books as a relatively small senior portion that grows as the interest free loan heads for maturity until finally, just at the point the debt is due to be repaid it becomes all senior debt. The fact that the senior debt at EOFY2020 happens to equal the undiscounted UFB1 debt is I believe a co-incidence. It is not surprising the figures are close because all of the UFB1 spending has been done, and the discount notional interest rate has only a few discounting years to adjust for.

SNOOPY



"

[Snoopy]

As a regulated monopoly, CNU should be allowed to return a sufficient return on equity. Whether that return justifies the current share price is another question but there is no doubt that CNU will be profit and will pay a dividend.

Vector would be the closest comparison as the majority of its business is a regulated monopoly.


I like long life utility type assets as an investment prospect, and the Chorus network(s) tick that box. But I am still put off by the unusual funding structure of Chorus. I get that there has to be government assistance because Chorus are building the broadband fibre network ahead of the demand curve. In capital terms there is no subsidy though, as far as I can work out. That is because the 'Crown Infrastruture Partners' funding, the 'CIP debt' and 'CIP equity' (actually preference shares) ultimately have to be repaid.

$924m in accessed crown funding (AR2020 p49) is not chickenfeed, even in these days of low interest rates. If Chorus could get a commercial loan at 3% today, to replace that CIP funding, they would be up for an annual extra incremental interest bill of:

$924m x 0.03 = $28m

Net earnings last year were $52m. So underlying net profit at Chorus could eventually be nearly halved (by $28m x 0.72 = $20.2m) based on that incremental interest figure, once the government loan support starts to become 'commercial' from FY2025. This is a very different position to the electricity 'gentailers'.

Like Chorus those gentailer companies own long life utility type assets. Unlike Chorus, those renewable power assets increase in value as the wholesale power price rises. To see a similar effect at Chorus, the price of wholesale broadband will have to keep rising at a similar rate to rising power prices, while the cost to operate the now existing fibre network continually falls going into the future. That seems unlikely. This means, from a future funding perspective, Chorus is in a far worse position than the likes of Contact Energy, Mercury Energy and Meridian Energy at least.

The other point I really don't understand is the savings in depreciation of $27m (AR2020 p43) that can be obtained because Crown Funding has been used. How can the book state of the Chorus assets be affected by how those assets are funded? Surely depreciation is a function of wear and tear and maybe technical obsolescence? If, however, we do take that extra depreciation deduction at face value and we do look to the future when the Crown funding is repaid, presumably that extra depreciation deduction will no longer be available? The after tax effect would be a reduction in NPAT of 0.72x$27m= $19.4m. Add that to the underlying new incremental interest bill of $28m -before tax- and any underlying Chorus profits ( NPAT effect of 0.72x$28m= $20.2m) for an indicative FY2020 based future year Net Profit After Tax drops to a measly:

$52m - $19.4m -$20.2m = $12.4m (a near 80% reduction on the headline NPAT).

Am I missing anything here?

SNOOPY

[Ferg]

Am I missing anything here?

Unfortunately you are double counting by not following the debits and credits. In fairness to you, CNU have not helped with their presentation whereby some figures have been aggregated and others have been offset. If you can answer / solve these questions, then you will have your answers:

1) how much of the $924m Crown funding relates to CIP debt? For the purposes of calculating future cost, what is the recognition profile and interest rate(s) on this debt? {we figured this part out earlier}
2) how much of the $924m Crown funding will end up as CIP equity? Will those preference shares need to be repaid? If so, then yes add some interest to that component in future years. If not, what is the annual cost of the preference shares?
3) how much of the $924m Crown funding remains after deducting CIP equity and debt per #1 and #2?
4) how much of the value in #3 will need to be repaid, if at all? (this part is CRUCIAL) Only the amount that should be repaid to the Government should be subject to additional future replacement funding costs per your post.
5) is the "book state" of the assets actually affected by crown funding? (depreciation yes, book value no) But more importantly, where on the Balance Sheet did the credit to depreciation come from? And what is the forecast profile of it's amortisation?

If you can answer these then you will have your impact on future profitability.

FERG

[Snoopy]

Net earnings last year were $52m. So underlying net profit at Chorus could eventually be nearly halved (by $28m x 0.72 = $20.2m) based on that incremental interest figure, once the government loan support starts to become 'commercial' from FY2025.

The other point I really don't understand is the savings in depreciation of $27m (AR2020 p43) that can be obtained because Crown Funding has been used.

If we take that extra depreciation deduction at face value and we do look to the future when the Crown funding is repaid, presumably that extra depreciation deduction will no longer be available? The after tax effect would be a reduction in NPAT of 0.72x$27m= $19.4m. Add that to the underlying new incremental interest bill of $28m -before tax- and any underlying Chorus profits ( NPAT effect of 0.72x$28m= $20.2m) for an indicative FY2020 based future year Net Profit After Tax drops to a measly:

$52m - $19.4m -$20.2m = $12.4m (a near 80% reduction on the headline NPAT).

Am I missing anything here?





Unfortunately you are double counting by not following the debits and credits. In fairness to you, CNU have not helped with their presentation whereby some figures have been aggregated and others have been offset. If you can answer / solve these questions, then you will have your answers:

1) how much of the $924m Crown funding relates to CIP debt? For the purposes of calculating future cost, what is the recognition profile and interest rate(s) on this debt? {we figured this part out earlier}


That $924m of funding refers only to the UFB1 roll out. For this the split was strictly 50/50 between CIP debt and CIP preference shares. So the CIP debt component is $924m/2 = $462m.

The debt is repayable in tranches which are graphically laid out as the blue columns on Slide 42 of the November 2020 shareholder presentation, and which I have tabulated below:



FY2025FY2030FY2033FY2036Total


CIP USB1 Debt Due
$85m$86m$128m
$163m$462m


CIP USB1 Discounted Value of Debt Due (mandated 8.5% discount rate)
$56.5m$38.0m$44.3m$44.2m$183m



Note that repayment of CIP debt cannot be accelerated by the holder (p140 of 'Share in Two Journeys' 13th September 2011 Telecom share split document). Although why you would want to accelerate the payback of an interest free loan I do not understand!

For banking covenant purposes, it is the present value of the CIP USB1 debt that is of concern to bankers (November 17th Presentation, Slide 41). Although it is the discounted value of the debt that appears in the CNU balance sheet, the difference between the face value and the discounted value becomes 'notional interest' due to be repaid.

As far as notional interest rates go AR2012 under Note 5 on Crown Funding Securities had this to say.

"On initial recognition the discount rate of between 10.77% and 10.87% for CIP equity securities and 6.65% to 6.90% for CIP debt securities"

Roll forward to AR2013 and Note 4 on Crown Funding has the following equivalent comment.

'The initial value of the senior portion of (CIP debt securities) is the present value (using a discount rate of 8.5%) of the sum repayable on the CIP debt securities."

There is no mention of any equivalent discount rate on equity securities, or why the CIP discount rate was upped from "6.65% to 6.90%" to 8.5%. That 8.5% figure continues to this day (AR2020 p50). Yet prevailing 180 day interest rates in 2012 were 4.25% verses 0.9% today. I have a massive problem with this as retaining that very high unexplained 8.5% discount rate IMO, significantly understates the balance sheet indebtedness of CNU.

SNOOPY

[Waltzing]

Always try to find time to read SNP on Banks and Gens.

Interesting interview on CNBC UK on european banks from Storm Uru in which MR Uru simply said he had no idea what business european banks were actually in.

I would have suggested he contact SNP and employ the inspector to investigate the balance sheets of european banks.

Shows that even some european investment funds dont have the resources to research their own markets.

Was there a note on depreciation in the financials that gave a more detailed break down.

Lets go and have a look.

[Snoopy]

2) how much of the $924m Crown funding will end up as CIP equity? Will those preference shares need to be repaid? If so, then yes add some interest to that component in future years. If not, what is the annual cost of the preference shares?


With the $924m we are talking about UFB1 funding. So we know that exactly half of that, $462m, will be 'CIP Equity'. I prefer to use the term 'CIP Preference' shares as a more accurate prescriptive term. Unlike 'CIP debt', there is no 'repayment schedule' as such. But there is a rather punitive (from a 2020 perspective) 'divdend demand' schedule that kicks in starting in 2025. The amount of preference shares subject to 'dividend demand' is as follows (derived from p140 of 'Share in Two Journeys' 13th September 2011 Telecom share split document).



from Year and beyond ......FY2025FY2030FY2033FY2036



Cumulative Percentage of CIP USB1 Preference Shares Interest Due

18.5%36.9%64.6%100%


Cumulative Dollar value of CIP USB1 Preference Shares Interest Due
$85m$170m$298m$462m


Annual Preference Shares Dividend Estimate (1)
$5.4m$10.8m$18.9m$29.3m


Equivalent Preference Share Interest rate on All Preference Share Capital
1.16%2.33%4.09%6.35%



Notes

1/ From the 'Share in Two Journeys' 13th September 2011 booklet, page 140, the amount of the dividend will be equal to a reference rate (based on the 180 day bank bill rate) plus six percentage points. I can't find a 180 day bank bill rate. But the 90 day bank bill rate is currently 0.35%. If I use that then the indicative interest rate to be charged is 6.35%. This is the figure that I have used in the above calculation.

2/ The table above shows the preference dividends that will became payable unless redeemed earlier. There is no expiry date mentioned for the CIP preference shares in any documentation that I have seen. So I have to assume there is no requirement to ever repay them.

Chorus last issued bonds on 3rd December 2020, with the ten year CNU040 bond being issued at 2.51% and the seven year CHU030 bond being issued at 1.98%, While no-one knows where interest rates will go in the future, I would currently bet that it would be worthwhile refinancing these CIP preference shares by 2036 at a cheaper prevailing rate than 6.35%, if available. The consequence of not doing so would severely dent the profit of Chorus further into the future.

Ferg asks if the preference shares 'need to be repaid'. Well they don't need to be repaid in any legal sense. It is just that there are likely significant consequences for Chorus's profits if they are not repaid!

I have shown from FY2036 that the annual cost of keeping the preference shares active is $29.3m. But the choice is not just between having the preference shares or not having them. A third option is to replace them with borrowings on more favourable terms, maybe at 3%. If that were to happen then from 2036 the annual incremental cost of retaining the preference shares would be:

$462m x ( 0.0635 - 0.030 ) = $16.2m (before tax) or $11.6m (after tax)

So $11.6m is my estimate of the 'net cost' 'per year' of retaining those preference shares.

I think you may have misworded your question Ferg, because you said that if the preference share had to be repaid then add some interest component in future years. You must have meant add a capital repayment in future years. Just interest repayments will not be sufficient to repay any capital. There are $462m in CIP Preference Shares outstanding , relating to UFB1. If this was to be fully repaid by FY2036 (in fifteen years time), this would require an annual 'capital repayment' of:

$462m / 15 = $30.8m per year

That would make a very big hole in the annual dividend payment. Why am I the only one to notice this possibility?

SNOOPY

[Snoopy]

3) how much of the $924m Crown funding remains after deducting CIP equity and debt per #1 and #2?


None. The Crown funding for UFB1 is equally split between 'CIP Debt' and 'CIP Preference Shares'.

I want to clarify my answer by noting that there is a third category of UFB1 funding in the form of 'free' CIP Warrants issued to the crown. The purpose of these warrants is to allow the crown to share in an upside scenario, if total shareholder returns exceeded 16% per year. The excise date of the warrants correspond to the repayment dates of CIP debt and the dates on which an increasing interest burden becomes payable of CIP preference shares. The implication here is that should these CIP Warrants become exercisable, they could be used to help pay off the 'CIP Debt' and 'CIP Preference Shares'. However the CIP Warrant exercise price is a 'stretch target'. If we take the base price for CNU as the day that CNU listed on 30-11-2011 of $3.29 (not strictly the way the base price calculation is done but it will suffice for demonstration purposes), then ten years of growth at the target rate to 2021 should see a Chorus share price of:

$3.29 x 1.16^10 = $14.51

Because it is a total return calculation we need to subtract from that target, the total dividends paid to date (13-04-2021) of $1.701t:

$14.51 - $1.701 = $12.81

The share price closed today at $6.85, which means the warrants are well out of the money. The warrants are expected to expire worthless.



4) how much of the value in #3 will need to be repaid, if at all? (this part is CRUCIAL) Only the amount that should be repaid to the Government should be subject to additional future replacement funding costs per your post.


Companies like Chorus, with a utility profile stable cashflows, tend to run a relatively high debt policy in the name of 'shareholder equity efficiency'. Debt ratios tend to be set by banking covenants. The most crucial of these for Chorus is Net Debt/EDITDA, that should not be greater than 4.75 times ( 17th November Presentation, Slide 41).

The current year calculation includes CIP debt at a discounted rate of only $183m with no allowance for the growing book value of CIP debt and no allowance made for made for any debt to be taken on to replace the CIP preference shares. Currently both the CIP debt and CIP preference shares are 'interest free' for Chorus. Interest free loans are not liked by accounting standards people. The convention seems to replace interest free loans on the books by loans at a reduced capital repayment rate, with the total owed made up by 'notional interest'. That means as the CIP debt gets nearer to maturity, the capital portion of those loans increases for debt covenant purposes. Correspondingly EBITDA needs to increase to ensure that the Net Debt/EBITDA banking covenant ratio is maintained. We don't know what the growth in Chorus EBITDA will be between now and 2025, let alone now and 2036. But we do know earnings growth will be 'government restricted'. Taking all of this into account I believe:

1/ that Chorus should plan for its CIP debt to be reissued by its banking syndicate at market rates (this will increase Chorus's debt on the books by $462m - $183m = $279m), This will require a consummate increase in EBITDA by Chorus over the period of $279m / 4.75 = $59m over and above the FY2020 figure of $648m (a one off increase of 9%) for this debt banking covenant to be maintained AND

2/ that the CIP preference shares, totalling $462m, which will require onerous payments, will need to be fully repaid. To do this over a 15 year period, Chorus will have to set aside $462m/15 = $30.8m per year every year until 2036. The alternative of simply replacing the CIP preference shares with debt is likely to blow the Total Debt/EBITDA banking covenant ratio out of the water IMO.

SNOOPY

[Snoopy]

Unfortunately you are double counting by not following the debits and credits. In fairness to you, CNU have not helped with their presentation whereby some figures have been aggregated and others have been offset. If you can answer / solve these questions, then you will have your answers:

5) is the "book state" of the assets actually affected by crown funding? (depreciation yes, book value no) But more importantly, where on the Balance Sheet did the credit to depreciation come from? And what is the forecast profile of it's amortisation?

If you can answer these then you will have your impact on future profitability.


After being quite pleased with my answers to the other questions you posed Ferg, here is where I come unstuck. I think we have both agreed that the 'book value' of an asset cannot be affected by how it is funded, just like the value of my car cannot be affected by how it is financed. But what would happen if I had my car financed by 'Crown Infrastructure Partners' and went to trade it in? The salesperson would offer me $x. But I would say:

"No, no, no ,no ,no. This is a CIP funded car, and as a result it has depreciated less than other cars of the same age and mileage. So I want $x + $y"

You are telling me the salesperson would go for my counter offer?

The journal entry for depreciation is normally:

Debit $d for depreciation expense. Credit $d for accumulated depreciation.

So to answer your question, the credit came from 'accumulated depreciation'. The accumulated depreciation is them offset against the historical cost of the asset reducing the assets book value on the balance sheet by the amount of the depreciation.

Next you ask about the profile of the accumulated depreciation amortisation. From AR2020 Note 1 page 43, I can see there is a crown funding offset to depreciation of $27m. The accompanying explanation is:

"Chorus receives funding from the Crown to finance the capital expenditure associated with the development of the UFB network . Where funding is used to construct assets, it is offset against depreciation over the life of the assets constructed,"

This indicates to me that may 'normal' journal entry for depreciation is wrong in this instance. It should instead read something like:

Debit $d for depreciation expense. Credit $d1 for accumulated depreciation, and Credit $d2 against CIP debt. (where $d1+$d2 =$d)

Except that can't be right because all of the CIP debt still has to be repaid in full according to the debt repayment schedule. A still baffled,,,

SNOOPY

[Ferg]

None. The Crown funding for UFB1 is equally split between 'CIP Debt' and 'CIP Preference Shares'.

I may have referenced the wrong figure wrt to the "Crown Funding" balance by using the figure of $924m from your post without first double checking it. Are we sure "none" of the Crown Funding balance is not repayable debt and CIP equity? If so, where did the credit to depreciation come from?

From the AR:
"The offset of Crown funding against depreciation is expected
to increase over time until the UFB build is completed in
December 2022 and the contracted Crown funding is
received. The associated amortisation credit to depreciation
will continue to increase accordingly."

That $27m credit to the P&L has to be a debit somewhere else. That somewhere else is the "Crown Funding" bucket. The fact the credit ends up in the P&L and not the Balance Sheet says to me not all of the "Crown funding" balance is repayable and CIP equity.


You are telling me the salesperson would go for my counter offer?
Not at all. You misinterpret my intent - I was seeking the other side of the $27m credit entry to depreciation, not the other side of the depreciation entry. This post is what I am driving at.

FERG

[Snoopy]

The journal entry for depreciation is normally:

Debit $d for depreciation expense. Credit $d for accumulated depreciation.

So to answer your question, the credit came from 'accumulated depreciation'. The accumulated depreciation is them offset against the historical cost of the asset reducing the assets book value on the balance sheet by the amount of the depreciation.

Next you ask about the profile of the accumulated depreciation amortisation. From AR2020 Note 1 page 43, I can see there is a crown funding offset to depreciation of $27m. The accompanying explanation is:

"Chorus receives funding from the Crown to finance the capital expenditure associated with the development of the UFB network . Where funding is used to construct assets, it is offset against depreciation over the life of the assets constructed,"

This indicates to me that may 'normal' journal entry for depreciation is wrong in this instance. It should instead read something like:

Debit $d for depreciation expense. Credit $d1 for accumulated depreciation, and Credit $d2 against CIP debt. (where $d1+$d2 =$d)


I wrote the above and during my short evening stroll to the supermarket and back realised the second hypothetical journal entry contained a mistake. The accumulated depreciation of any equipment cannot be affected by how that equipment is funded. If it were my 'car trade in story' (post 2725) would be a reality. However the 'depreciation expense' is simply a journal entry that could be manipulated provided there are other compensating book entries to make the whole scenario add up. So my revised accounting journal entry should have read:

"Debit $d1 for depreciation expense, Debit $d2 for 'Crown Funding Subsidy'. Credit $d for accumulated depreciation. (where $d1+$d2 =$d)

SNOOPY

[Ferg]

"Debit $d1 for depreciation expense, Debit $d2 for 'Crown Funding Subsidy'. Credit $d for accumulated depreciation. (where $d1+$d2 =$d)
I don't mean to be negative but No, that is not correct. Where did the $27m credit to depreciation come from? It must have been journaled from "Crown Funding". Again, if in reading this you come up with an accounting impossibility or something that appears nonsensical, then I recommend you re-interpret what I said some other way after following the debits and credits.
FERG

[zspoon]

Look at the accounting for standard for government grants. Accounting policy choice to release either against depreciation or as other income (i.e. ‘where does the credit go’). The book value of the asset is unaffected because there is no journal which touches either the cost or the accumulated depreciation of the asset.

Truly surprising that the key to understanding a set of IFRS accounts are the IFRS accounting standards...

[Snoopy]

Look at the accounting for standard for government grants. Accounting policy choice to release either against depreciation or as other income (i.e. ‘where does the credit go’). The book value of the asset is unaffected because there is no journal which touches either the cost or the accumulated depreciation of the asset.

Truly surprising that the key to understanding a set of IFRS accounts are the IFRS accounting standards...


It took me some time to find the NZ sanctioned version of IAS20 but here is the link

https://www.xrb.govt.nz/dmsdocument/2396

Clause 26 (recognising a government grant as deferred income) and the alternative Clause 27 (recognising a grant as a reduced depreciation expense) - the option chosen by Chorus- are spelt out.

It certainly makes sense that the book value of any asset is unaffected by any government funding package.

However, things are not that simple, as this particular government grant is in the form of 'CIP debt' and 'CIP equity' that must be paid back. So now we move on to Clause 32

"A government grant that becomes repayable shall be accounted for as a change in accounting estimate (see NZIAS8 Accounting Policies, Changes in Accounting Estimates and Errors). Repayment of a grant related to income shall be applied first against any unamortised deferred credit recognised in respect of the grant. To the extent that the repayment exceeds any such deferred credit, or when no deferred credit exists, the repayment shall be recognised immediately in profit or loss. Repayment of a grant related to an asset shall be recognised by increasing the carrying amount of the asset or reducing the deferred income balance by the amount repayable. The cumulative additional depreciation that would have been recognisd in profit or loss to date in the absence of the grant shall be recognised immediately in profit or loss."

It is not clear to me where the government 'depreciation subsidy' has come from with Chorus. Is it from 'CIP debt' or 'CIP equity' ? Maybe it doesn't matter, since both have to be repaid? On second thoughts only 'CIP debt' has to be repaid. So maybe it does matter?

I see from clause 17 that

"Similarly, grants related to depreciable assets are usually recognised in profit or loss over the periods and in the proportions in which depreciation expense on those assets is recognised."

This clause would appear to say that grants relating to 'Fibre assets' (life 20 years) and 'Ducts manholes and poles' (life 20-50 years) - reference AR2020 page 26 - would have a reversed depreciation allowance spread over that time. But the CIP debt is fully repayable in just 15 years. So any offsetting of depreciation looks to be a problem, because of the long life of those assets being funded.

The ultimate repayment of the unamortised part of the CIP funding is straightforward. But once we move to the amortised bit of the loan, clause 32 would suggest to me that any depreciation subsidy previously booked would be reversed.and significant losses would be crystallised reversing all those depreciation subsidies of the past. Have I got that right?

SNOOPY

[Snoopy]

Are we sure "none" of the Crown Funding balance is not repayable debt and CIP equity?


I can point you to the document which is a PDF summary of CIP1 securities

https://company.chorus.co.nz/file-download/download/public/1872

From paragraph 8

Chorus is required to redeem the CIP1 Debt Securities in tranches from 2025 to 2036 by repaying the issue price to the holder as follows:



2025203020332036


Debt Repayment
$86m$86m$129m$164m



Note this debt repayment schedule is in fixed dollar amounts. Furthermore if you add up all the repayments they add up to $465m. This matches the $465m of CIP1 Equity on which dividends become payable (note 18). The total of $930m, representing the total crown funding made to Chorus, is spelt out in dollar terms, and very importantly no amortisation deductions that might reduce Chorus's liability to pay back these totals has been made. This to me is clear evidence that all of the CIP1 funding must be repaid.



If so, where did the credit to depreciation come from?

From the AR2020 p26:
"The offset of Crown funding against depreciation is expected to increase over time until the UFB build is completed in December 2022 and the contracted Crown funding is received. The associated amortisation credit to depreciation will continue to increase accordingly."

That $27m credit to the P&L has to be a debit somewhere else. That somewhere else is the "Crown Funding" bucket. The fact the credit ends up in the P&L and not the Balance Sheet says to me not all of the "Crown funding" balance is repayable and CIP equity.


Good question. The $27m amortisation of Crown Funding that we are talking about appears in AR2020 on page 26 (which includes all of the offset against UFB1 depreciation) under 'Depreciation & Amortisation' and on page 51 in the 'Crown Funding' note. On page 27 under 'Finance Income & Expense' there is an interest charge of $29m of CIP 'notional interest' which may incorporate the offset you are looking for.

Journal Entry:

Debit: $27m reimbursement against Depreciation Expense. Credit: $27m Crown Funding Interest Expense

I submit this $27m 'interest expense' is part of 'notional interest' because no interest money is actually paid over when the adjustment against depreciation is made. So the journal entry balances. But over time the 'notional interest' unwinds back into a capital sum so that when the time comes to pay back the CIP1 funding, the full amount is still repayable. You are correct Ferg that the credit goes into the crown funding bucket. But my theory is that this credit 'leaks out' of that crown funding bucket by the time the CIP repayment is due.

This reasoning also explains why the 8.5% discount rate for notional interest is so high and doesn't change as other market interest rates change. The 8.5% is what is needed to reflect the recovery of offsetting depreciation rates, which are fixed by legislation.

SNOOPY

[Snoopy]

Roll forward to AR2013 and Note 4 on Crown Funding has the following equivalent comment.

'The initial value of the senior portion of (CIP debt securities) is the present value (using a discount rate of 8.5%) of the sum repayable on the CIP debt securities."

There is no mention of any equivalent discount rate on equity securities, or why the CIP discount rate was upped from "6.65% to 6.90%" to 8.5%. That 8.5% figure continues to this day (AR2020 p50). Yet prevailing 180 day interest rates in 2012 were 4.25% verses 0.9% today. I have a massive problem with this as retaining that very high unexplained 8.5% discount rate IMO, significantly understates the balance sheet indebtedness of CNU.


As outlined in my previous post 2731, my new explanation for the very high 8.5% discount rate is that it is indirectly linked to the depreciation allowed for these government funded fibre assets. I am not completely sure this is correct. But it is the answer that best fits the facts as I see them. So until I get a better explanation, I will run with my current thoughts on this.

The 'squeeze" that I refer to in this post title refers to:

1/ the ballooning balance sheet representation of UFB1 debt, AND
2/ the increasing regulation of revenue that ultimately supports the profit that must service this debt.

Of particular interest is the coming regulatory period that takes us through to the end of FY2024.



FY2025FY2030FY2033FY2036Total


CIP USB1 Debt Due
$85m$86m$128m
$163m$462m (Gross Value)


CIP USB1 Discounted Value of Debt Due (mandated 8.5% discount rate)
$56.5m$38.0m$44.3m$44.2m$183m (FY2020 Balance Sheet Representation)


CIP USB1 Discounted Value of Debt Due (mandated 8.5% discount rate)
$61.3m$41.2m$48.1m$48.0m$199m (FY2021 Balance Sheet Representation)


CIP USB1 Discounted Value of Debt Due (mandated 8.5% discount rate)
$66.5m$44.7m$52.1m$52.0m$215m (FY2022 Balance Sheet Representation)


CIP USB1 Discounted Value of Debt Due (mandated 8.5% discount rate)
$72.2m$48.5m$56.6m$56.4m$234m (FY2023 Balance Sheet Representation)


CIP USB1 Discounted Value of Debt Due (mandated 8.5% discount rate)
$78.3m$52.7m$61.4m$61.3m$254m (FY2024 Balance Sheet Representation)



On 6th April Chorus announced that the indicative maximum allowable revenue range to $680m to $710m. I will take the mid point of that range - $695m - to illustrate my point. Revenue from 'fibre broadband' and 'fibre premium' (AR2020 p52) totalled over FY2020:

$393m + $73m = $466m

This implies a profit maximising growth rate over the ensuing four years of:

$466m(1+g)^4= $695m => g=10.5%

The implied compounding annual growth rate for fibre revenue should be up to a maximum of 10.5%. Based from a 60% take up of fibre that is rolled passed the door (the EOFY2020 figure), this means we are taking about take ups of 66.3% (EOFY2021), 73.3% (EOFY2022), 81.0% (EOFY2023) and 89.5%(EOFY2024). Granted some of that growth penetration may be a bit lower because some of the revenue increase might be for higher bit-rate services, rather than just 'more services', Nevertheless I think it would be stretch for Chorus to extract that much growth from its fibre network for the next four years in a row. The problem for Chorus is that fibre revenue growth does not equate to Chorus revenue growth. Legacy copper revenue is lost along the journey, and this particularly hurts when Chorus loses their legacy copper customers to other fibre networks not run by Chorus (such as Enable in Christchurch). To illustrate this point, look at the relationship between fibre revenue and EBITDA over the last five years.....

SNOOPY

[Snoopy]

The implied compounding annual growth rate for fibre revenue should be up to a maximum of 10.5%. Based from a 60% take up of fibre that is rolled passed the door (the EOFY2020 figure), this means we are taking about take ups of 66.3% (EOFY2021), 73.3% (EOFY2022), 81.0% (EOFY2023) and 89.5%(EOFY2024). Granted some of that growth penetration may be a bit lower because some of the revenue increase might be for premium services, rather than just 'more services', Nevertheless I think it would be stretch for Chorus to extract that much growth from its fibre network for the next four years in a row. The problem for Chorus is that fibre revenue growth does not equate to Chorus revenue growth. Legacy copper revenue is lost along the journey, and this particularly hurts when Chorus loses their legacy copper customers to other fibre networks not run by Chorus (such as Enable in Christchurch). To illustrate this point, look at the relationship between fibre revenue and EBITDA over the last five years.....





FY2016FY2017FY2018FY2019
FY2020FY2021FFY2022FFY2023FFY2024FFY2025F


EBITDA
$594m$652m$653m
$636m$648m


NPAT
$99.6m$131.7m$97.2m$65.6m
$67.1m$52.4m (2)$55.5m (2)$58.8m (2)$65.0m (2)$95.0m (2)



Fibre Uptake Rate
24%35%45%53%60%


Non-Fibre Revenue {C}-{B}
$875m$838m$714m$602m$493m
$359m$137m$233m$274m


Fibre Revenue {B}
$133m$202m$276m$368m$466m
$591m (3)$715m (3)$735m (3)$755m (3)



Overall Revenue (C)
$1,008m$1,040m$990m$970m$959m$950m (2)$852m (2)$968m (2)$1,029m (2)$1,067m (2)




Notes

1/ NPAT figures are normalised, as per my post 2650.
2/ Forecast figures are taken from https://simplywall.st/stocks/nz/telecom/nzx-cnu/chorus-shares#future
3/ Forecast revenue from Chorus 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2021 value interpolated).

The above table shows that, over the last four years in particular, EBITDA has reached a plateau despite the ever increasing revenue from fibre. Overall revenue over the period has been largely flat to declining. Customers do tend to pay a bit more to access broadband than they did to access the legacy copper line services. But this revenue gain is more or less offset by the loss of customers in Northland (Northpower), the Central North Island (Ultrafast Fibre) and Christchurch (Enable). In these regions customers upgrading to fibre move from a Chorus copper account to an entirely different fibre provider. Customers that upgrade on those paths are lost forever to Chorus,

Projecting these trends it seems likely that EBITDA at Chorus will not increase materially going forward into the future, despite the encouraging growth in fibre internet all over New Zealand. In tandem with this, it seems that although most of the debt that the company needs to take on to build its share of the UFB network around the country is already on the books, the amount of debt that must be recognised is geometrically increasing (see part 1 of this post). The incremental debt recognised by EOFY24 will be:

$254m - $183m = $71m

If EBITDA remains flat, then the 'Net Debt' to 'EBITDA' ratio becomes ( 17th Nov presentation, Slide 41):

($2,680m + $71m) / $648m = 4.24 (FY2024 estimate)

This is a rise on the FY2020 equivalent figure of 4.14, but 4.24 is still below the maximum target allowable of 4.75. There remains execution risk with these projections.

The real challenge will come in FY2025 when the first tranche of 'CIP debt', $85m, will need to be repaid then refinanced. But much more significant than that, in EBITDA terms,will be the fundamental loss of earning power when the demands of the 'CIP equity' dividends become real.

SNOOPY

[Snoopy]

FY2016FY2017FY2018FY2019
FY2020FY2021FFY2022FFY2023FFY2024FFY2025F


EBITDA
$594m$652m$653m
$636m$648m


NPAT
$99.6m$131.7m$97.2m$65.6m
$67.1m$52.4m (2)$55.5m (2)$58.8m (2)$65.0m (2)$95.0m (2)



Fibre Uptake Rate
24%35%45%53%60%


Non-Fibre Revenue {C}-{B}
$875m$838m$714m$602m$493m
$359m$137m$233m$274m


Fibre Revenue {B}
$133m$202m$276m$368m$466m
$591m (3)$715m (3)$735m (3)$755m (3)



Overall Revenue (C)
$1,008m$1,040m$990m$970m$959m$950m (2)$852m (2)$968m (2)$1,029m (2)$1,067m (2)




Notes

1/ NPAT figures are normalised, as per my post 2650.
2/ Forecast figures are taken from https://simplywall.st/stocks/nz/telecom/nzx-cnu/chorus-shares#future
3/ Forecast revenue from Chorus 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2021 value interpolated).


The article below contains some very bullish thoughts on Chorus, suggesting it should be trading at up to a fair value of $14.41.

https://simplywall.st/stocks/nz/telecom/nzx-cnu/chorus-shares/news/chorus-limited-nzsecnu-shares-could-be-50-below-their-intrin

IMO more prominence should have been given to the disclaimers further down the page.

"PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NZSE every day."

This should give readers a clue that the valuation process is automated (no real surprise there).

"The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance."

In the case of Chorus the 'future capital requirements' include the repayment or refinancing of the 'CIP debt' and 'CIP preference shares' which are currently helping to finance Chorus with no cash contribution from the company. Currently these debts which will have to be dealt with from as soon as 2025 amount to 1.3 billion dollars (17th November Presentation p43) ! Compare this to the collective DCF valuation that $1.7billion that Simply Wall Street puts on the present valuation of Chorus cashflows for the next ten years and you can see the magnitude of the omitting future capital requirements' from any valuation.

When you do a DCF valuation on a company that is not rapidly growing, a disproportionate part of the valuation sits in the terminal value calculation from 2030 onwards ($8.8billion in this case). I don't believe that assuming cashflows will rise by the five year average of the current ten year bond rate (2.3%) is appropriate for a mature government regulated network. I am not saying this is impossible. There maybe some value enhanced add-ons that we cannot imagine now that will see the net cashflow from Chorus behave like this. But I don't think it is prudent to assume that this will happen for valuation purposes.

The earnings growth assumption of 14.4% per year seems to have been compiled from a low point in the business cycle and is a recovery situation. If that growth rate has been built into the DCF model for the next ten years then I think the DCF modelling is seriously flawed.

CNU is currently trading on the market at $6.70, the price set by 'Mr Market'. I am picking this is much closer to the true valuation of the company than $14.41.

SNOOPY

[Snoopy]

Net Debt Nov 2020 Presentation (Chorus)


Borrowings$2,234m


add PV of CIP debt securities (senior)$183m


add Net Leases Payable$263m


less Cash$0m


equals Total Net Debt$2,680m




Borrowings

Chorus Interpretation: (Refer Side 42, November 2020 Presentation):

$30m (Long term bank facilities) + $5m (Overdraft) + $400m (NZ CNU010 Bond) + $500m (NZ Bond) + $1,299m (European Medium Term Notes) = $2,234m (Total)




In December 2020 Chorus issued two new bonds:

1/ CNU030 7 year bonds: $200m with a coupon rate of 1.98%
2/ CNU040 10 year bonds: $200m with a coupon rate of 2.51%

At the time it was made known that these two bonds would replace the $400m of CNU010 4.12% bonds, due to mature on Thursday 6th May. It is clear there will be an ongoing saving in interest charges with the replacement of $400m of CNU010 bonds with $200m of CNU030 bonds and $200m of CNU040 bonds.

Previous Annual Interest Charge: $400m x 0.0412 = $16.48m



Forward Annual Interest Charge 1: $200m x 0.0198 = $3.96m


plus Forward Annual Interest Charge 2: $200m x 0.0251 = $5.02m


equals Total Forward Interest Charge : $8.98m



This should produce an annualised saving of: $16.48m - $8.98m = +$7.5m

All other things being equal this refinancing should produce an annual boost in profits from FY2022 of 0.72 x $7.5m = $5.4m

SNOOPY

[Snoopy]

Per page 51 AR2020: "The difference between funding received and the fair value of the securities is recognised as Crown funding. Over time, the CIP debt and equity securities increase to face value and the Crown funding is released against depreciation and reduces to nil."


This has been an information dense thread over the last 6 weeks or so, so I have decided to read it again to make sure I have taken all this stuff in. One correction. The above quote is from p49 in AR2020, not p51 (error confirmed by post author in post 2696).

But what struck me were the quoted words that I have put in bold, that I now have a new insight into. Instead of saying the Crown funding was amortised, as you might expect if the Crown delivered a bucket of cash which was gradually spent and so reduced to zero, the wording was very different:

"The Crown funding reduces to nil."

I originally took that be be a description of some kind of amortising process for crown cash delivered that I assumed was happening. I now think it means something quite different. "The Crown funding reduces to nil" IMO is describing a phenomenon, whereby at the end of the 'funding process' (which is actually providing interest free loans) there is no Crown funding anymore, because all of that Crown funding capital (CIP debt and CIP preference shares) must be paid back!



It appears the full value of $924m is not yet recognised under the CIP heading, with the balance sitting in "Crown Funding". This makes sense in that CNU would receive funds or account for expected funding, which would sit in Crown Funding until certain criteria were met. Once the criteria were satisfied, funds would then be treated as CIP debt+equity.


I don't believe that any CIP 'Crown Funding' is paid out in advance as suggested here. From p229 of the 'Share Two Journeys' 13th September 2011 publication.

https://company.chorus.co.nz/file-download/download/public/1467 (warning large file 9.4MB)

"Chorus will have access to approximately $929m of investment through 'Crown Fibre Holdings' (CFH/CIP) progressively throughout the UFB build period in accordance with Chorus's progress in deploying the UFB Network. This investment will take the form of the subscription by CFH for for CFH securities which Chorus can choose to issue periodically in accordance with certain build milestones."

From clause 3 in the UFB1 summary of Crown Funding agreement

https://company.chorus.co.nz/file-download/download/public/1872

"Under the UFB1 Subscription Agreement Chorus may require CIP to subscribe for CIP1 Securities during the UFB1 build period to 31 December 2019 (unless terminated earlier). The maximum value of CIP1 Securities that Chorus can require CIP to subscribe for at any time is determined according to the number of premises passed by Chorus' fibre network under UFB1 up to that time.'"

'Passed' is past tense and suggests that the cable must already be outside the potential customer premises before any CIP funding is handed over.

Then from AR2020 at the top of page 51.

"Crown funding is recognised at fair value when there is reasonable assurance that the funding is receivable and all attached conditions are complied with."

One of the conditions to be complied with is that the installation has already taken place. So the above statement suggests that no crown funding can be recognised until the installation job is done.

SNOOPY

[Nor]

Always eagerly reading your posts or at least skimming them. Hoping a conclusion cannot be far off!

[newtrader]

I also appreciate your analysis on this company Snoopy. Their capital management certainly is difficult to decipher!

I've been a long time holder and have been trying to come up with an intrinsic valuation based on future earnings. The bit I'm figuring out if how much earnings growth we should expect in the future.
Chorus's future earnings appear to be unclear due to the regulatory framework. As per their latest presentation, they are exploring new revenue sources but it may a bit speculative at this stage to put numbers against them.

So my question is whether you believe there is still potential growth in Chrous or will it become a stable dividend payer like the gentailers.

Please correct me if I have made any incorrect assumptions!

[Nor]

I remember that recently Japanese insto or instos were substantial holders. I suppose they still are. I've got to wonder if they understand it? If their participation can be seen as a recommendation, or not.

[Nor]

Actually when one thinks about Japan Post's purchase of Toll it doesn't look like a recommendation at all.

[Snoopy]

I also appreciate your analysis on this company Snoopy. Their capital management certainly is difficult to decipher!

I've been a long time holder and have been trying to come up with an intrinsic valuation based on future earnings. The bit I'm figuring out if how much earnings growth we should expect in the future.

Chorus's future earnings appear to be unclear due to the regulatory framework. As per their latest presentation, they are exploring new revenue sources but it may a bit speculative at this stage to put numbers against them.

So my question is whether you believe there is still potential growth in Chorus or will it become a stable dividend payer like the gentailers?


My gut feeling is that in the medium term, we should regard CNU as a 'good dividend payer'. In the longer term there is growth potential, but that growth comes in the shadow of what to do with Crown Infrastructure Partners 'billion dollar debt' that will need to be repaid or refinanced.

The 26th March press release on 'Initial Asset Value Presentation' seems to have precipitated the share price slump from around $7.75 at the time to around $6.50 today. So I think it is worthwhile spending some time trying to decipher what this press release is saying.

https://www.nzx.com/announcements/369756

I understand that there has to be some government price controls on monopoly assets. The IAV (Initial Asset Value) model is not necessarily reflective of the balance sheet valuation of these fibre assets. I -think- that slide 4 in that presentation is telling us that although the fibre broadband network is fully justified as being valued at $5.5billion for IAV modelling purposes, proposed government imposed revenue constraints means that the network should now only be valued at $4billion.

As an aside, the net carrying amount of 'Fibre Assets' + 'Ducts Manholes and Poles' + 'Network Electronics' sums to $3.916m (AR2020 p42). It was Zspoon (post 2667) that told me this is not relevant to IAV modelling. But I take some comfort from the fact that the reduced IAV value of the Fibre Asset network for modelling proposes ($4b), and, as near as I can figure, the balance sheet value of the fibre assets ($3.916b) are very closely aligned.

I am unclear as to whether IAV modelling applies to 'Fibre Broadband', 'Fibre Premium' or both. Why is that important? Because I see enhancements to the broadband network as the primary path of growth for Chorus going forwards, Chorus seems concerned that the mooted regulatory revenue will constrain their ability to invest in 'network enhancing options', some of which may not have been invented yet. Then again, maybe Chorus is not the right business to innovate in this area? Take a look at these revenue trends from the last four years:



FY2017FY2018FY2019FY2020


Revenue Fibre broadband (GPON)$123m$198m$294m$393m


Revenue Fibre Premium (P2P)$79m$78m$74m$73m



Why is 'fibre premium' declining, even as the rest of the fibre network revenue grows? I had hoped that 'fibre premium' might be the cash cow that allowed Chorus profitability to grow above a government regulated pace. But is looks like this potential 'growth engine' is actually sick. If I look in the AR2020 glossary:

''Fibre Premium' means "Where two parties or devices are connected point to point by fibre." whereas

'Fibre Broadband' means 'Gigabit passive optical network'.

As fibre broadband gets faster and faster, I am wondering if the need for a direct peer to peer 'fibre premium' service diminishes?

The principal driver of Fibre Premium, according to AR2020 p23, is 'Direct Fibre Access Service".

https://company.chorus.co.nz/sites/default/files/downloads/Chorus%20UFB%20Services%20Agreement%20Direct%20Fib re%20Access%20Service%20Description%20June%202017. pdf

Anyone got any insights as to how 'fibre premium' might yet become the next Chorus growth story?

SNOOPY

[newtrader]

I am unclear as to whether IAV modelling applies to 'Fibre Broadband', 'Fibre Premium' or both. Why is that important? Because I see enhancements to the broadband network as the primary path of growth for Chorus going forwards, Chorus seems concerned that the mooted regulatory revenue will constrain their ability to invest in 'network enhancing options', some of which may not have been invented yet. Then again, maybe Chorus is not the right business to innovate in this area? Take a look at these revenue trends from the last four years:




FY2017
FY2018
FY2019
FY2020


Revenue Fibre broadband (GPON)
$123m
$198m
$294m
$393m



Revenue Fibre Premium (P2P)
$79m
$78m
$74m
$73m




Why is 'fibre premium' declining, even as the rest of the fibre network revenue grows? I had hoped that 'fibre premium' might be the cash cow that allowed Chorus profitability to grow above a government regulated pace. But is looks like this potential 'growth engine' is actually sick. If I look in the AR2020 glossary:

''Fibre Premium' means "Where two parties or devices are connected point to point by fibre." whereas

'Fibre Broadband' means 'Gigabit passive optical network'.

As fibre broadband gets faster and faster, I am wondering if the need for a direct peer to peer 'fibre premium' service diminishes?

The principal driver of Fibre Premium, according to AR2020 p23, is 'Direct Fibre Access Service".

https://company.chorus.co.nz/sites/default/files/downloads/Chorus%20UFB%20Services%20Agreement%20Direct%20Fib re%20Access%20Service%20Description%20June%202017. pdf

Anyone got any insights as to how 'fibre premium' might yet become the next Chorus growth story?

SNOOPY

My current understanding is that 'Fibre Premium' is a business offering to allow their different business premises to be directly linked up (peer-to-peer). It might be useful for complex applications where reliability or security may be important. Imagine if a business wants to establish a private network between their different sites without going through the internet. My view is that this is a very niche product/service and small/medium business may not require this service.

However based on the HY Result Presentation on 22 February 2021, it appears this Fibre Premium revenue is captured under 'regulated fibre revenue'. On slide 24 it estimates the following input revenues:
~$480m in FY20
~$270m in H1 FY21

If you compare these numbers against slide 13 (revenue), it appears the numbers is derived from the sum of Fibre Broadband and Fibre Premium.

[Aaron]

Am I correct in thinking this is just more competition for Chorus?
https://www.nzherald.co.nz/business/internet-from-space-elon-musks-starlink-expands-its-new-zealand-ambitions/SNCDQM5IMVS3ZLRASQJYZKB65I/

Its behind the paywall so here is the free one

https://www.stuff.co.nz/business/industries/124302357/elon-musks-broadband-service-starlink-open-for-new-zealand-preorders

Obviously it is not fibre but moving data with speeds from 50Mb/s to 150Mb/s in most locations.

Not really what Chorus need right now.

[Snoopy]

Am I correct in thinking this is just more competition for Chorus?
https://www.nzherald.co.nz/business/internet-from-space-elon-musks-starlink-expands-its-new-zealand-ambitions/SNCDQM5IMVS3ZLRASQJYZKB65I/

Its behind the paywall so here is the free one

https://www.stuff.co.nz/business/industries/124302357/elon-musks-broadband-service-starlink-open-for-new-zealand-preorders

Obviously it is not fibre but moving data with speeds from 50Mb/s to 150Mb/s in most locations.

Not really what Chorus need right now.

"Some orders may take six months or more to fulfil.

The Starlink hardware would cost $799 plus $114 for shipping and handling, and the service would cost $159 per month with no data cap.

Those wanting to secure their position in line were required to pay a $159 deposit."

Seems a bit more pricey than any Chorus offering? Might a solution for a business operating in a remote area without fibre access though?

SNOOPY

[676767]

[QUOTE=Aaron;885191]Am I correct in thinking this is just more competition for Chorus?
https://www.nzherald.co.nz/business/internet-from-space-elon-musks-starlink-expands-its-new-zealand-ambitions/SNCDQM5IMVS3ZLRASQJYZKB65I/


I dont believe so, its not really targeted at urban centers where chorus makes their main income, Starlink have a low maximum number of endpoints per square km i believe that doesn't support that model.
Hopefully these LEO services take over the hard to maintain and loss making Rural DSL services that chorus currently have to operate.
A UFB only future would be great for chorus's OPEX as the cost to upgrade and maintain is much lower

[dobby41]

Am I correct in thinking this is just more competition for Chorus?
https://www.nzherald.co.nz/business/internet-from-space-elon-musks-starlink-expands-its-new-zealand-ambitions/SNCDQM5IMVS3ZLRASQJYZKB65I/


Probably not - an edge case rather than mainstream for NZ I think. Wait for a few rain fades and see how people feel.

[Snoopy]

Interesting announcement to the market from Chorus today:

https://www.nzx.com/announcements/370164

"Chorus is today providing an update to the indicative maximum allowable revenue (MAR) range of $715 million to $755 million per annum included in its Initial Asset Value presentation update of 26 March, to a reduced range of $680 million to $710 million per annum for the first regulatory period."

That doesn't sound good to me. The revenue is going to be further constrained but there is no mention of lower costs to offset that.


One month and a bit on, and there has been another 'price sensitive' announcement to the market, a submission by Chorus to the Commerce Commission.

https://www.nzx.com/announcements/372272

There is a mention in there of allowing the use of 'tilted depreciation'.

“The MAR (Measurement of returns Adjusted for Risk) proposal includes the use of tilted depreciation to ensure a smooth transition into the new regulatory regime and properly reflect the commercial risks we face.”

I have done a websearch on this term and Come up with this

https://www.accc.gov.au/system/files/138%20NZ%20CC%20TSO%20decision%20local%20residenti al%20phones%20Jul%2007.pdf

From paragraph 85

"The rate of depreciation determines the rate at which the costs of an investment are recovered over time. For example, if the TSP (Telecom Service Provider) invests $10m in cable to provide services to TSO (Telecommunications Service Obligation) customers, the rate of depreciation determines the rate at which the $10m investment is recovered by the TSP. The rate of depreciation therefore determines the rate of return of capital."

Now as I understand it, the Commerce Commission are already determining what an acceptable level of 'return on capital' is for Chorus. So what Chorus is suggesting here ( I think) is that, because broadband equipment has a long life, and use of broadband is still developing, the depreciation rate of equipment should be 'slowed down', until 'the use of that equipment grows' to the extent that the 'actual wear and tear' on that equipment reflects its increased use. The depreciation rate will eventually be accelerated again such that overall depreciation over the life of the equipment asset does not change.

From the Chorus link

"Depreciation tilting was identified by government and confirmed by the Commission in the Input Methodologies as a tool to be used to reduce revenue volatility in the transition to the new regulatory framework. It is NPV neutral, so doesn’t change the overall returns Chorus receives."

Maybe the overall return for Chorus does not change. But it seems to me this policy will result in more profits declared by Chorus in the short to medium term and less in the long term. So my question is, what is the advantage to Chorus in doing this? They pay more tax up front ;-P !!!?!

SNOOPY

[Snoopy]

One month and a bit on, and there has been another 'price sensitive' announcement to the market, a submission by Chorus to the Commerce Commission.

https://www.nzx.com/announcements/372272



This is a table of the changing fibre revenue picture as Chorus's take on their network modelling evolves:




FY2016FY2017FY2018FY2019
FY2020FY2021FFY2022FFY2023FFY2024FFY2025F


(1) Fibre Revenue (26-03-2021 estimate)
$133m$202m$276m$368m$466m
$591m$715m(1)$735m$755m(1)


(2) Fibre Revenue (06-04-2021 estimate)
$133m$202m$276m$368m$466m
$591m$680m(2)$695m$710m(2)


(3) Fibre Revenue (17-05-2021 estimate, tilting)
$133m$202m$276m$368m$466m
$591m$760m(2)$770m$780m(3)



Notes

1/ Figures taken from 26th March 2021 Press Release.
2/ Figures taken from 6th April 2021 Press Release.
3/ Figures taken from 17th May 2021 Press Release.
4/ I have not reported the 'smoothed revenue' result for 17th May because none of the other results are smoothed.

Iteration 2 is the same as Iteration 3 but without the 'tilted depreciation'. As in the previous post 'Tilted Depreciation' means more profit for Chorus in the short term, to be ultimately 'balanced out' by lesser profits further into the future.

I still find it intriguing that the RAB (Regulated Asset Base) for fibre is expressed as at 26-03-2020, (Slide 4 of Presentation) , at as a $5.5 billion dollar asset made up of a financial loss asset of $1.5b and a base of $4b. The $1.5b reduction is presented as asset depreciation. The depreciated value of the remaining fibre assets on the balance sheet is $1.547b (which ties up). By using the higher $5.5b network valuation figure, it looks like regulation is being done assuming all assets are new.

Commentary attached to the 17th May 'Press Release':

"The MAR submission is based upon the conservative starting Regulated Asset Base (RAB) of $5.5 billion submitted to the Commission in late March, which Chorus advocates strongly should be higher to better reflect the cost of building our UFB network."

Presumably if the RAB is valued at $6b, like Chorus want, then Chorus can legitimately charge more money to get that pre-determined return on assets? Looking at Note 1 in the balance sheet on Network assets would suggest that Chorus has spent more than $6b in real life on fibre broadband anyway, and they talk of wanting to spend more. But if the Commerce Commission says the whole lot is only worth $5.5b new, retrospectively after the fibre network was built, the implication is that Chorus spent too much building it - despite the whole thing coming in slightly under the CIP budget. Is it just me, or is the Crown being two faced with their fibre network valuations here?

SNOOPY

[newtrader]

My thoughts on Starlink and other technologies are that they probably aren't a direct threat. They fill a need where fibre isn't available or cost prohibitive (e.g. rural or remote areas). Fibre is likely to be best choice for consumers that need reliable internet

Reliability, stability and low latency is quite important for a few use cases (including gaming and video/audio calling).
A extra few milliseconds in internet delay has a dramatic impact on video/audio calling and gaming. You know how awkward it is if you've been a call where there is an even small delay in audio or video.

[newtrader]

"Depreciation tilting was identified by government and confirmed by the Commission in the Input Methodologies as a tool to be used to reduce revenue volatility in the transition to the new regulatory framework. It is NPV neutral, so doesn’t change the overall returns Chorus receives."

Maybe the overall return for Chorus does not change. But it seems to me this policy will result in more profits declared by Chorus in the short to medium term and less in the long term. So my question is, what is the advantage to Chorus in doing this? They pay more tax up front ;-P !!!?!

SNOOPY

Perhaps management are proposing this so they have better cashflow and to continue to pay out that dividend?

On the topic of this regulatory framework, are prices inflation protected? i.e. if we see high inflation is Chrous entitled to adjust their prices accordingly? Just thinking what Chrous may look like in a world of high inflation.