CNU - Chorus [Archive] - Page 12

Snoopy

02-07-2021, 01:40 PM

Snoopy

04-07-2021, 05:20 PM

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..

Some more information from AR2018 when the term 'Fibre Premium' was introduced as a revenue reporting category. The revenue figures I have compared with the equivalent figures from AR2017 when the now superseded revenue naming conventions were in place.

Revenue FY2017 (from AR2017)
Revenue FY2017 (from AR2018)

Basic Copper
$450m

Copper Based Voice

$163m

Enhanced Copper
$248m

Copper Based Broadband

$501m

Data Service over Copper

$32m

Fibre
$198m

Fibre broadband (GPON) (2)

$123m

Fibre premium (P2P) (1)

$79m

Value Added Network Services
$36m
$34m

Infrastructure
$23m
$23m

Field Services
$76m
$76m

Other
$9m
$9m

Total Revenue
$1040m
$1040m.
.

Notes

1/ P2P means 'where two parties or devices are connected point to point via fibre'.
2/ GPON means 'Gigabit Passive Optical Network'. GPON does not imply that everyone connected to it has a Gigabit speed connection. It just means that with suitable switching and routing equipment hooked up to the network, they could. So GPON simply means the fibre FTTP network that all Chorus customers are hooked up to.

The first point to note is that what was once classed as 'Fibre' ($198m), does not equal the sum of 'Fibre Broadband' and 'Fibre Premium' ($202m). Furthermore the sum of 'Basic Copper' and 'Enhanced Copper' ($698m) does not equal the sum of 'Copper Based Voice', 'Copper Based Broadband', and 'Data Service over Copper' ($696m). However that $2m 'copper' difference could be rounding reclassification anomaly, whereas even 'rounding error' could not explain the $4m mismatch in 'Fibre' categories. It is possible that some of the 'value added services' have been reallocated to fibre.

The 'old' Fibre classification included:

1/ Something called HSNS or 'High Speed Network Services', a section of dedicated data bandwidth that may transfer over copper or fibre.
2/ 'UFB Backhaul', which can deliver connections between mobile tower sites.
3/ 'Direct Fibre Access Services', which I think is what is subsequently classified as 'Fibre Premium' P2P.

This is useful in reconfirming what 'fibre premium' revenue is not: A premium product to provide 'hyperfibre connections' to upscale customers.

SNOOPY

Entrep

06-07-2021, 12:26 PM

I'm taking a look at CNU. This is from Craigs in May:

Prima facie this appears positive as our estimates did not include depreciation tilting so the Commission's estimates would represent a lift in allowable revenue. However, the devil is in the detail of how the Commission arrived at its MAR estimate. The key things to note are: 1) Depreciation of the core fibre assets is based on Straight Line, but the Commission allowed depreciation of the financial loss asset based on Diminishing Value. So essentially has allowed some depreciation tilting, whereas we had previously assumed Straight Line for both. 2) Offsetting this the Commission reduced opex by around 10% relative to CNU’s submission. While the depreciation methodology affects the timing of cash flows but is NPV neutral, we assume the reduction of the opex allowance is permanent and effectively reduces the value of the residual Copper asset by lumping additional cost into that bucket. We estimate a 15-20 cps impact on our valuation.

This MAR estimate was based on CNU’s RAB submission of $5.5b. The Commission's view on RAB is due in August so this has the potential to reduce the MAR range further.

Forecast changes but DPS largely unchanged: We have increased earnings estimates for FY23 and FY24 to reflect a higher MAR and smoothing, but longer-term this is temporary as the front-loading of depreciation will reverse and become a drag on earnings. This temporary impact and the relatively small scale of the earnings changes means we have made no changes to near-term DPS estimates.

Price Target of $6.55 (prev $6.70). Neutral rating remains: Our Price Target remains based on the average of our forward DCF valuation (average WACC 6.3%, Tg 2.5%), and our forward DDM valuation. Our Price Target implies a cash yield of 4.0%. Key up/downside risks include regulation, UFB connection volumes and performance, and connection loss to fixed wireless.

Snoopy

06-07-2021, 10:37 PM

I'm taking a look at CNU. This is from Craigs in May:

Quite a bit of jargon in that report from Craigs. 'MAR' stands for 'Maximum Allowable Revenue' permissible for the regulated monopoly broadband wholesale network. The FY2020 total broadband revenue through Chorus was $466m. This is still well under the $689m (FY2022) to $786m (FY2024) of revenue that the commerce commission propose as an 'upper bound' for revenue in the future. Although the Craig's report does suggest that the 'commerce commission ceiling' may yet be further lowered.

The report takes a short to medium term view looking at FY23 and FY24, with no mention of the massive debt repayment schedule that starts to kick in around that latter date. UFB connection volumes is listed as a 'risk'. I would have thought that UFB connection volumes were the primary driver of earnings, and it is IMO disgracefully misleading of Craigs to skirt this core issue. A proper analysis should IMO model the copper being 'backed out', with particular reference to the part of the broadband roll out that Chorus do not control (greater Christchurch, much of the Central North Island and Greater Whangarei) as well as the timing of of more and enhanced service connections via Chorus.

A very poor analysis I think would sum up what Craigs has done here. Making such a statement, I guess, puts an onus on me to come up with something better. My analysis is still a work in progress, but it is progressing....

SNOOPY

Snoopy

07-07-2021, 10:01 AM

I am becoming convinced that increasing ARPU will be a core determinant of of the profitability of Chorus going forwards. But strangely, although Chorus themselves are keen to throw this acronym around in their presentations, I can only find one mention of what this figure actually is. In slide 15 of PR2020 we learn that I can

"Growing fibre uptake and ARPU: June FY20 $48.42* vs June FY19: $47.50"
I can
This is a note specifically referring to Fibre GPON (Gigabit Passive Optical Networks) revenue of $393m (FY2020) to $294m (FY2019). The little asterisk in my quote leads to another reference which says that the figure for FY2020 has been altered

"*FY20 ARPU adjusted to exclude COVID-19 related industry credits"

The FY2019 figure seems clean though. So I was curious as to how Chorus are doing their ARPU calculations:

ARPU = Broadband Revenue / Broadband Users

To convert that to a monthly figure, divide by 12. Using the figures on pages 21 and 22 of AR2019 I get:

ARPU = 1/12 x ($294m / 0.599m ) = $40.90 (too low)

If I add 'fibre premium (P2P)' to the 'fibre broadband (GPON)' revenue I get

ARPU = 1/12 x (($294m+$74m) / 0.599m ) = $51.20 (too high)

That figure doesn't take into account the growth in the number of broadband users during the year. If I back out the 'fibre premium' P2P revenue and use a linear average of the number of subscribers at EOFY2018 and EOFY2019 then I get:

ARPU = 1/12 x ($294m/ (0.5x(0.599m + 0.433m)) = $47.48 (low, but very close)

That previous calculation assumes a single straight line growth 'curve' represents the change in broadband accounts over the year. AR2019 gives us the half year figure as well. Using that as well will give a better linear interpolation of the growth in broadband accI canounts:

ARPU = 1/12 x ($294m/ (0.3333x(0.599m + 0.517m+0.433m)) = $47.45 (extra bit of linear interpolation gives a slightly worse result)

I am satisfied that second to last calculation is 'close enough'.

The following revenue figures for 'fibre broadband' and 'copper broadband' are largely taken from the 'Management Commentary' section of the respective annual reports. The 'In summary' table lists the number of connections, whereas the 'Revenue Commentary' lists the revenue attributable to each type of broadband.

Year
Broadband (GPON) RevenueBroadband (GPON) ConnectionsARPU (F)low
Copper Broadband RevenueCopper Broadband ConnectionsARPU (C)$47.15/m (from 01/10/2021, +2.5%)

FY2015
$29m75,000$?
$268m1,132,000$?

FY2016
$60m167,000$37.19
$456m1,059,000$34.69

FY2017
$123m$]292,000$44.66
$501m$]894,000$42.75

FY2018$]
$198m433,000$45.52
$421m754,000$42.58

FY2019
$294m599,000$47.48
$344m597,000$42.44

FY2020
$393m740,000$48.92
$271m466,000$42.49

Notes

1/ Sample ARPU calculation for Fibre Broadband (GPON) for FY2019:

ARPU = 1/12 x ($294m/ (0.5x(0.599m + 0.433m)) = $47.48

2/ Fibre GPON customers for FY2016 = Fibre 'Mass market' Customers for FY2016
Fibre GPON Revenue for FY2016 and FY2015 taken from Appendix 3, Slide 36 , in PR2017.

3/ Fibre GPON customers for FY2015 estimated as: 88,000 - 13,000 = 75,000

4/ Copper broadband numbers for FY2016 and FY2015 are from Slide 5 of the Chorus PR2016.

5/ Copper broadband revenues for FY2016 and FY2015 are from Appendix 3, Slide 36, in PR2017

Why is this table important? The first ARPU column is representative of the business being gained as fibre broadband is being rolled out across the country. The second ARPU column represents business being lost as copper broadband is gradually retired and replaced with fibre broadband. It is heartening to see the ARPU being gained is greater than the ARPU being lost , even if such a superficial statement does not tell the full story (more on this later).

I talk of copper broadband as a 'legacy technology'. Yet it is surprising how recently the likes of copper VDSL was the latest in broadband technology and still in its growth phase (revenues sharply rose between FY2015 and FY2017). The calculated ARPU is consistent with the wholesale /Dial Up (remember that?)/ ADSL/VDSL/ bill being fairly steady over the time-frame of this table. By contrast the ARPU for Fibre GPON is steadily rising. This is consistent with, on average, a higher number of higher specification Fibre Broadband plans being sold as the years go by.

SNOOPY

Snoopy

07-07-2021, 09:14 PM

The FY2018 annual report lead to a recategorisation of Chorus customers into different reporting classes.

Connections FY2017 (from AR2017)
Connections FY2017 (from AR2018)

Baseband Copper
976,000
313,000

Naked Unbundled Bitstream Access (Broadband using Chorus Equipment)
213,000

Naked Unbundled Copper Baseband IP (Voice) (using Customer Equipment)
18,000

Copper VDSL

244,000

Copper ADSL

650,000

Unbundled Copper Local Loop (Voice & Broadband using Customer Equipment)
81,000

Sub Loop Extension Service (Connecting Customer Equipment to Chorus)
1,000

Unbundled Copper

82,000

Data Service over Copper
8,000
8,000

Fibre (mass market / GPON)
292,000
292,000

Fibre (Premium Business) / Premium (P2P)
13,000
13,000

Total Connections
1,602,000
1,602,000.
.

The main disconnect between the two reporting regimes is how the copper customers are distinguished. The purpose of this post is to try and figure out how to disentangle 'copper broadband' figures when they are reported under the old naming regime (In Annual Reports FY2017 and earlier). However, I now find this information has been 'retrospectively disclosed' in PR2017 Appendix 3. That takes away the purpose of this exercise. So I will leave this post as an 'unfinished symphony'.

SNOOPY

Snoopy

09-07-2021, 09:53 AM

Year
ARPU (Fibre)low
ARPU (Copper)

FY2016
$37.19
$34.69

FY2017
$44.66
$42.75

FY2018$]
$45.52
[$42.58

FY2019
$47.48
[$42.44

FY2020
]$48.92
$42.49

Why is this table important? The first ARPU column is representative of the business being gained as fibre broadband is being rolled out across the country. The second ARPU column represents business being lost as copper broadband is gradually retired and replaced with fibre broadband. It is heartening to see the ARPU being gained is greater than the ARPU being lost, even if such a superficial statement does not tell the full story (more on this later).

Wholesale Broadband Operator
%ge Nationwide Connections
EOFY2020 Connections {A}
EOFY 2020 Premises Passed {B}
%ge Regional Take Up {A}/{B}

Chorus
72%
725,000
1,209,000
60.0%

Northpower
2%
19,000
33,000
57.8%

WEL Networks
14%
145,000
237,000
61.2%

Enable
12%
117,600
187,000
62.9%

Total
100%
1,006,600
1,666,000
60.4%

Notes

1/ The end of the financial year is, for all four operators, on 30th June.

The most important figure in the above table, for Chorus investors, is the one in bold. Chorus owns 100% of the legacy copper network. So as users progress to fibre, they will eventually lose all of their copper legacy network, but only retain around 72% of the replacement fibre network. This means that although transitioning from the copper network will overall mean a boost in funding for pure fibre network owners, the expected 'gain' in revenue at Chorus is a little different.

Weighted Average Fibre Monthly Revenue Gain Per User 72% x $48.92= $35.22

less Weighted Average Monthly Copper Revenue Lost Per User 100% x $42.49= $42.49

equals Weighted Average Overall Monthly Revenue Change Per User -$7.27

Yes you did read that right. As the fibre transformation wave wafts over the country, Chorus can expect to lose on average $7.27 MRPU for every customer transitioned to fibre! In Australia they are forecasting around 70% of old copper network premises will eventually transition to fibre. The remainder will transition to fixed wireless or have no fixed line at all (relying instead on mobile communications not associated with any physical address).

If we use this 70 percent transition figure in an NZ context (an incremental 10% over where we are now), and assume we are sitting at at 60% take up rate right now, we can work out how much revenue Chorus can expect to lose from here on in, as 'NZ as a whole' transitions to fibre:

$7.27 per month x 12 months x 120,900 users transitioning = -$10.5m over a year, but echoing down all future years as well, from the remaining copper users expecting to transition from copper to fibre.

Based on last years NPAT figure, that represents a permanent NPAT profit decline of (0.72 x10.5m) / $52m = 15% ($7.6m in dollar terms).

This is in sharp contrast to the other broadband providers who are only making gains in the copper to fibre transition. To combat these impending ongoing revenue losses, Chorus will be under pressure to shut down the copper network where they can to avoid duplicating capital spend and maintenance.

SNOOPY

Snoopy

12-07-2021, 09:29 AM

5/ Forecast fibre revenue from 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2021 and FY2023 values interpolated).

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:

1/ 'copper connected revenue' and
2/ '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 interest is as follows.

FY2016
FY2017
FY2018FY2019FY2020
FY2021FFY2022FFY2023FFY2024F

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

Fibre Revenue Increment

+$69m
+$74m+$92m+$100m
+$124m+$123m+$20m+$20m

Fibre Revenue Increment Percentage

+51.9%
+36.6%+33.3%+27.2%
+26.5%+20.8%+2.8%+2.7%

Non-Fibre Revenue
$875m
$838m
$714m$602m$491m
$409m$339m$279m$229m

Non-Fibre Revenue Decrement

-$37m
-$124m-$112m-$111m
-$82m-$70m-$60m-$50m

Non-Fibre Revenue Decrement Percentage

-4.3%
-14.8%-15.7%-18.4%
-16.7%-17.1%-17.7%-17.9%

Total Revenue
$1,008m
$1,040m
$990m$970m$950m
$1,001m$1,054m$1,014m$984m

Points to note on the above table

1/ The last four columns are 'forecasts' which is a sophisticated way of saying 'guesses'. The guesses are educated (the fibre bit by Chorus and the rest by me) but they could be wrong!
2/ Net migration of people to New Zealand from April 2020, thanks to Covid-19, has been near zero (previously around 5k per month), which has removed a tailwind of probable new customers.
3/ Spark and Vodaphone, now joined by Two Degrees, have stepped up their plans to sell 'fixed mobile' services over their mobile networks. These are lower cost competitors for Fibre Broadband for light broadband users. There is also a transition underway to 5G mobile networks. 5G is a more serious competitor to fibre broadband.

I believe that:

3i/ the aforementioned fixed mobile competition, PLUS
3ii/ the not as yet widespread adoption of 8k streaming video AND
3iii/ the slow take up of virtual reality gaming AND
3iv/ the fact that the fibre broadband roll out is coming to an end (the supply of customers just waiting to jump on has gone).

....means there is little justification for another incremental jump in access speed by consumers (and consequent higher broadband prices) right now. Hence the reason behind the forecast slowing in the growth of fibre broadband revenue.

4/ The carrying value of copper cables at EOFY 2020 was $360m and last year depreciation on those cables was $60m. This points to an accounting life going forwards (assuming no additions or disposals) of 6 years, starting from EOFY2020. Of course 'accounting life' and 'useful asset life' are not always the same thing. But we can say that if the copper network was effectively decommissioned by EOFY2026 (just five years away) that would not cause a ripple in the accounts. My somewhat aggressive forecast reductions in copper revenue up until EOFY2024 reflects this. Yet I do expect some legacy copper network which is not economical to replace with fibre or wireless systems to remain. That means I am not assuming the copper network will be completely dead by EOFY2026.

So how is my forecast going so far? Q4 2021 operational figures were released by Chorus today. So I will discuss that.

SNOOPY

Snoopy

12-07-2021, 12:57 PM

So how is my forecast going so far? Q4 2021 operational figures were released by Chorus today. So I will discuss that.

The following line information is derived from the July 12th 2021 announcement.

Lines ConnectedFY2020FY2021Change YOY

No Broadband Copper194,000147,000

plus Copper Broadband {A}466,000
320,000-146,000

equals Copper Broadband & Voice Connections660,000467,000

Fibre Broadband Connections {B}740,000860,000+120,000

Total Broadband Connections {A}+{B}1,206,0001,180,000

We can now work out the underlying 'change in profitability' that these broadband connection adjustments imply over the year.

From my post 2759:

Weighted Average Fibre Annual Revenue Gain Per User 12 x $48.92= $587 {A}

Incremental Number of new Fibre Users 120,000 {B}

Incremental Annual Revenue from new Fibre Users {E} $70.44m {A}x{B}

Weighted Average Annual Copper Revenue Lost Per ex-User12 x $42.49= $510 {C}

Decremental Number of ex- Copper Revenue Users 146,000 {D}

Decremental Annual Copper Revenue Lost from ex-Users {F} $74.46m {C}x{D}

equals Net Change in Revenue from transformation: Copper-> Fibre Broadband User[ {E}-{F} -$4.02m

If the operating costs of the respective 'fibre'; and 'copper' networks are not dependent on the annual change in the number of users on them, then all of this revenue change should flow through to the bottom line.

Change in NPAT = 0.72 x -$4.02 = -$2.9m

The actual impact won't be a great as $2.9m, because that figure assumes the respective increase in fibre broadband users and decrease in copper users that I have described occurred on 1st July 2020. In fact those changes took a whole year to roll through the income statement. So we might expect the actual reported profit decline due to these changes as closer to $1.5m for FY2021. However, as things sit right now, the underlying profitability of the business has declined by $2.9m per year. The full effect of these changes in profitability over FY2021 will not be apparent in the accounts until FY2022.

Next from my post 2735

All other things being equal this refinancing should produce an annual boost in profits from FY2022 of 0.72 x $7.5m = $5.4m

However this refinancing only took place just over a month shy of the end of the financial year. So the actual incremental increase of profit will be:

$5.4m/12 = $0.45m

Unfortunately the company wide interest saving overall wasn't even worth this much. Because the new replacement bonds were issued before the old bonds expired. That meant we had a seven month interest bill from the new bonds that is incremental to the existing debt structure,.

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%

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 presents an after tax decrease in profit of

0.72 x $8.98m x 7/12 = $3.8m

We have to go back to my post 2650 to find the underlying profit for FY2020 as $67.1m, well north of the headline figure of $52m

FY2020: ($52M + 0.72($2m+$6m+$5m+$2m+$1m+$5m+$2m ) = $68.6m

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.

My forecast NPAT for FY2021, net of all one off charges, is therefore:

$67.1m - $1.5m + $0.45m -$3.8m = $62.3m

On a per share basis this represents earnings of $62.3m / 444.492m = 14.0cps

Note this is well below the mooted dividend rate of 25cps. But like the gentailers, Chorus is becoming a cashflow story, not a profit story, from here on in.

SNOOPY

Snoopy

13-07-2021, 10:08 AM

Borrowings

Chorus Interpretation: (Refer Side 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)

I have previously talked about the maturity and reissuing of bonds as an interest saving measure. But there is another way of looking at what has happened. You could think of this bond refinancing - at a much lower interest rate- as freeing up more shareholder cash that could fund increased borrowing. Why would Chorus suddenly want to borrow a whole lot more money, especially as they are on the cusp of completing their UFB build program? The answer is, they already have borrowed more, in the form of interest free 'CIP debt' and dividend deferred 'CIP preference shares', for each of which, a brutal repayment (or refinancing?) schedule is looming ever closer.

The $400m NZ Bond referred to above are the CNU010 4.12% bonds that matured in May 2021. These bonds were effectively replaced by the CNU030 and CNU040 bonds as outlined in the quoted text below.

The other NZ bond mentioned in the quote above is the $500m CNU020 issue with a coupon rate of 4.35%. That originated on 23rd November 2018 and does not mature until 2028. That means there is little chance of interest rate reset relief from that bond money until 2028.

The next chance for 'interest rate relief' will come from the maturity of the EMTN (Euro Medium Term Note) 500 million bond in 2023, currently valued at $NZ883m in the EOFY2020 statements ($NZ776m in the FY2017 statements). This bond, taken out on 18th October 2016 carries a minuscule nominal interest rate of just 1.125%. However the interest payments are only partially hedged to the NZD - based on a bond capital of $NZD500m or about 300m euro (3/5 of the actual value of the underlying bond). That means any decline in the NZD to Euro exchange rate will result in a higher interest rate being paid in NZD terms.

On 18/10/2016 NZD1 = 0.6513 Euro. Today we are sitting at NZD1 = 0.59 Euro

This means the effective interest rate that Chorus is paying on this bond today is:

(3/5)*1.125% + (2/5) (0.6513/0.59)*1.125% = 1.172%

In dollar terms that translates to an incremental annual payment of $776m x (0.01172-0.01125) = $0.365m. In this context, no auditor would count that as significant. Nor can I see any significant interest payment savings when this bond is refinanced in 2023.

The 300 Euro 7 year EMTN bond that matures in December 2026, was only taken out 5th December 2019. IMO this is unlikely to be refinanced at lower rates than the 0.875% coupon rate achieved.

What does all this mean? We are stuck with the just matured CNU010 bond as providing the only meaningful borrowing cost saving before 2028.

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

400m
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

Working backwards, that $7.5m in 'interest saved' could be used to support a new loan, taken out at 2.5% of:

$7.5m / 0.025 = $300m

SNOOPY

Snoopy

14-07-2021, 10:44 AM

Working backwards, that $7.5m in 'interest saved' could be used to support a new loan, taken out at 2.5% of:

$7.5m / 0.025 = $300m

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).

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)1.3071.7082.0062.355

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

Note

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:

$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.

Looking at the 'capacity to support a larger loan' verses the 'rolling mounds of debt' that are appearing on the horizon, it looks like the first $85.3m mound of debt could easily be serviced from current cashflows ( $85.3m << $300m ). However I have come to the conclusion that the real debt load to worry about in the future are the CIP preference shares. What looked like fair market interest rates when the CIP Preference Share terms were set up in 2012 ( the 180 day NZ bank bill rate plus 6% ) are now looking positively usurious. I can't find a 180 day rate any more. But if we take the current 90 day rate at the all time low of 0.25% we are still talking a 6.25% interest rate. 6.25% is monstrous for a utility.

The preference share capital repayment schedule, once again taken from 17th November 2020 Chorus presentation slide 43, to avoid interest payments (otherwise known as preference share dividends) is as below:

Repayment Year2025203020332036Total

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

Cumulative Dollars to Repay$85.3m$197.1m$377.7m$766.4m$766.4m

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

PV Dollars to Repay (FY2020 perspective)$65m$115m$188m$325m

It looks to me as though by 2025, it would be realistic to assume that Chorus could initiate enough new borrowing to eliminate both the 2025 CIP debt repayment obligation of $85.3m and the 2025 CIP equity repayment obligation of $85.3m. ( $85..3m + $85.3m = $170.6m << $300m ). The subsequent following 'CIP debt' and 'CIP equity' repayment obligation is not until 2030. In internet terms that is a lifetime away (just think how far the internet has come in terms of network capability over the last ten years). Is it even meaningful to think that far ahead if you are running a broadband network company? Maybe the board and senior management all consider that they will be retired by then, so they don't have to worry about it?

Nevertheless I have noticed an interesting sharemarket phenomenon. Every time Chorus announces to the market that more CIP securities have been taken on as the fibre broadband rollout continues, the CNU share price goes down a few cents. CIP securities, be they debt or preference shares, ultimately represent debt that must be repaid. So maybe Mr Market isn't as cavalier about Chorus's ever ballooning debt as the board is?

SNOOPY

Snoopy

14-07-2021, 09:23 PM

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%.

There has been an update on Chorus's 'Maximum Allowable Revenue' (for fibre broadband) position for the three years to 2024 since I last discussed this on 3rd May. The 27th May 'stock exchange announcement' states:

"The Commerce Commission has released its draft decision on Chorus’ price-quality determination for the first regulatory period for fibre (RP1, 2022-2024). The draft decision references an annual revenue range of $689 million to $786 million, including pass-through costs, during RP1 and remains broadly consistent with Chorus’ forecast fibre revenues for the period."

This is in response to interim correspondence from Chorus to the Commerce Commission on 17th May, where Chorus was talking about an MAR of $720m to $820m, So while the Commerce Commission has come up in the maximum dollar ceiling from their 3rd May MAR suggestion, the result is still well below (by $30m) the revenue cap that Chorus is asking for. However slide 29 on the 17th November 2020 presentation, the page titled 'Regulated Asset Base Implementation' has given me pause for thought.

That slide states the 'Anchor and Price Capped Products' include:

1/ Voice
2/ 100/20 Mbps fibre
3/ Direct fibre

Then the footnote says 'symmetrical wash up for unders and overs". I don't understand what that footnote means. All I can think of is that if a fibre plan was offered 60/60 Mbps with the reduced maximum download speed, offset by an increased maximum upload speed, then that would come under the same rules. Because the reduced download performance has been 'symmetrically offset' by an improved upload speed?

What does appear indisputable is that the MAR applies to a minimum 'bottom line of service'. However, if Chorus chooses to offer a higher level broadband plan, there is no mention of this coming under the Maximum Allowable Revenue cap. According to the Q4 Operating Statistics released to the market on 12th July 2021, 19% of all fibre broadband connections are 1Gbps as of EOFY2021. Wholesale prices went up last year for the 100Mbps plan from $46 to $47 per month. But at the same time the price of the 1Gbps plan fell from $60/month to $56/month. The wording on the slide I referenced above would suggest that the 1Gbps plan is not subject to the MAR price cap. But whether:

1/ The whole amount is not subject to the MAR price cap ($56/month) OR
2/ The difference between the 1 Gbps price and the 100Mbps price ($56/month - $47/month = $9/month) is not subject to the MAR price cap OR
3/ I am totally wrong and all the wholesale fibre broadband charges are included in the MAR price cap (as I originally surmised)

I do not know. Can anyone out there provide any clarity on how these 'superior' broadband plans will interact with the Commerce Commission set MAR price cap for fibre broadband?

SNOOPY

Snoopy

15-07-2021, 03:08 PM

It looks to me as though by 2025, it would be realistic to assume that Chorus could initiate enough new borrowing to eliminate both the 2025 CIP debt repayment obligation of $85.3m and the 2025 CIP equity repayment obligation of $85.3m. ( $85..3m + $85.3m = $170.6m << $300m ).

O.K. big decision day. What kind of data rate will Chorus users really want in ten years time? I know they say forecasting is difficult, particularly when trying to forecast the future. But look at two movie developments of the last ten years that have fizzled. Peter Jackson's experiment with 48 frames per second on the first 'Hobbit' film, 'An Unexpected Journey'. And sticking on a pair of 3D glasses to bring the action right out of the screen. I hadn't realised it before, but these two developments are in one sense linked.

https://www.theguardian.com/film/2013/dec/13/peter-jackson-48fps-tone-down-hobbit-desolation-smaug-hd

Higher definition isn't always better, and one school of view is that with a 4k image moving at 24fps we are already at the viewing sweet spot. Likewise I believe that game players will get tired of wearing ungainly virtual reality headsets. This is bad news for Chorus, as it removes 'upselling opportunities' from all but the most specialised clients. On top of this, we have the well established user paradigm of expecting internet access in real terms to keep getting cheaper. So here is my consequent call. There will be no major upswing in Chorus EBITDA over the next fifteen years! In fact there could be 'leakage of business at the fringes' to 5G mobile networks. I don't share the apparent view of the board that the best strategy to deal with the eye watering 2 billion dollar CIP funding deficit is to dig a hole in the ground and stick you head in there while upspecified futuristic super streams of income make everything O.K. .

It is common investor practice to match the expected dividend yield you regard as an acceptable gross return (in my case a gross return of 5%) to the discount rate you should apply to future cashflows. I was tempted to use an even lower acceptable yield rate of 4.5%, to match what I did at Mercury Energy. But while the long term business case for Chorus makes a very good story, their very monopoly status will ensure the 'heavy hand of government regulation' won't let profits get too high. I also believe there is 'technology risk' whereupon some lower bandwidth customers may be spirited away by increasingly competent mobile networks. This in the world of 'still just off record low interest rates' means my required 5% gross return is the right number to use, IMO.

I will continue my assumption that the first stage of CIP debt and CIP preference shares payments due in 2025 can be afforded by new borrowing. So my 'revised repayment schedules' will leave out those 2025 capital repayments and instead concentrate on the discounted cash total needed to to fully repay the post 2025 balance of the CIP debt and CIP preference shares.

Debt Repayment Schedule: CIP Debt

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: 5.0% discount rate (FY2020 perspective)1.2761.6291.8862.183

PV Dollars to Repay (FY2020 perspective)$64m$88m$96m$248m

Debt Repayment Schedule: CIP Preference Shares

Repayment Year2025203020332036Total

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

Cumulative Dollars to Repay$85.3m$197.1m$377.7m$766.4m$766.4m

Discount Rate Divisor: 5.0% discount rate (FY2020 perspective)1.2761.6291.8862.183

]$
PV Dollars to Repay (FY2020 perspective)$121m$199m$351m

On a per share basis discounted to present day value, the cash needed to repay these post 2025 debts is:

($248m + $351m) / 404.492m = $1.48 per share

SNOOPY

Snoopy

15-07-2021, 08:24 PM

On a per share basis discounted to present day value, the cash needed to repay these post 2025 debts is:

($248m + $351m) / 404.492m = $1.48 per share

Now we come to the crux of this matter. How to use the above information in a CNU valuation from an EOFY2020 perspective?

We are looking at a fifteen year time-frame over which this collective debt must be repaid from EOFY2020 So I would submit that, to model the situation without bias:

$1.48/15 = 9.9cps

should be modelled as being repaid this year, to even out the burden of paying down this loan total over the life of this collective loan balance.

Of course FY2021 has now concluded and there are no reports of paying down either 'CIP debt' or 'CIP preference shares' (both together the total CIP owings). This isn't surprising. None of the CIP funding has yet moved into a repayment window. Effectively all the CIP assistance is an 'interest free loan' until 2025, and the collective debt that we are specifically talking about here will be interest free until 2030! So it is best to think of the 9.9c as part of a ring fenced piece of cashflow that will eventually grow to a discounted total of over $1.48 per share over 15 years as the CIP owings are either:

1/ progressively repaid OR
2/ repaid in lump sums.

In fact, I believe the CIP owings are more likely to be paid off in lump sums. But such is the size of these debts, the cashflow from one year would be insufficient to pay off any of them. So it is clear that planning for these debt retirements will have to be done several years in advance. In reality this will not be by putting aside equal payments over 15 years into a ring fenced account. But because we don't know the real timetable for paying off all these debts, it seems prudent to model them being paid off evenly on an annual basis. Effectively I am proposing 'accrual accounting for debt repayments', which seems to me fair.

This means that when I model the "free cashflow from operating activities less sustaining capex" (see 17th November 2020 presentation slide 33) , which is the basis of future dividend flows for FY2022 (17th November 2020 Presentation Slide 33) and beyond, I must remove an additional 9.9c from the "free cashflow from operating activities less sustaining capex."

SNOOPY

Snoopy

16-07-2021, 09:52 AM

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.

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.

The difference between total capital expenditure and sustaining capital expenditure is set to become critical in determining the future dividend returns from Chorus shareholders. From the 17th November 2020 Presentation, Slide 33:

"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."

The following table is compiled from information in:

a/ Slide 34 of the 17th November 2020 presentation.
b/ AR2020 p28

Capex over 2020

Fibre Layer 2 Sustaining$31m

Fibre Products & Services Sustaining$14m

Fibre 'Other Fibre Connections' Sustaining$20m

Fibre Customer Retention Sustaining$7m

Fibre UFB Communal Development$170m

Fibre Connections & Layer 2 Development$251m

Other Fibre Connections & Growth Development$42m

Fibre Customer Retention Development$13m

Fibre Total$548m

Copper Network Sustaining$31m

Copper Layer 2 Sustaining$7m

Copper Customer Retention Sustaining$16m

Copper Connections Sustaining$1m

Copper Development$0m

Copper Total$55m

Common IT Sustaining$43m

Common Building & Engineering Services Sustaining$17m

Common Development$0m

Common Total$60m

Sustaining Total$186m

Development Total$476m

Overall Total$663m

In light of the new revised dividend policy, a useful question to ask is: What sort of dividend would shareholders expected if such a policy had been operating over FY2020? (the last year for which full published results are available). Over FY2020 operating cashflow was $476m which equates to:

$476m/ 444.492m = $1.07 per share

From that we have to remove 'Sustaining Capex'

$186m / 444.492m = 42cps

I have argued in post 2766 that we must remove a 9.9cps CIP debt repayment allowance from the total free cashflow available as well. This means the total free cashflow available was:

107cps - 42cps -9.9cps = 55cps

A policy of distributing 80% of free cashflow available would see a dividend of 44cps.

What actually happened? The interim dividend paid was 10cps which together with a final dividend of 14cps, made a total dividend of 24cps relating to the FY2020 financial year. On paper then, we are looking at the prospect of a very substantial dividend hike going forwards. Or are we...?

SNOOPY

Waltzing

16-07-2021, 11:41 AM

I think it clear that this style of forum does not really provide DIC SNOOP with the delivery format that would do justice to publishing the analysis.

Snoopy

16-07-2021, 05:09 PM

A policy of distributing 80% of free cashflow available would see a dividend of 40cps.

What actually happened? The interim dividend paid was 10cps which together with a final dividend of 14cps, made a total dividend of 24cps relating to the FY2020 financial year. On paper then, we are looking at the prospect of a very substantial dividend hike going forwards. Or are we...?

I put a hint of uncertainty when I was discussing a possible dividend payout into the mix because of a comment on Slide 32 of the 17th November 2020 presentation:

"Capex peaked in FY18 & FY19, leverage peaked in FY2020."

Here is what 'Investopedia' says about leverage:

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

What Is Leverage?

Leverage results from using borrowed capital as a funding source when investing to expand the firm's asset base and generate returns on risk capital. Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets.

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

I mention this because I had previously considered that 'leverage' was more or less synonymous with 'debt ratio' (basically the second part of the definition above). But if I use the same amount of interest payable to support a higher debt (this is possible when interest rates fall), then that action does not amount to using 'higher leverage', because the ratio of cash income in to cash out ( EBITDA/I ) has not changed. I make this point, because I have already assumed that the 2025 CIP owings can be refinanced without bursting through the existing EBITDA/I borrowing covenant. Thus Chorus can refinance the 2025 CIP owings without increasing leverage beyond FY2020 levels,

However the slide said that leverage peaked in FY2020. I take that to mean there would be no more increased borrowings over and above what was already 'theoretically committed' to refinancing those FY2025 owings, as refinancing those 2025 CIP owings will exhaust the increased funding capability from falling interest rates over the last seven years. Slide 32 suggests that Chorus has put a limit on their borrowings peaking at FY2020 levels forever into the future. And if that is true, then any unforeseen spending in the future must also come off the so-called 'free cashflow', and reduce the dividend accordingly.

SNOOPY

P.S. I see in the footnote of Slide 32 that Chorus define leverage as 'Net Senior Debt'/ EBITDA, So leverage is proportional to cash income as I had assumed.

'Leverage' ( 'Net Debt'/EBITDA ) is calculated in Slide 41 of the 17th November 2020 Presentation (Calculation 1 below). However, none of the 'senior debt' input numbers into the calculation correspond to the equivalent numbers reported on the balance sheet at EOFY2020 (Calculation 2 below). My thought was, maybe Chorus is using some kind of averaged debt numbers across the year? So I used averaged figures between EOFY2019 and EOFY2020 in Calculation 3.

Slide 41EOFY2020 {A}EOFY 2019 {B}Average ({A}+{B})/2

Borrowings$2,234m$2,322m$2,232m$2,277m

add PV of CIP debt securities senior$183m$225m$190m$208m

add Net Leases Payable$263m$266m$254m$260m

equals SubTotal$2,680m$2,813m$2,676m$2,745m

less Cash$0m-$5m$273m$134m

equals Total Net Debt$2,680m$2,818m$2,403m$2,611m

Using EBITDA for FY2020 of $648m, we can now calculate the leverage of Chorus ( 'Net Debt'/EBITDA ).

Calculation 1

$2,680m / $648m = 4.13

Calculation 2

$2,818m / $648m = 4.35

Calculation 3

$2,611m / $648m = 4.03

Calculation 3 is close to the correct answer (calculation 1). But I would have hoped it would have been closer. Maybe the variance is explained in the sub note on Slide 41

"based on S&P and bank covenant methodologies."

Anyone know what that might mean?

SNOOPY

Snoopy

17-07-2021, 10:25 PM

I had noted that in April two Chorus directors notified the market, that they had bought Chorus shares 'on market':

1/ On 31-03-2021 director Sue Bailey bought 5,000 shares increasing her holding to 25,000. At the price paid for this acquisition, $6.94 per share, Ms Bailey's total shareholding was worth $173,500, up from $138,800 before the purchase.

2/ On 07-04-2021 director Prue Flacks bought 18,900 shares increasing her holding to 43,334. At the price paid for this acquisition, $6.57 per share, Ms Flack's total shareholding was worth $284,708.38, up from $160,531.58 before the purchase.

Generally directors buying shares on the market of a company they govern is a positive sign for investors: A signal for outsiders that they should consider buying into the company. However a not so well publicised change in the director shareholding rules should cause potential shareholders in Chorus to pause. From p76 AR2020 there is a new minimum shareholding policy for directors:

"Chorus' Minimum Shareholding Policy sets the expectation on Director's to hold, at minimum, shares equal in value to one year's director base fee (after tax). If not held at date of appointment (or policy), the policy expects Directors to accumulate this holding over the first three years in office."

The 'after tax' thing is a little odd as I would have thought independent directors are independent contractors and are not employees of Chorus. That would imply they would not have any tax deducted from their directors fees. Furthermore different directors are liable to have varying tax obligations depending on how they manage their financial affairs. So there would be no way to know how much tax the individual directors end up paying. Putting this aside, I see the 'base fee' for a director is $114,000.

Prue Flacks has been in the job for more that three years and her holding is worth well over 'base director fee' level. So it would be fair to see Prue's purchases as an endorsement of Chorus. However the same is not true for Sue Bailey, who only became a director in October 2019. Sue has until October 2022 to build up her shareholding, although it might not be a good look to be seen to be 'dragging the chain'. So I would argue the reason for Sue's share purchase in this instance might have been to avoid any embarrassment at a falling share price taking her Chorus shareholding below the new minimum holding requirement.

The reason I mention this now is that should the Chorus share price fall significantly, and you see directors buying, then first thoughts might be the directors, who have intimate knowledge of the business consider the prevailing share price offers value. However, with this new minimum shareholding rule, there might be another reason: Company rules demanding that they buy!

I am aware of some overseas companies having minimum director shareholding levels. But this is the first time I have noticed such a policy in New Zealand. Do any other NZ listed companies do this?

SNOOPY

Snoopy

18-07-2021, 09:40 AM

In the footnote of Slide 32 (17th November 2020 Presentation) that Chorus define leverage as 'Net Senior Debt'/ EBITDA.

Slide 41EOFY2020 {A}EOFY 2019 {B}Average ({A}+{B})/2

Borrowings$2,234m$2,322m$2,232m$2,277m

add PV of CIP debt securities senior$183m$225m$190m$208m

add Net Leases Payable$263m$266m$254m$260m

equals SubTotal$2,680m$2,813m$2,676m$2,745m

less Cash$0m-$5m$273m$134m

equals Total Net Debt$2,680m$2,818m$2,403m$2,611m

Using EBITDA for FY2020 of $648m, we can now calculate the leverage of Chorus ( 'Net Debt'/EBITDA ).

Calculation 1

$2,680m / $648m = 4.13

Calculation 2

$2,818m / $648m = 4.35

Calculation 3

$2,611m / $648m = 4.03

Above are three different ways to calculate leverage, based on the information presented in AR2020 and PR2020 (17th November 2020). But right now I am going to revert to the story that Chorus is telling us and compare the situation at EOFY2020 with the position at EOFY2021.
.

Slide 41, PR2020 November 2020Slide 22, PRHY2021 February 2021

Borrowings$2,234m$2,599m

add PV of CIP debt securities senior$183m$191m
)

add Net Leases Payable$263m$271m

equals SubTotal$2,680m$3,061m
$

less Cash$0m$268m

equals Total Net Debt$2,680m$2,793m

The most current annual measure of EBITDA is 'EBITDA 2HY2020' + 'EBITDA HY2021'. These figures may be found on slide 12 of the February 2021 HY2021 presentation:

$316m + $323m = $639m

Calculation 1

Leverage = 'Net Senior Debt'/ EBITDA = $2,793m / $639m = 4.37

That figure was passed off in the half year results presentation without comment. However if we go back to slide 32 of the November 2020 results presentation the comment was made that leverage peaked in FY2020 at 4.14 and was forecast to fall at EOFY2021. Of course the EOFY 2021 result is not yet out. But the interim result is heading in the wrong direction, as leverage powers to an all time high. So what is going wrong?

First glance would suggest borrowings have jumped. When netted off against cash on hand the increase in net debt has been (+$97m or 4%). Lease costs are up which is disappointing when the narrative is (from AR2020 p18):

"As our network becomes increasingly fibre-centric we’re looking closely at the assets we need to deliver services into the future. We’ve already begun to dispose of non-essential network sites and are reshaping our investment programmes to better reflect ongoing local demand."

So Chorus are closing down non-essential sites yet lease costs have gone up? Huh?

EBITDA on an annual basis continues to fall from $648m to $639m (-1.4%). That is consistent with the hollowing out of the nationwide customer base calculated in my post 2761.

It looks like the increasing leverage is a result of a little bit of everything going the wrong way. Increasing the interim dividend from 10cps to 10.5cps (in dollar terms that is an increased payout of $0.005x 444.492m shares = $2.2m) has pushed debt in the wrong direction too.

If I have to sum things up, it looks like more spending and less income coming in to offset that. It is not a good story and the full year result should receive extra scrutiny to see if the numbers really do reflect the positive noises coming out of management.

SNOOPY

Mista_Trix

18-07-2021, 01:26 PM

Although I've got very little commentary to add. I appreciate you showing us your working and giving commentary.

Snoopy

18-07-2021, 09:46 PM

The difference between total capital expenditure and sustaining capital expenditure is set to become critical in determining the future dividend returns from Chorus shareholders.

Once the UFB1 and UFB2 networks are complete, there will still be new customers wanting to plug into the existing fibre. So I feel there will still be a capital expenditure requirement above and beyond just sustainability. To try and get a feel for this I will tabulate the fibre 'UFB Communal' and 'Fibre Connections and Fibre Layer 2' spend over the last few years.

'UFB Communal' is what is commonly called 'dark fibre'. This is the cabling bit of the broadband system that you see the lines-people stringing between power poles or tunnelling underground. They call it dark because it is dead to the world without some ancillary equipment to 'light it up'. This is where Layer 2 comes in. Layer 2 is the basic electronics need to activate Level 1. I say activate in a very basic sense. To do anything useful, like being able to use an internet protocol, then those components, as I understand it, fall into the classification of 'Layer 3' (not what we are talking about here). The fibre connection side of things is installing the ONT (Optical Network Terminal) box in your house, and the cable and electronics from the roadside network to connect everything up.

The historical spending on 'UFB Communal' and 'Fibre Connections and fibre layer 2' (Capital Expenditure Commentary) and percentages of connections available taken up (from 'Dear Investors' introduction) are from the respective annual reports. The forecast information is interpolated from graphs "Chorus Our Fibre Plans" (p18), with the URL of the document referenced below.

The historical 'Fibre Able to Connect' information is from the respective annual results presentations.

FY2013FY2014FY2015
FY2016FY2017FY2018
FY2019
FY2020FY2021F
FY2022F
FY2023F

'UFB1 & UFB2' Communal
$362m$338m$236m
$194m$183m$231m$245m
$170m$102m$44m$17m

Fibre Connections & Fibre Layer 2
$31m$74m$169m
$205m$258m$294m$308m$282m
$237m$186m$141m

Fibre Build in Year
0.147m0.142m
0.145m0.130m0.154m0.176m0.101m
0.068m
0.042m
0.012m

Slogans of farm protest aren’t enough
Fibre Able to Connect
0.206m0.353m0.495m
0.640m0.778m0.932m1.108m1.209m
1.277m
1.319m
1.331m

Fibre Uptake
3%8%14%
24%35%45%53%
60%

Notes

1/The above table should be read the above in the context of the UFB1 cable roll out being finished in November 2019 (five months into FY2020) but UFB2 still continuing.
2/ Forecast future UFB2 connections interpolated from graph in Slide 22 of PR2020.

From "Chorus Our Fibre Plans"

https://comcom.govt.nz/__data/assets/pdf_file/0016/234340/Chorus-Our-Fibre-Plans-12-February-2021.pdf

Between 2021 and 2024 Chorus plans to reduce total expenditure by 29% (page 1). But Chorus still propose to invest $983 million in capital ($504 in establishment capex and $479 in recurring capex) expenditure (page 17) and incur $599 million of operating expenditure over the three years from January 2022 to December 2024 (page 19). If we split that establishment capital expenditure in proportion to fibre build per year that works out as $281m over 2021, $173m over 2022 and $50m over 2023 ($281m+$173m+$50m=$504m). Note these three time periods are calendar years that are six months out of step with the 1st July to 30th June financial years that are featured in the above table.

We know that Chorus is up against their leverage ceiling. So the total forecast fibre network roll out and hook up spending must come out of the so called 'Free cashflow' as defined by Chorus. This adds up to $339m over FY2021, $230m over FY2022 and $158m over FY2023. With 444.492m shares on issue, this equates to 76cps, 52cps and 36cps respectively.

FY2021 is now historical in operational terms, if not in official reporting terms. If we assume a constant NPAT for FY2022 and FY2023 (a big if), this means the amount of additional cashflow available as a result of the UFB roll out winding down is (76 - 52)cps = 24cps for FY2022 and (76 - 36)cps = 40cps for FY2023.

SNOOPY

Snoopy

20-07-2021, 05:00 PM

Snoopy wrote:
"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.

I am still getting over the 'shock' of Chorus taking their 'European Medium Term Note' (EMTN) debt and going to the trouble of putting in place 'cross currency interest rate swaps which entitle Chorus to receive EUR Principal for NZD principal' (AR2020 p46) - nothing shocking so far, seems quite sensible. But at balance date time, there is apparently no recognition of this. The EMTN principal debt seems to be revalued on the balance sheet at current exchange rates anyway!

But how bizarre a re-shock is this? Last December 2020 Chorus took out some NZD denominated debt well timed to take advantage of very low market borrowing rates that locked in prevailing low interest rates for 7 or 10 years. But what does Chorus do next (p16 of HYR2021)?

"Chorus has also entered into two interest rate swaps which have a combined face value $200 million and were entered in conjunction with the 10 year NZD bonds issued on 2 December 2020. The intention of these swaps is to swap the interest exposure from a fixed to a floating rate to December 2030."

IOW having gone to all that trouble of locking in a very low interest rate for 7 and 10 years, Chorus spend more money on a financial instrument that effectively converts these very low fixed interest payments into more volatile and very likely higher floating interest rate demands? Generally a business goes for fixed interest rates to gain certainty in future interest payment schedules. Why are Chorus wanting to manipulate this loan arrangement to make future interest payments uncertain? Here is their excuse

"This hedging relationship was entered to comply with Chorus Treasury policy which does not allow for greater than 70% of term debt to be subject to fixed interest rates beyond a 3 year time period."

Perhaps the Chorus board should also have mentioned that their 'Treasury Policy Committee' have since been certified as insane?

SNOOPY

Snoopy

23-07-2021, 10:43 AM

What kind of data rate will Chorus users really want in ten years time? I know they say forecasting is difficult, particularly when trying to forecast the future. But look at two movie developments of the last ten years that have fizzled. Peter Jackson's experiment with 48 frames per second on the first 'Hobbit' film, 'An Unexpected Journey'. And sticking on a pair of 3D glasses to bring the action right out of the screen. I hadn't realised it before, but these two developments are in one sense linked.

https://www.theguardian.com/film/2013/dec/13/peter-jackson-48fps-tone-down-hobbit-desolation-smaug-hd

Higher definition isn't always better, and one school of view is that with a 4k image moving at 24fps we are already at the viewing sweet spot. Likewise I believe that game players will get tired of wearing ungainly virtual reality headsets. This is bad news for Chorus, as it removes 'upselling opportunities' from all but the most specialised clients. On top of this, we have the well established user paradigm of expecting internet access in real terms to keep getting cheaper. So here is my consequent call. There will be no major upswing in Chorus EBITDA over the next fifteen years! In fact there could be 'leakage of business at the fringes' to 5G mobile networks. I don't share the apparent view of the board that the best strategy to deal with the eye watering 2 billion dollar CIP funding deficit is to dig a hole in the ground and stick you head in there while upspecified futuristic super streams of income make everything O.K. .

From p44

https://comcom.govt.nz/__data/assets/pdf_file/0016/234340/Chorus-Our-Fibre-Plans-12-February-2021.pdf

"Strong ATPU (Average Throughput Per User) growth has been a constant for telecommunications networks since the dawn of the internet age. While we cannot predict what technologies or services will fuel growth in years to come, it is prudent for us to plan for strong growth."

That sounds suspiciously like "build it and they will come." Is it really prudent to build something when you have no idea what the demand will be? Chorus have made some vague generalisations on the areas they think this demand will come from, as I continue the quote:

"More capable devices in homes and businesses, including streaming, gaming, smart home devices and PCs – and more devices per connection."

"bandwidth-hungry content services, such as higher-resolution video streaming and videoconferencing; cloud-based gaming, application and storage systems; and large, high-speed, coordinated software updates."

"changing consumer behaviours, such as more remote-working and online viewing."

I can pick holes in that vision of the future quite easily. ''Smart home devices", the IOT (Internet of Things) is certainly coming. But increased bandwidth and speed requirements for these devices will be negligible. Your refrigerator may be able to order more beer when you haul enough cans out of it. But your refrigerator itself won't be watching the Olympics via an HD video stream while it does this.

Cloud based back up is not necessarily better than on site back up, and back up itself is not very bandwidth or time dependent. In fact most back ups are done outside of normal work hours and at times of low network use.

I have already shown there may be a limit to video streaming quality requirements.

Why would software updates have to be concurrent across multiple sites? If there was a glitch in the update such a policy could cause a global shut down of a critical piece of software. I would have though software updates could easily be done in the background as bandwidth allows.

Finally remote working represents a transfer of demand from one site to another, not an overall increase.

Chorus have some interesting video case studies on their website based on the broadband technology as it exists already.

https://company.chorus.co.nz/videos

I see in the 'Electra' video, that this company is using a 200Mbps feed. Electra is the locally owned electricity distribution company to the Kapiti and Horowhenua region. They have a couple of unrelated subsidiaries:

1/ 'Securely' ® is a Levin-based company that provides medical alarms, house alarms and business alarms. They provide a 24/7 alarm monitoring service for our wide range of customers throughout New Zealand with offices in Levin, Tauranga, and Lower Hutt.

2/ 'Connect 8' a specialised infrastructure construction company with special expertise in telecommunications including the construction of mobile network towers, the construction of under and over ground power cables and water and wastewater pipes.

I am unclear on the total staff count of all of these businesses. But they are spread over different office centres and 200Mbps looks to be sufficient to run the main HQ at Levin. The 'Linked In' reference page says there are between 200 and 500 employees in total. I would estimate from the video that between 20 and 50 employees are based in HQ in Levin and there are no complaints about current plan adequacy. So I do wonder where the increasing demand for even a 1Gbps service, offering five times the data transfer rate they have now, would come from.

Not coming from the telecommunications industry, I don't know how much incremental capital expenditure would be required to upgrade a line from 200Mbps to 1Gbps, for example. Maybe we aren't talking big dollars as I presume all the dark fibre would remain untouched? It would only be the electronics on the ends, and probably the customer hardware (Chorus wouldn't be paying to upgrade that), that needed upgrading? But Chorus do seem very arrogant about the threat of fixed wireless broadband run by Spark, Vodaphone and 2 degrees on the future demand for fibre. NBN (the equivalent of Chorus in Australia) thinks that fixed wireless broadband will settle at around 30% of the total broadband market. Unlike Chorus, NBN will be supplying fixed wireless broadband in rural areas, so NBN seems to have a more technology agnostic view of where things are heading. If 70% is the correct figure and is around where fibre broadband will plateau, then Chorus must be approaching new customer saturation in NZ. That means growth will increasingly come from existing customers upgrading their systems. So where will the forecast continuously increasing demand for faster than 200Mbps in the commercial space come from?

Ah yes, "Build it and they will come."

SNOOPY

Snow Leopard

19-08-2021, 01:28 PM

Todays big mover, on the back of a few typos (https://www.nzx.com/announcements/377567), and nay a mention ?

*Apart from this post

Snoopy

19-08-2021, 02:09 PM

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?

From Today's press release"

"The Commerce Commission has released a draft decision proposing an initial regulated asset base (RAB) of $5.427 billion for Chorus’ regulated fibre business from January 2022. The Commission’s draft RAB is made up of core fibre assets of $3.98 billion and a financial loss asset of $1.446 billion. In March, Chorus proposed a conservative starting RAB of $5.5 billion based on extensive modelling work by international experts Analysys Mason. The Commission used this RAB value to inform its draft Price-Quality decision on 27 May."

Today's release from the Commerce Commission, via Chorus, seems to confirm the unsatisfactory situation that Chorus was facing in May 2021. Yet the CNU price jumps 12%?

SNOOPY

peat

19-08-2021, 02:47 PM

earned 12 cents last year ending 30/6/20.
earned 5 in the first half of this FY.

go figure.

newtrader

19-08-2021, 05:20 PM

The Chorus network was super busy during the first day of lockdown

12856

allfromacell

19-08-2021, 06:02 PM

The Chorus network was super busy during the first day of lockdown

12856

Wow that's one hell of a lot of porn 🤣

Snoopy

19-08-2021, 06:04 PM

The Chorus network was super busy during the first day of lockdown

Great! How much extra money will Chorus get from that record 3.6Tbps of data from all those on unlimited broadband data plans?

SNOOPY

nztx

19-08-2021, 09:55 PM

Snoopy

20-08-2021, 09:13 AM

Large bounce just off a network valuation figures released ..

Any sign of what was supposed to be significant increases in presumably investor returns a year or two ago
and not just a hike up in valuations ?

or is the market just chasing invisible shadows ? ;)

I am expecting a lift in dividend when the results are announced. That would be in line with the wind down in capital expenditure freeing up cashflow as the geographic reach of fibre broadband network reaches completion. However I expect EBITDA to continue to fall, as the gains that Chorus makes on signing new broadband customers are offset by the loss of copper customers in areas where Chorus do not operate the local fibre broadband network. Based on current earnings, I believe that the long term debt position of Chorus is unsustainable.

I have been reading up on how Spark will be heavily pushing 5G fixed wireless broadband. I have personally witnessed already how good 4G wireless broadband is for households. 5G will remove the only real restriction on 4G fixed wireless broadband, the data cap. Technically fibre broadband will remain superior. There is a first mover advantage. If Chorus can really up their customer win rate in the coming months, it will be difficult for the likes of Spark and Vodaphone -with fixed wireless broadband- to win fibre customers over. I did see in PR2021 for Spark (slide 17) that the roll out of fixed wireless broadband was below target. Nevertheless dollars do talk. Wireless fixed broadband is where the profit margin is for Spark. Personally I think most households would be more than satisfied with '5G wireless fixed broadband'.

Unlike Spark, Chorus is a one revenue stream company. I think Chorus is increasingly shaping up as a 'value trap'. If there is a further lift in share price, following an increased dividend announcement on full year results day, I might consider that as a queue to exit.

SNOOPY

discl: founding shareholder

newtrader

20-08-2021, 09:44 AM

I am expecting a lift in dividend when the results are announced. That would be in line with the wind down in capital expenditure freeing up cashflow as the geographic reach of fibre broadband network reaches completion. However I expect EBITDA to continue to fall, as the gains that Chorus makes on signing new broadband customers are offset by the loss of copper customers in areas where Chorus do not operate the local fibre broadband network. Based on current earnings, I believe that the long term debt position of Chorus is unsustainable.

I have been reading up on how Spark will be heavily pushing 5G fixed wireless broadband. I have personally witnessed already how good 4G wireless broadband is for households. 5G will remove the only real restriction on 4G fixed wireless broadband, the data cap. Technically fibre broadband will remain superior. There is a first mover advantage. If Chorus can really up their customer win rate in the coming months, it will be difficult for the likes of Spark and Vodaphone -with fixed wireless broadband- to win fibre customers over. I did see in PR2021 for Spark (slide 17) that the roll out of fixed wireless broadband was below target. Nevertheless dollars do talk. Wireless fixed broadband is where the profit margin is for Spark. Personally I think most households would be more than satisfied with '5G wireless fixed broadband'.

Unlike Spark, Chorus is a one revenue stream company. I think Chorus is increasingly shaping up as a 'value trap'. If there is a further lift in share price, following an increased dividend announcement on full year results day, I might consider that as a queue to exit.

SNOOPY

discl: founding shareholder

Thanks for your analysis Snoopy. Without additional non-regulated revenue streams (Chorus said they are working on it), I view it as a long-term stable dividend payer without much more growth prospects.
If there is further uplift in the share price, I may also consider recycling the capital elsewhere. I've held for more than 7 years.

I'm curious what is your target price for an exit.

peat

20-08-2021, 10:34 AM

Based on current earnings, I believe that the long term debt position of Chorus is unsustainable.
Personally I think most households would be more than satisfied with '5G wireless fixed broadband'.

I am seriously considering going short!!

I doubt many would go to fixed wireless if they already have fibre but yes it will likely be attractive to those leaving copper.
Except for hardcore gamers but they're not good customers anyway.

DeathByWarriors

20-08-2021, 11:47 AM

Lockdowns are probably a net positive for Chorus. Increased traffic means that people on Fixed Wireless (particularly those suddenly trying to work/learn from home) will notice network congestion issues and look to upgrade to a superior product (fibre).

Snoopy

20-08-2021, 01:33 PM

Snoopy

20-08-2021, 01:43 PM

Thanks for your analysis Snoopy. Without additional non-regulated revenue streams (Chorus said they are working on it), I view it as a long-term stable dividend payer without much more growth prospects.
If there is further uplift in the share price, I may also consider recycling the capital elsewhere. I've held for more than 7 years.

I'm curious what is your target price for an exit.

At current prices, I would class Chorus as 'overvalued' rather than 'grossly overvalued'. I am certainly not looking at the 'freak peak' north of $9 a year ago. If I had done the analysis I have done now 'back then', maybe I would have sold 'back then'. I think I will regard whatever the price is after the expected 'positive dividend announcement' as a good sell price. But CNU is actually my smallest NZX investment, by some margin. So I may yet just hold it to ground me and provide a foil to what is my main investment in the telecommunications space, which is Spark.

SNOOPY

Sideshow Bob

23-08-2021, 09:22 AM

Chorus 2021 full year results & annual report - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/377679)

Strong operational performance delivers 120,000 new fibre connectionsChorus today released its audited annual results confirming earnings before interest, tax, depreciation and amortisation (EBITDA) of $649m for the year ended 30 June 2021.

Summary
• UFB uptake 65 per cent; Chorus rollout is 95 per cent complete
• 871,000 active fibre connections (FY20: 751,000)
• Average monthly data usage for fibre customers 500GB (FY20: 436GB)
• EBITDA for the year $649m (FY20: $648m)
• Net profit after tax was $47m (FY20: $52m)
• Operating revenue for the period was $947m (FY20: $959m)
• Operating expenses were $298m (FY20: $311m)
• Capital expenditure $672m (FY20: $663m)
• Depreciation and amortisation for the period was $425m (FY20: $402m)
• Earnings before interest and tax of $224m (FY20: $246m)
• Fully imputed final dividend of 14.5 cents per share, total for FY21 of 25 cps

Chorus' focus in FY21 was to help customers capitalise on the gigabit head start the fibre network has given New Zealand. Over the year, fibre uptake grew from 60 to 65 per cent, with 120,000 newfibre connections across 100 or so broadband retailers. Demand for reliable, high-capacity broadband was evident, with gigabit connections growing from 16 to 19 per cent of Chorus' fibre connections. The ongoing surge in demand for internet data reflects broadband's role as an essential utility. The monthly average household data usage, over copper and fibre and including both downloads and uploads, grew from 350GB to 432GB across the year. Fibre customers consumed even more, averaging 500GB in June, up from 436GB the year before. The latest lockdown has seen unprecedented levels of throughput and data over the network. Despite COVID-19 disruptions during FY21, customer satisfaction increased from 8.1 to 8.2 for installations and 7.3 to 7.5 for service to homes with an existing or 'intact' fibre socket.Softer market conditions due to the ongoing effects of COVID-19 on broadband demand, together with competition from other fibre and wireless networks, resulted in a $12 million drop in revenue compared with FY20.

However, continued tight management of costs and the absence of one-off COVID-19 costs incurred in FY20 helped Chorus achieve its goal of a modest increase in EBITDA.Speaking about the results, Chorus CEO JB Rousselot said: "Despite the softer market in the wake of COVID-19, we continued our active wholesaler strategy and were pleased to grow total fibre connections to 871,000. We are well on the way to our target of one million connections next year. “Today, there are about 140,000 homes and businesses that could switch on a fibre service in a matter of hours if they chose to, and another 280,000 with fibre at their gate."Our UFB2 rollout continues to track ahead of schedule.

Fibre passed another 69,000 premises during the year. From Whitianga, with more than 3,000 premises, to Fox Glacier, with just 100 or so;smaller and smaller communities are now getting connected to fibre."Competition from alternative technologiesNew Zealand has superb digital infrastructure that offers options to consumers about how they choose to access broadband.

“We’re delighted to see that the vast majority of customers choose to pick fibre when they migrate off the copper network”, said Mr Rousselot."We're comfortable with competition, but we believe customers should be given all the information about the characteristics of different broadband services and time to consider their options rather than being told their service is changing and they have to make a quick decision.

"Chorus is a tireless supporter of the Commerce Commission's Measuring Broadband New Zealandprogramme. The analysis helps customers understand what performance they can expect from the various broadband technologies available in the market. “As the surge in data demand during the latest COVID-19 lockdowns shows, peak time capacity and performance is what really matters for consumers."We're also encouraged by recent Commerce Commission proposals to require retailers to provide clearer product disclosure for consumers.

“We believe that New Zealanders should be able to make informed decisions based on facts and unbiased equivalent data, rather than partial information and hype. Saying a service is fast doesn’t cut it if the speed slows significantly at peak times or when you’ve reached a certain data limit.”Regulatory environmentSignificant steps remain in the Commerce Commission's process to finalise the new fibre regulatory model between now and 1 January 2022.

Fibre consumers will benefit from ongoing investment if the Commission’s final determinations provide for:
1. A smooth transition into the new regime that drives Chorus to add more connections at higher speeds
2. Sufficient operational and capital expenditure to let us meet the demands of our customers
3. The ability to continue with our active wholesaler strategy
4. Recognition of the full cost of building our UFB network and a fair return on the publicprivate partnership investment made to build the fibre network over the last decade.

This should be underpinned by retail regulation that provides stronger consumer protections and better information about broadband technologies.Two aspects of the recent draft price-quality decision that Chorus is concerned about are proposedcapital and operating expenditure cuts, and the obligation of an additional, complex approval process for offering retailer incentives to promote fibre."We feel that the incentives we offer equally to all retailers to promote fibre should not be subject to a drawn-out approval process.

Retailers keen to promote fibre need early certainty around these incentives to plan their offerings and their campaigns and further approval processes wouldhinder this."In our submissions to the Commission, we continue to make the case that some of the draft outcomes don't fairly recognise the investment made over many years by our investors."

It's critical that the actual value of our participation in this partnership is recognised so we can keep investing in developing the capability and reliability of fibre broadband for New Zealand,” said Mr Rousselot.

DividendChorus will pay a final dividend of 14.5 cents per share, fully imputed, on 12 October 2021, bringing total dividends for FY21 to 25 cents per share.

FY22 guidanceFY22 guidance is subject to no material changes in regulatory or competitive outlook.
• EBITDA: $640 − $660 million
• Capital expenditure: $550 − $590 million
• FY22 initial dividend guidance of 26 cents per shareENDS

Marilyn Munroe

01-09-2021, 04:41 PM

Chorus fires a return salvo at their wireless broadband competitors;

https://sp.chorus.co.nz/product-update/chorus-future-fibre-portfolio-confirmed-changes

Boop boop de do
Marilyn

Snoopy

03-09-2021, 02:44 PM

Not coming from the telecommunications industry, I don't know how much incremental capital expenditure would be required to upgrade a line from 200Mbps to 1Gbps, for example. Maybe we aren't talking big dollars as I presume all the dark fibre would remain untouched? It would only be the electronics on the ends, and probably the customer hardware (Chorus wouldn't be paying to upgrade that), that needed upgrading? But Chorus do seem very arrogant about the threat of fixed wireless broadband run by Spark, Vodaphone and 2 degrees on the future demand for fibre. NBN (the equivalent of Chorus in Australia) thinks that fixed wireless broadband will settle at around 30% of the total broadband market. Unlike Chorus, NBN will be supplying fixed wireless broadband in rural areas, so NBN seems to have a more technology agnostic view of where things are heading. If 70% is the correct figure and is around where fibre broadband will plateau, then Chorus must be approaching new customer saturation in NZ. That means growth will increasingly come from existing customers upgrading their systems. So where will the forecast continuously increasing demand for faster than 200Mbps in the commercial space come from?

Ah yes, "Build it and they will come."

Arrogance has gone! Some very sobering quotes follow from the annual letter to shareholders.

Broadband connections falling year to year. OK it was only a drop of 26,000. But that has to be an 'ouch' moment.

"Outlook: FY22 is a crossroads year for Chorus."

Followed by a moment of realism:
"Fixed wireless services can deliver a broadband service that may provide a credible alternative for some customers,"

And an admission of what looks like $29m (PR2021 slide 18) of ongoing expenditure to keep those wireless network owners away...

"We’ve been investing in strong public information campaigns and advertising activity. We want consumers to be able to make an informed choice. We’ve also been providing retailers with marketing incentives to promote fibre uptake. These are a critical tool for us, when mobile network operators have substantial retail market power, large incumbent customer bases, and prefer that consumers use their wireless networks. The playing field is further tilted in their favour because, unlike fibre, fixed wireless services aren’t subject to price or quality regulation."

$29m isn't chicken feed when your whole year's profit is only $47m down from $52m the year before. Yet the Commerce Commission seems determined to stifle such spending:

"we’re concerned by the suggestion in the Commission’s draft price-quality decision that our retailer incentives require a drawn-out approval process. This would tilt the retail broadband market in the favour of large incumbents that do not have the willingness to promote fibre like the smaller retailers do."

Still if Chorus continue to go backwards in terms of broadband lines, maybe that Commerce Commission duggested (that was a typo but I think 'dug-gested' which carries a tone of expecting things to be lower is actually a better word than 'suggested' in this instance) value for the whole network is not a stretch:

"Market analysis suggests that a fairer approach to our investment risks, the cost of equity and the treatment of Crown funding should value the fibre network at more than $7 billion. Our initial $5.5 billion valuation, based on measures that don’t reflect our commercial reality, means we’ve had to propose acceleration of depreciation as a way to bridge the potential gap between our business plan revenue forecasts and the revenue cap for 2022 to 2024."

$7b - $5.5b = $1.5b of accelerated depreciation? That is equivalent to more than thirty years worth of present day net profit after tax - gone!

I wonder if the above has anything to do with this? From PR2021, slide 27:
"we expect the April 2022 interim dividend will be fully imputed, followed by unimputed dividends for the short to medium term."

I had predicted the end of imputed dividends. But it looks like the end will come sooner than I expected.

SNOOPY

Snoopy

04-09-2021, 08:15 PM

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+$3m-$3m ) - $5m) / 444.492m = 13.9cps

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 (adding to a total of $13m in Covid-19 relief response), 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

Time to update the earnings per share trend for the current financial year.

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.

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+$3m-$3m ) - $5m) / 444.492m = 13.9cps

FY2021: ($47m + 0.72( $2m+$1m-$4m+$7m ) +$1m) / 447.025m = 11.7cps

Notes

1/ 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.

2/ 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.

3/ 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.

4/ Normalised FY2020 removes a combined $2m Covid-19 relief payment encompassing 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 (adding to a total $13m of Covid-19 relief response), an incremental $2m increase in consultancy fees related to the regulatory transition, a $1m one off expense for restructuring forward dated interest rate swaps. I have 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 $3m, 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. I subtract $5m from NPAT, to account for the one off $5m tax refund resulting from the resumption of building depreciation. Finally my normalised FY2020 now removes a favourable $3m one off settlement (not mentioned in AR2020 specifically, but see AR2021 p17))

5/ Normalised FY2021 profit adjusts for a $1m value Added Network one off dispute settlement (assumed non taxable), a $2m one off restructuring labour costs, as a result of the ongoing transition from a 'build it' to a 'manage it' network, and $1m of costs relating to the decommissioning of legacy copper network equipment in Spark exchanges. I have subtracted a $4m reduction of interest costs relating to the "Ineffective portion of changes in fair value of cash flow hedges" and added back $7m interest charge arising from interest rate swap resets.

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. There is a steady trend apparent here, but unfortunately the earnings per share trend is steadily down. I can see Warren over there. He is looking even less impressed than last year!

Conclusion: FAIL TEST

SNOOPY

Snoopy

04-09-2021, 08:25 PM

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

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

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

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

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

FY2020: $62.0m / $927m = 6.7%

FY2021: $52.3m / $948m = 5.5%

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

Conclusion: FAIL TEST

Snoopy

04-09-2021, 08:36 PM

'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

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

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

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

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

FY2020: $62.0m / $959m = 6.5%

FY2021: $52.3m / $947m = 5.5%

A long commentary for FY2020. A somewhat shorter assessment for FY2021: Yikes!

Conclusion: FAIL TEST

SNOOPY

Snoopy

04-09-2021, 09:27 PM

I am becoming convinced that increasing ARPU will be a core determinant of of the profitability of Chorus going forwards. But strangely, although Chorus themselves are keen to throw this acronym around in their presentations, I can only find one mention of what this figure actually is. In slide 15 of PR2020 we learn that

"Growing fibre uptake and ARPU: June FY19: $47.50"

This is a note specifically referring to Fibre GPON (Gigabit Passive Optical Networks) revenue of $294m (FY2019).

If I back out the 'fibre premium' P2P revenue and use a linear average of the number of subscribers at EOFY2018 and EOFY2019 then I get:

ARPU = 1/12 x ($294m/ (0.5x(0.599m + 0.433m)) = $47.48 (c.f $47.50 above - just 2c low, but very close)

The following revenue figures for 'fibre broadband' and 'copper broadband' are largely taken from the 'Management Commentary' section of the respective annual reports. The 'In summary' table lists the number of connections, whereas the 'Revenue Commentary' lists the revenue attributable to each type of broadband.

Year
Broadband (GPON) RevenueBroadband (GPON) ConnectionsARPU (F)low
Copper Broadband RevenueCopper Broadband ConnectionsARPU (C)$47.15/m (from 01/10/2021, +2.5%)

FY2015
$29m75,000$?
$268m1,132,000$?

FY2016
$60m167,000$37.19
$456m1,059,000$34.69

FY2017
$123m$]292,000$44.66
$501m$]894,000$42.75

FY2018$]
$198m433,000$45.52
$421m754,000$42.58

FY2019
$294m599,000$47.48
$344m597,000$42.44

FY2020
$393m740,000$48.92
$271m466,000$42.49

FY2021
$477m860,000$49.69
$203m320,000$43.04

Notes

1/ Sample ARPU calculation for Fibre Broadband (GPON) for FY2019:

ARPU = 1/12 x ($294m/ (0.5x(0.599m + 0.433m)) = $47.48

2/ Fibre GPON customers for FY2016 = Fibre 'Mass market' Customers for FY2016
Fibre GPON Revenue for FY2016 and FY2015 taken from Appendix 3, Slide 36 , in PR2017.

3/ Fibre GPON customers for FY2015 estimated as: 88,000 - 13,000 = 75,000

4/ Copper broadband numbers for FY2016 and FY2015 are from Slide 5 of the Chorus PR2016.

5/ Copper broadband revenues for FY2016 and FY2015 are from Appendix 3, Slide 36, in PR2017

6/ Actual ARPU for FY2021 listed on slide 15 of PR2021 to be $49.87, a little higher than the $49.69 that I have calculated above. However Chorus has used a different calculation method
"ARPU is total GPON revenue for the June month, divided by the average of May and June connection."
I have used an average connection for the full year, not just May and June.

Why is this table important? The first ARPU column is representative of the business being gained as fibre broadband is being rolled out across the country. The second ARPU column represents business being lost as copper broadband is gradually retired and replaced with fibre broadband. It is heartening to see the ARPU being gained is greater than the ARPU being lost , even if such a superficial statement does not tell the full story (more on this later).

I talk of copper broadband as a 'legacy technology'. Yet it is surprising how recently the likes of copper VDSL was the latest in broadband technology and still in its growth phase (revenues sharply rose between FY2015 and FY2017). The calculated ARPU is consistent with the wholesale /Dial Up (remember that?)/ ADSL/VDSL/ bill being fairly steady over the time-frame of this table. By contrast the ARPU for Fibre GPON is steadily rising. This is consistent with, on average, a higher number of higher specification Fibre Broadband plans being sold as the years go by.

SNOOPY

Snoopy

05-09-2021, 09:32 AM

Wholesale Broadband Operator
%ge Nationwide Connections
EOFY2020 Connections {A}
EOFY 2020 Premises Passed {B}
%ge Regional Take Up {A}/{B}

Chorus
72%
725,000
1,209,000
60.0%

Northpower
2%
19,000
33,000
57.8%

WEL Networks
14%
145,000
237,000
61.2%

Enable
12%
117,600
187,000
62.9%

Total
100%
1,006,600
1,666,000
60.4%

Notes

1/ The end of the financial year is, for all four operators, on 30th June.

The most important figure in the above table, for Chorus investors, is the one in bold. Chorus owns 100% of the legacy copper network. So as users progress to fibre, they will eventually lose all of their copper legacy network, but only retain around 72% of the replacement fibre network. This means that although transitioning from the copper network will overall mean a boost in funding for pure fibre network owners, the expected 'gain' in revenue at Chorus is a little different.

Weighted Average Fibre Monthly Revenue Gain Per User 72% x $48.92= $35.22

less Weighted Average Monthly Copper Revenue Lost Per User 100% x $42.49= $42.49

equals Weighted Average Overall Monthly Revenue Change Per User -$7.27

Yes you did read that right. As the fibre transformation wave wafts over the country, Chorus can expect to lose on average $7.27 MRPU for every customer transitioned to fibre! In Australia they are forecasting around 70% of old copper network premises will eventually transition to fibre. The remainder will transition to fixed wireless or have no fixed line at all (relying instead on mobile communications not associated with any physical address).

If we use this 70 percent transition figure in an NZ context (an incremental 10% over where we are now), and assume we are sitting at at 60% take up rate right now, we can work out how much revenue Chorus can expect to lose from here on in, as 'NZ as a whole' transitions to fibre:

$7.27 per month x 12 months x 120,900 users transitioning = -$10.5m over a year, but echoing down all future years as well, from the remaining copper users expecting to transition from copper to fibre.

Based on last years NPAT figure, that represents a permanent NPAT profit decline of (0.72 x10.5m) / $52m = 15% ($7.6m in dollar terms).

This is in sharp contrast to the other broadband providers who are only making gains in the copper to fibre transition. To combat these impending ongoing revenue losses, Chorus will be under pressure to shut down the copper network where they can to avoid duplicating capital spend and maintenance.

Wholesale Broadband Operator
%ge Nationwide Connections
EOFY2021 Connections {A}
EOFY 2021 Premises Passed {B}
%ge Regional Take Up {A}/{B}

Chorus
73%
837,000
1,282,000
65%

Northpower
2%
21,000
33,000
64%

Ultrafast fibre
14%
161,000
240,000
67%

Enable
11%
132,000
200,000
66%

Total
100%
1,151,000
1,755,000
65.6%

Notes

1/ The end of the financial year is, for all four operators, on 30th June.
2/ Ultrfastfibre was in May 2020 sold to Sentier Investments based in Australia but no doubt for one of their global infrastructure funds .

The most important figure in the above table, for Chorus investors, is the one in bold. Chorus owns 100% of the legacy copper network. So as users progress to fibre, they will eventually lose all of their copper legacy network customers, but only retain around 73% of the replacement fibre network customers. This means that although transitioning from the copper network will overall mean a boost in funding for pure fibre network owners, the expected 'gain' in revenue at Chorus is a little different.

Weighted Average Fibre Monthly Revenue Gain Per User 73% x $49.69= $36.13

less Weighted Average Monthly Copper Revenue Lost Per User 100% x $43.04= $43.04

equals Weighted Average Overall Monthly Revenue Change Per User -$6.91

Yes you did read that right. As the fibre transformation wave wafts over the country, Chorus can ultimately expect to lose on average $6.91 MRPU for every customer transitioned to fibre! In Australia they are forecasting around 70% of old copper network premises will eventually transition to fibre. The remainder will transition to fixed wireless or have no fixed line at all (relying instead on mobile communications not associated with any physical address).

If we use this 70 percent network transition target figure in an NZ context (an incremental 5% over where we are now), and assume we are sitting at at 65% take up rate right now, we can work out how much revenue Chorus can expect to lose from here on in, as 'NZ as a whole' transitions to fibre:

Forecast users transitioning in future: 0.7 x 1,282,000 - 837,000 = 60,400

$6.91 per month x 12 months x 60,400 users transitioning = -$5.0m over a year, but echoing down all future years as well, from the remaining copper users expecting to transition from copper to fibre.

Based on the FY2021 NPAT figure, that represents a permanent NPAT profit decline of (0.72 x $5.0m) / $47m = 7.7% ($3.6m in dollar terms).

This is in sharp contrast to the other broadband providers who are only making gains in the copper to fibre transition. To combat these impending ongoing revenue losses, Chorus will be under pressure to tackle their cost structure further.

SNOOPY

Snoopy

06-09-2021, 01:04 PM

The following line information is derived from the July 12th 2021 announcement.

Lines ConnectedFY2020FY2021Change YOY

No Broadband Copper194,000147,000

plus Copper Broadband {A}466,000
320,000-146,000

equals Copper Broadband & Voice Connections660,000467,000

Fibre Broadband Connections {B}740,000860,000+120,000

Total Broadband Connections {A}+{B}1,206,0001,180,000

We can now work out the underlying 'change in profitability' that these broadband connection adjustments imply.

From my post 2759:

Weighted Average Fibre Annual Revenue Gain Per User 12 x $48.92= $587 {A}

Incremental Number of new Fibre Users 120,000 {B}

Incremental Annual Revenue from new Fibre Users {E} $70.44m {A}x{B}

Weighted Average Annual Copper Revenue Lost Per ex-User12 x $42.49= $510 {C}

Decremental Number of ex- Copper Revenue Users 146,000 {D}

Decremental Annual Copper Revenue Lost from ex-Users {F} $74.46m {C}x{D}

equals Net Change in Revenue from transformation: Copper-> Fibre Broadband User[ {E}-{F} -$4.02m

If the operating costs of the respective 'fibre'; and 'copper' networks are not dependent on the annual change in the number of users on them, then all of this revenue change should flow through to the bottom line.

Change in NPAT = 0.72 x -$4.02 = -$2.9m

The actual impact won't be a great as $2.9m, because that figure assumes the respective increase in fibre broadband users and decrease in copper users that I have described occurred on 1st July 2020. In fact those changes took a whole year to roll through the income statement. So we might expect the actual reported profit decline due to these changes as closer to $1.5m for FY2021. However, as things sit right now, the underlying profitability of the business has declined by $2.9m per year. The full effect of these changes in profitability over FY2021 will not be apparent in the accounts until FY2022.

Next from my post 2735 (on refinancing debt)
"All other things being equal this refinancing should produce an annual boost in profits from FY2022 of 0.72 x $7.5m = $5.4m"

However this refinancing only took place just over a month shy of the end of the financial year. So the actual incremental increase of profit will be:

$5.4m/12 = $0.45m

Unfortunately the company wide interest saving overall wasn't even worth this much. Because the new replacement bonds were issued before the old bonds expired.

That meant we had a seven month interest bill from the new bonds that is incremental to the existing debt structure. This presents an after tax decrease in profit of

0.72 x $8.98m x 7/12 = $3.8m

We have to go back to my post 2650 to find the underlying profit for FY2020 as $67.1m, well north of the headline figure of $52m

My forecast NPAT for FY2021, net of all one off charges, is therefore:

$67.1m - $1.5m + $0.45m -$3.8m = $62.3m

On a per share basis this represents earnings of $62.3m / 444.492m = 14.0cps

Note this is well below the mooted dividend rate of 25cps. But like the gentailers, Chorus is becoming a cashflow story, not a profit story, from here on in.

Actual profit result was a normalised NPAT of $51.3m. That is getting towards 20% lower than the forecast figure I calculated. I give myself a 'D' for my prediction - a pretty poor effort. So what went wrong?

1/ Incremental/decremental broadband/copper revenue: I used last years average line charge figures as a proxy for this year's figures (MRPU broadband used $48.92(actual $49.69), MRPU copper used $42.49 (actual $43.04 )).

Weighted Average Fibre Annual Revenue Gain Per User 12 x $49.69= $596 {A}

Incremental Number of new Fibre Users 120,000 {B}

Incremental Annual Revenue from new Fibre Users {E} $71.55m {A}x{B}

Weighted Average Annual Copper Revenue Lost Per ex-User12 x $43.04= $516 {C}

Decremental Number of ex- Copper Revenue Users 146,000 {D}

Decremental Annual Copper Revenue Lost from ex-Users {F} $75.41m {C}x{D}

equals Net Change in Revenue from transformation: Copper-> Fibre Broadband User[ {E}-{F} -$3.86m

This produces a change in NPAT over the year of 1/2 x (0.72 x $3.86m) = -$1.4m ( c.f -$1.5m as assumed)

In fact the resultant error in doing that was small ( $1.5m - $1.4m = $0.1m). In truth the overall difference between all the operating revenue and all the operating expenses was more or less unchanged over the year (see AR2021 income statement).

2/ I forecast $0.45m in financing cost savings over the year, offset by $3.8m in concurrent bond funding, with the refinancing of the CNU010 bonds into an equivalent dollar value of prematurely borrowed CNU030 and CNU040 bonds. $0.45m - $3.8m = -$3.3m. That is consistent with interest paid on fixed rate NZ bonds going up by $3m over FY2021 (AR2021 Page 20).

What I didn't take into account was the maturity of the EMTN GBP 6.75% European Bonds, representing $NZ491m of capital that was repaid in April 2020. That would have reduced the interest payable on a year on year comparative basis by:

$NZ491m x 0.0675 x 10/12 = $27.6m

That makes my expected 'financial expense increment' to after tax profit: 0.72($27.6m -$3m) = $17.7m

The actual 'financial expense increment' on interest expenses (AR2021 p20) was 0.72($153m-$123m)= $21.6m, the difference being unexplained rises in other interest expenses.

My problem is both of the 'errors' 1/ and 2/ that I have identified above have increased profits, whereas actual profits decreased, So there is a lot more to investigate yet.

3/ Annual Depreciation increased over the year to $331m from $319m (a rise of $12m). This is what happens when your main capital asset, your broadband network, has hundreds of millions of dollars of additional capital expenditure poured into it over the year. Furthermore, annual amortisation rose to $94m from $83m (a rise of $11m), most likely a result of major software upgrades over FY2021. Thus increasing 'D&A' produced a negative effect on profit of: 0.72(-$12m - $11m)= -$16.6m.

4/ Profit was lower over FY2021 but tax was higher. This can be explained by a $5m tax credit in FY2020 relating to the reintroduction of a depreciation allowance on buildings. I hadn't considered this, which made the actual FY2021 tax bill, estimated from the comparative FY2020 period, $5m higher than I expected.

So taking into account the three significant factors of a reduction in interest payments, the higher depreciation and amortisation charges, and the comparative underpayment of tax in the comparative year FY2020, the incremental/decremental adjustment to underlying NPAT from FY2020 to FY2021 was:

+$17.7m - $16.6m - $5m = -$3.9m

This is very close to the actual declared drop in NPAT declared of $5m (rounding errors could account for the difference). Nevertheless this is very different to the normalised profit drop of $72.1m - $51.3m = $20.8m

Another way of looking at this is that the numerous 'one off events' that ended up inflating my 'normalised' FY2020 NPAT figure would become permanent and embedded changes to the business, as part of a post Covid-19 reality check. IOW my 'normalising adjustments' were actually un-normalising the new reality. Could this 'new reality' be that:

1/ Contractors now have to be paid more to be able to sit out government mandated periods where working site access is restricted?
2/ The company continues to offer partly subsidised education connections provided as part of Chorus’ COVID-19 response (this has never been quantified to my knowledge)?
3/ There are now permanently high external advice consultancy fees based around ongoing proposed regulatory price adjustments? Hopefully when the new regulatory framework is in place from 2022, the need for these highly paid external consultants will drop away?
4/ The effect of dealing with the NZD floating rate interest payments on the EMTN debt is a permanent thing, not a fluctuating adjustment that should be credited one year and debited the next. as I had assumed. My explanation as to why this supplementary interest charging is a one way street? There are relative underlying economy strengths between Europe and New Zealand, which are expressed as one way long term currency movements. I had regarded adjustments for floating debt repayments as 'one off' reflected interest charges that should be removed. But maybe the extra interest charges under this label have become a normal structured part of interest repayments?

Maybe I did have points 1-4 above wrong? But until I get some more supporting evidence of that, I am sticking with my own earnings calculations.

SNOOPY

Waltzing

06-09-2021, 01:18 PM

"Chorus is becoming a cashflow story, not a profit story, from here on in."

financial statements are not published inside standardised data structured formats and therefore your calculations cant be automated and nor can anyone one else.

mistakes are then highly likely.

ok your new story line is therefore?

Snoopy

13-09-2021, 03:18 PM

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.

This has become a bit of an 'old chestnut' of mine: The representation of the 'Crown Infrastructure Partner Securities', incorporating both 'CIP Debt' and 'CIP Equity' (actually preference shares) on the Chorus balance sheet. First of all, hats off for Chorus listing the 'preference share equity' as debt. But as for the way the balance is discounted back to present day values using an ultra high (IMO) 8.5% discount rate....

CIP Debt Facilities

Chorus have used the face value of the debt facilities issued (Slide 21, August 2021 Presentation) and used an 8.5% annual discount factor (AR2021 p43) to get their 'present value' of CIP debt:

$85m / 1.085^4 + $86m / 1.085^9 + $128m / 1.085^12 + $163m / 1.085^15 = $198.6m

The undiscounted value of that CIP debt is: $85m+$86m+$128m+$163m = $462m, equal to the total value of the UFB1 debt - exactly the same situation as last year (Slide 21, August 2021 presentation). The UFB1 construction project is now complete, as it was last year (which no doubt explains why the ultimate repayment value of UFB1 debt has not changed). I noted this, but wondered why the still under construction related UFB2 funding was left out of the 'Chorus Debt Facilities' picture?

-On a separate note, I see the UFB2 equity drawn by Chorus has increased from $143m to $265m over FY2021, an increase of $122m as the UFB2 roll out passed another 70,000 premises during the financial year (PR2021 slide 6)-.

Back to my question, the UFB2 roll out during the year was all funded by 'UFB2 equity' (sic), not 'UFB2 debt'. This answers my question regarding why the UFB2 debt funding has been left out of the debt picture (Slide 21, August 2021 presentation - there isn't any UFB2 debt funding as yet the UFB2 $105m debt facility remains untouched).

CIP Equity Facilities

The total of $545m on the balance sheet listed as "Crown Infrastructure Partners (CIP) securities" represents both 'CIP equity' ($306m) and 'CIP debt' ($209m) (See AR2021 p44). 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, the listed total "Crown Infrastructure Partners (CIP) securities" liability of $545m is discounted from the ultimate repayment amount, as accounting standards allow. Nonertheless all of this 'CIP debt security' 'discounted debt' will eventually have to be repaid at face value. As for the 'CIP equity' (preference shares) these will either:

1/ Have to be repaid at face value OR
2/ Be settled by converting the preference shares to ordinary shares, and that process will diluting existing shareholders' interests.

I don't sleep easy with either prospect. This debt does not come into any banking covenant calculations, because the bank as they are entitled to do, regards the CIP Preference Shares as equity. I don't like it.

SNOOPY

Snoopy

14-09-2021, 10:02 AM

What is of particular interest to me is the effect of IFRS 16 on EBITDA, because that impacts banking covenants.

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?

AR2021 p20 tells us that :

1/ 'Other interest expense' includes $20m of 'lease interest', from a total of $30m.
2/ Now, if we go back to p18 of AR2021 and look under the 'expenditure commentary' we can see an entry 'Other $21m'. We are told this 'Other $21m' includes

"expenditure on general costs such as advertising, telecommunications, travel, training and legal fees. These reduced by $6 million in FY21, mainly as a result of adjustments to our doubtful debt provision and lower advertising spend."

If 'lease interest' is included in this definition of 'Other $21m', then the only way to reconcile the overall position is that "expenditure on general costs such as advertising, telecommunications, travel, training and legal fees" reduced by $6m to only $1m over all of FY2021. This seems unlikely. So I have to assume that $21m of lease interest is not included in 'Other' category under operating expenses

3/ Back up a couple of pages further to p16 of AR2021. Right under the main 'Management Commentary' header you can see how the earnings are calculated. The first step is to take the 'operating revenue' and remove the 'operating expenses'. These are the same 'operating expenses' we have just looked at in a more detailed way on page 20. That means that over FY2021, the EBITDA figure declared (difference between 'Operating Revenue' and 'Operating Expenses' as laid out on AR2021 p16) has, most likely, not had lease interest deducted from it (instead the lease interest has been deducted further down the page as part of the 'Net Finance Expense'). Or put another way, the 'I' referred to in EBITDA includes the 'lease interest' (a charge that used to be reported directly against earnings as rent), before it was removed to give the - higher as a result- EBITDA figure that you see reported.

In the midst of this 'microanalysis', we mustn't forget our objective. That is to ensure that the effect of 'lease interest' is not 'double counted' when calculating banking covenants. 'Lease interest' is part of what used to be considered 'rent' in the pre-IFRS16 days. So when we use EBITDA as part of a banking covenant calculation, we should calculate this for Chorus as : 'Declared EBITDA' - 'Lease Interest'.

For Chorus over FY2021, this means, for banking covenant purposes: EBITDA = $649m - $20m = $629m

SNOOPY

peat

14-09-2021, 10:10 AM

shorting not allowed. :(

Snoopy

14-09-2021, 10:17 AM

Chorus View

Total Net Debt$2,680m

divided by EBITDA$648m

equals 'Net Selected Debt' / EBITDA4.14

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 am using the calculation method shown on Slide 22 from PR2021 (August)

FY2021
Chorus View (Pre IFRS16)
Chorus View (Post IFRS16)
Reference
Snoopy View

Bank and Note Debt (1)
$2,339m
$2,339m
(Slide 21 PR2021)
$2,339m

add PV of CIP Debt Securities (Senior)
$198m
$198m
(my post 2799)
$462m (2)
(Slide 21, PR2021)

add Net Leases Payable

$264m
(Note 5 AR2021)

equals Total Selected Debt
$2,537m
$2,801m

$2,801m

less cash
$53m
$53m

$53m

equals Total Net Selected Debt
$2,484m
$2,748m

$2,748m

divided by EBITDA
$629m
$649m

$629m

equals 'Net Selected Debt' / EBITDA
3.95
4.23

4.37

Notes

1/ Total net bank and other senior debt = $140m+($858m+$511m-$70m)+($200m+$500m+$182m)+$18m = $2,339m.
The $70m decrease in balance sheet value of the Euro bonds is because of a change in end of year value of an associated hedging instrument, the cross currency interest rate swaps used to hedge the Euro bonds (AR2021 p54). Likewise the $18m adjustment upwards in the value of the NZ bonds is because of the offsetting $18m decrease in value of interest rate swaps that are used to ensure hedge effectiveness (AR2021 p54).
2/ I don't like the accounting standard that lets a company discount debt that ultimately has to be repaid. So I am assuming a PV discount rate of 0%.

My 'Snoopy' view of this calculation removes the 'lease interest expense' (a part of rent) from EBITDA (so EBITDA is lowered). But I have also removed the 'Net Leases Payable' (a construct of IFRS16) as a liability, as I don't consider that a debt in a pre-IFRS16 sense. I don't consider my approach better than the approach Chorus has used. But my approach aligns better with the old way of assessing this banking covenant.

The other controversial thing that I have done is to disallow any discounting of CIP debt, in addition to removing the 'Net Leases payable' debt. By pure chance the effect of doing each of those two things separately has exactly cancelled out any overall debt change. Nothing should be read into this, as it is just a case of two unrelated changes unexpectedly neutralizing each other.

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. Personally I don't believe Chorus do deserve a credit upgrade, based on my retro calculation that shows the company is a slightly less favourable debt position.

SNOOPY

Snoopy

14-09-2021, 01:32 PM

"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$126m

equals 'Interest Coverage'2.0

Notes

1/ For the interest bill I am using in this calculation (Ref AR2020 p47):

$185m - $29m - $27m - $3m = $126m

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 broken. Not good news!

FY2021
Pre IFRS16 ViewPost IFRS16 View

EBIT
$215m$224m

divided by Net Interest Expense
$92m$112m

equals 'Interest Coverage'
2.32.0

Notes

1/ Pre IFRS16 EBIT Calculation

Published EBIT of $224m. But as explained in my post 2800, 'lease interest' (a rent cost) has not been removed from this figure. However 'lease interest' is an accounting construct derived from whole of contract rent agreements and is not equivalent to annual rent in any given year. We can best estimate annual rent from the Cashflow statement, as cashflow is not affected by accounting constructs (AR2021 p32).

Rent Estimate (exclusive of GST) is: ($28m/1.15) = $24m

Furthermore we must add back the 'Right of Use Asset Depreciation' of $15m (AR2021 p19). Why? Because although 'D' (depreciation) has already been removed to calculate EBIT, the 'Right of Use Asset Depreciation' is an incremental element of depreciation - an accounting construct created by IFRS16, that did not exist before. So if we want it to not exist again, taking a retrospective preIFRS16 view of the accounts, we have to remove this 'incremental deduction' i.e. add it back

So pre-IFRS16 EBIT is $224m -$24m +$15m = $215m

2/ Pre IFRS16 Interest Calculation

For the net interest bill I am using in this calculation (Ref AR2021 p41):

($153m-$1m) - $34m - $30m + $4m = $92m

I have removed from the net interest bill:

(i) $34m of CIP securities 'notional interest' (AR2021 p20)
(ii) $20m of 'lease expense' interest and $7m amortisation from a swaps reset and a further $3m undisclosed. (AR2021 p20)

And I have added back a reduction in interest:
(iii) $4m from the ineffective portion of a cashflow hedge. (AR2021 p20)

The latest reference i can find to the revised interest ratio coverage indicator is in this 25-05-2017 press release:
https://stocknessmonster.com/announcements/cnu.nzx-301693/

The interest coverage result of 2.4 is less than the revised 2.75 interest coverage covenant referred to in the link above. This calculation is telling me the 'Interest Coverage Ratio' covenant is broken. Not good news!

3/ Post IFRS16 Calculation

For the interest bill (see calculation above), I am now adding back the 'lease interest expense' that I had previously removed:

$92m + $20m = $112m

Since we are now working with current EBIT figures, EBIT remains as reported at $224m (AR2021 p16)

SNOOPY

zspoon

14-09-2021, 08:36 PM

Is there a reason you’re using EBIT rather than EBITDA for interest cover calc?

Snoopy

14-09-2021, 09:58 PM

Is there a reason you’re using EBIT rather than EBITDA for interest cover calc?

Good question. Answer: Because 'Simply Wall Street' do it?

https://simplywall.st/stocks/nz/telecom/nzx-cnu/chorus-shares/news/chorus-nzsecnu-use-of-debt-could-be-considered-risky

Maybe that wasn't such a good answer as the "Simply Wall Street" guys do seem to be a bit 'out there' with some of their valuations!

According to these guys:

https://learn.financestrategists.com/explanation/accounting-ratios/interest-coverage-ratio/

'Interest Coverage Ratio' can be either EBIT/I or EBITDA/I. But then in the worked example they use EBIT/I. Unlike the 'Net Senior Debt' calculation, I haven't yet found a worked example of 'Interest Coverage Ratio' as calculated by Chorus themselves. Anyone have an opinion as to which calculation method I should use and why?

SNOOPY

zspoon

15-09-2021, 03:23 PM

Snoopy

15-09-2021, 08:05 PM

It depends on what is agreed with the bank - there are various formulations, including straight net profit. At the end of the day all this really is is a KPI for the bank to track which could indicate serviceability issues.

One would presume that they aren’t using EBIT, otherwise you’d be seeing a disclosed covenant breach based on your own version of workings - particularly give the gap between EBIT and EBITDA is so large for Chorus given their massive depreciation charge. Given the size of non-cash items in their EBIT, this would have a poor correlation with ability to service interest obligations. It would also be unusual to have one covenant being linked to EBITDA, and another being linked to EBIT.

I am not sure this post will end up being coherent, but I thought I would throw out a few 'random thoughts' on this topic, while thinking about a 'housing loan analogy'.

For 1/ 'Net Senior Debt' / EBITDA , this is the equivalent of 'Loan to Income Ratio' borrowing agreement for a homeowner. From a bankers perspective, they don't care if you don't keep the house looking brand new (the DA bit is the amount of money you should be spending on sandpaper, overalls and paint). As long as you are holding down your high paying job and the associated cashflow is coming in to look after the bank loan balance, that is all the bank cares about.

2/ EBITDA / 'Net Interest', is a straight 'cashflow in' to 'cashflow out' measure, and might be thought of as analogous to measuring your ability to service an 'interest only mortgage'.

There is of course a relationship between 'Net Interest' and 'Net Senior Debt', the former being an annual payment that is a fractional multiple of the latter. So in that, sense I might argue that 'Net Senior Debt' / EBITDA (1) and EBITDA / 'Net Interest' (2), although separate numbers, are actually measuring the same thing. Having said that, (1) does not change with interest rates. Whereas (2) will reduce in value and increase in risk when interest rates rise. What (2) is saying is that, as interest rates rise, your loan will require more of your income to service it. I would have said that fact is self evident, and there is no need to contrive a statistic to tell yourself what you already know!

What about:

3/ EBIT / 'Net Interest'? (3) is again an analogous measure to an 'interest only mortgage' home loan, albeit a loan on a tighter leash than covenant (2) . Imagine if you were a taxi driver borrowing against your house to buy your brand new taxi cab. After 5 years, your cab might have clicked over sufficient kilometres -with the associated wear and tear- to be in need of replacement, PLUS you may have to renew your taxi operators licence. IOW the 'DA' part of your annual accounts, is representing money you have to put aside each year, just to stay in business.

One conclusion from this is that if you were in a business with a required high capital replacement spend (e.g. running a taxi) then,

1/ the depreciation on your vehicle and
2/ amortisation of your fixed period taxi licence,

represents cash you will have to stump up every 5 years or so, just so you can keep operating your business as it is now. IOW the 'DA' bit of the accounts is not free cashflow in the strictest sense, but represents money that must be put aside every year just to allow normal operations to continue like now, over the medium term.

In this 'taxi' borrowing example, (3) is a much more useful statistic than (2). Also in this 'high depreciation' situation, (3) is the best measure of whether your bank can expect their payments coming in each week, whereas (1) is a better measure of whether the bank are likely to get all their loan capital back - eventually.

Nevertheless, IF your company owns a very long lived asset, like a neighbourhood fibre network, AND has been granted an indefinite licence to operate that network (IOW there is no need to regularly rebuild the 'book value' of certain company assets, as the cash generating ability of those assets is not being reduced in any meaningful way by 'wear & tear' - somehow Chorus springs to mind), THEN (2) is a better 'cash in', 'cash out' 'business balance measure'. But in those situations, is (2) really measuring anything different to (1)? I might argue that in the current low interest rate environment, and with the majority of interest payments being fixed by hedging, it isn't! Could this be the reason that Chorus doesn't mention 'Interest Coverage Ratio' in its presentations these days?

SNOOPY

Snoopy

16-09-2021, 04:22 PM

The difference between total capital expenditure and sustaining capital expenditure is set to become critical in determining the future dividend returns from Chorus shareholders. From the 17th November 2020 Presentation, Slide 33:

"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."

The following table is compiled from information in:

a/ Slide 34 of the 17th November 2020 presentation.
b/ AR2020 p28

Capex over 2020

Fibre Layer 2 Sustaining$31m

Fibre Products & Services Sustaining$14m

Fibre 'Other Fibre Connections' Sustaining$20m

Fibre Customer Retention Sustaining$7m

Fibre UFB Communal Development$170m

Fibre Connections & Layer 2 Development$251m

Other Fibre Connections & Growth Development$42m

Fibre Customer Retention Development$13m

Fibre Total$548m

Copper Network Sustaining$31m

Copper Layer 2 Sustaining$7m

Copper Customer Retention Sustaining$16m

Copper Connections Sustaining$1m

Copper Development$0m

Copper Total$55m

Common IT Sustaining$43m

Common Building & Engineering Services Sustaining$17m

Common Development$0m

Common Total$60m

Sustaining Total$186m

Development Total$476m

Overall Total$663m

The difference between total capital expenditure and sustaining capital expenditure is set to become critical in determining the future dividend returns from Chorus shareholders. From the 17th November 2020 Presentation, Slide 33:

"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."

The following table is compiled from information in:

a/ Slide 43 of the 23rd August 2021 presentation.
b/ AR2021 p21

Capex over 2021SustainingDevelopmentSub Total

Fibre Layer 2 Sustaining$31m

Fibre Products & Systems Sustaining$11m

Fibre Network & 'Other Fibre Connections' Sustaining$22m

Fibre Customer Retention Sustaining$11m

Fibre UFB Communal Development$147m

Fibre Connections & Layer 2 Development$244m

Other Fibre Connections & Growth Development$83m

Fibre Customer Retention Development$18m

Fibre Total$567m

Copper Network Sustaining$29m

Copper Layer 2 Sustaining$4m

Copper Customer Retention Sustaining$11m

Copper Connections Sustaining$1m

Copper Development$0m

Copper Total$45m

Common IT Sustaining$46m

Common Building & Engineering Services Sustaining$14m

Common Development$0m

Common Total$60m

Sustaining Total$180m

Development Total$492m

Overall Total$672m

The year to year comparison with the quoted post above shows a $6m reduction is 'sustaining capital expenditure'. But that includes $10m in sustaining costs less spent on the copper network. So sustaining capex for the fibre network has gone up over the year, although that is in the face of a fibre network that is still growing. Nevertheless as long as the overall sustaining capex comes down,

free cash flow = net cash flows from operating activities - sustaining capex

then free cashflow goes up. Since dividends going forwards will be based on 'free cashflow', this is a good thing for shareholders.

SNOOPY

Snoopy

17-09-2021, 08:39 PM

Forecast fibre revenue from 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2021 and FY2023 values interpolated).

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:

1/ 'copper connected revenue' and
2/ '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 interest is as follows.

FY2016
FY2017
FY2018FY2019FY2020
FY2021FFY2022FFY2023FFY2024F

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

Fibre Revenue Increment

+$69m
+$74m+$92m+$100m
+$124m+$123m+$20m+$20m

Fibre Revenue Increment Percentage

+51.9%
+36.6%+33.3%+27.2%
+26.5%+20.8%+2.8%+2.7%

Non-Fibre Revenue
$875m
$838m
$714m$602m$491m
$409m$339m$279m$229m

Non-Fibre Revenue Decrement

-$37m
-$124m-$112m-$111m
-$82m-$70m-$60m-$50m

Non-Fibre Revenue Decrement Percentage

-4.3%
-14.8%-15.7%-18.4%
-16.7%-17.1%-17.7%-17.9%

Total Revenue
$1,008m
$1,040m
$990m$970m$950m
$1,001m$1,054m$1,014m$984m

The actual FY2021 revenue figures have been published as I write this. So it is time to update my revenue forecasting table.

Chorus has been locked in a regulatory battle with the Commerce Commission on how much 'maximum allowable revenue' (MAR) their 'regulated asset base' of fibre broadband assets will be allowed to charge their downstream retail customers over FY2022 through to FY2024, otherwise known as the 'Price Quality (PQ) Period - First.' (PQP1)

1/ The initial Commerce Commission proposal on 26-03-2021 was a rising sum starting from $715m (FY2022) rising to $755m (FY2024).
2/ A revised proposal on 27-05-2021 reduced this to a range from $689m to $786m.
3/ A further comment on 19-08-2021 from the Commerce Commission stated.

"The Commission has noted in its draft RAB (Regulated Asset Base) decision today that “If all other aspects of our draft PQ decision remained unchanged, our indicative estimate of the combined impact of these decisions would lead to a 2%-2.5% reduction in allowable revenue over the PQP1 period. This figure also includes the impact of updated WACC values applied in the pre-implementation period.”

The market took this to mean that the revised downwards regulated revenue rates may yet be increased again by the time the final decision in December comes out. The case Chorus made to the Commerce Commission was for a regulated rate range between $720m to $820m. I am doubtful that the Commerce Commission will be that generous in their final regulated outcome figures. So for the purpose of this update I am going to assume that the Commerce Commission raises the allowable revenue figures back to the range of the 26-03-2021 proposal: $715m (FY2022) rising to $755m (FY2024) [Forecast fibre revenue from 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2023 values interpolated).]

My table of forecast 'total change of revenue' over the period of interest is as follows.

FY2016
FY2017
FY2018FY2019FY2020
FY2021FY2022FFY2023FFY2024F

Fibre Revenue
$133m
$202m
$276m$368m$466m
$545m$715m$735m$755m

Fibre Revenue Increment

+$69m
+$74m+$92m+$98m
+$79m+$170m+$20m+$20m

Fibre Revenue Increment Percentage

+51.9%
+36.6%+33.3%+26.6%
+17.0%+31.2%+2.8%+2.7%

Non-Fibre Revenue
$875m
$838m
$714m$602m$493m
$402m$332m$272m$222m

Non-Fibre Revenue Decrement

-$37m
-$124m-$112m-$109m
-$91m-$70m-$60m-$50m

Non-Fibre Revenue Decrement Percentage

-4.3%
-14.8%-15.7%-18.1%
-18.5%-17.4%-18.1%-18.4%

Total Revenue
$1,008m
$1,040m
$990m$970m$959m
$947m$1,047m$1,007m$977m

Notes

1/ 'Non-fibre revenue' up until and including FY2021 has been calculated by subtracting 'Fibre revenue' from 'Total revenue'.

2/ 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:

a/ 'copper connected revenue' and
b/ 'field services, value add network services and infrastructure'

as two groups. The latter group I am forecasting constant revenue of $120m over FY2022 to FY2024 inclusive (Actual figures were $118m over FY2020 and $119m over FY2021). The 'copper connected revenue', comprising 'copper based broadband', 'copper based voice' and 'data services copper' have taken an $91m decline over FY2021. So I am forecasting declining revenue to continue: down $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.

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

So what to make of this? IF you compare the actual fibre revenue over FY2021 of $545m with

a/ the forecast regulated fibre revenue for FY2021 (slide 24 PRHY2021) $620m (interpreted from graph), OR
b/ my linearly interpolated FY2021 fibre revenue of $592m (being the arithmetic average of the previous year's fibre revenue used figure of $468m and the prescribed first year of MAR $715m).

THEN that actual revenue represents $47m to $75m less revenue than forecast just six months ago. That seems to be an astonishing drop in projected annual fibre revenue in just six months, which has to call into question the forecasting ability of Chorus. Have I got that observation right?

SNOOPY

Snoopy

19-09-2021, 09:46 PM

Is there a reason you’re using EBIT rather than EBITDA for interest cover calc?

To get another angle on this, I have decided to rework my interest rate covenant calculations using EBITDA

FY2021
Pre IFRS16 ViewPost IFRS16 View

EBIT
$215m$224m

divided by Net Interest Expense
$92m$112m

equals 'Interest Coverage'
2.32.0

Notes

1/ Pre IFRS16 EBIT Calculation

Published EBIT of $224m. But as explained in my post 2800, 'lease interest' (a rent cost) has not been removed from this figure. However 'lease interest' is an accounting construct derived from whole of contract rent agreements and is not equivalent to annual rent in any given year. We can best estimate annual rent from the Cashflow statement, as cashflow is not affected by accounting constructs (AR2021 p32).

Rent Estimate (exclusive of GST) is: ($28m/1.15) = $24m

Furthermore we must add back the 'Right of Use Asset Depreciation' of $15m (AR2021 p19). Why? Because although 'D' (depreciation) has already been removed to calculate EBIT, the 'Right of Use Asset Depreciation' is an incremental element of depreciation - an accounting construct created by IFRS16, that did not exist before. So if we want it to not exist again, taking a retrospective preIFRS16 view of the accounts, we have to remove this 'incremental deduction' i.e. add it back

So pre-IFRS16 EBIT is $224m -$24m +$15m = $215m

2/ Pre IFRS16 Interest Calculation

For the net interest bill I am using in this calculation (Ref AR2021 p41):

($153m-$1m) - $34m - $30m + $4m = $92m

I have removed from the net interest bill:

(i) $34m of CIP securities 'notional interest' (AR2021 p20)
(ii) $20m of 'lease expense' interest and $7m amortisation from a swaps reset and a further $3m undisclosed. (AR2021 p20)

And I have added back a reduction in interest:
(iii) $4m from the ineffective portion of a cashflow hedge. (AR2021 p20)

The latest reference i can find to the revised interest ratio coverage indicator is in this 25-05-2017 press release:
https://stocknessmonster.com/announcements/cnu.nzx-301693/

The interest coverage result of 2.4 is less than the revised 2.75 interest coverage covenant referred to in the link above. This calculation is telling me the 'Interest Coverage Ratio' covenant is broken. Not good news!

3/ Post IFRS16 Calculation

For the interest bill (see calculation above), I am now adding back the 'lease interest expense' that I had previously removed:

$92m + $20m = $112m

Since we are now working with current EBIT figures, EBIT remains as reported at $224m (AR2021 p16)

I consider there are two ways to do this.

1/ The first is to consider what the EBITDA was in pre IFRS16 times. EBITDA does not take into account any interest charges. That means the 'lease interest' part of the 'current accounting standard' annual interest charge - which I class as a rent substitute - has not been accounted for. We need to pull 'the rent' - as a cost - out of the 'interest bucket' and put in back into the 'operating expense bucket'. This will decrease any ultimate interest rate charges reported. But it will decrease EBITDA as well, due to the extra cost of the rent. Nevertheless rent in any year is not exactly the same thing as 'lease interest'. We have to calculate annual rent from the operational accounts of the business, and that means looking at the cashflow statement. This I have done in the quoted post above, and calculated the rent to be $24m.

Furthermore the 'depreciation expense' under IFRS16 is now greater than it was. This is because there is now a new incremental element of depreciation - called the 'depreciation of right of use assets' (actually an IFRS16 accounting construct). Pre-IFRS16, total depreciation was less by this incremental amount. We must compensate for this smaller depreciation pre-IFRS16 if we are to compare today's EBITDA figures with yesterdays. This means for today's EBITDA to revert to the equivalent of the old EBITDA measure, we must increase today's EBITDA value by $15m (figure referred to in quoted post above), being the amount of this incremental depreciation.

With the adjustments in the above two paragraphs made, this means the EBITDA total reduces to:

EBITDA = $649m - $24m + $15m = $640m

I also need to make a complimentary adjustment to the denominator of my banking covenant, the 'Interest' divisor. Because 'lease expense interest' has been removed from the EBITDA figure quoted, to be consistent I also need to remove 'lease expense interest', from the divisor, because 'lease expense interest' is not interest in the pre IFRS16 sense.

For the interest bill I am using in this calculation (Ref AR2021 p41):

($153m - $1m) - $34m - $30m + $4m = $92m

Note that as well as ;lease interest expense', I have removed from the net interest bill:

(i) $34m of CIP securities 'notional interest'
(ii) $20m of 'lease expense' interest and $7m amortisation from a swaps reset and a further $3m undisclosed.

And I have added back a reduction in interest:
(iii) $4m from the ineffective portion of a cashflow hedge.

=> EBITDA/I = $640m / $92m = 7.0 > 2.75 => everything is A O.K.

2/ The second method is to use the EBITDA figure as quoted in the Annual Report. However in this case, the 'lease expired interest' that was equivalent to rent has not been removed. So to measure the ability of EBITDA earnings to cover any interest charges, we must make sure that those 'exaggerated earnings' are able to cover the consummately higher 'exaggerated interest bill' that includes 'lease expense interest' as part of the interest bill total.

EBITDA = $649m as reported.

I = $92m (as above) + $20m = $112m

=> EBITDA/I = $649m / $112m = 5.8 > 2.75 => everything is A O.K.

SNOOPY

Snoopy

20-09-2021, 08:03 PM

For this table I have reverted to the 'conventional' calculations, (Not including the case where the discount rate of debt is zero).

Interest CoverageDebt to EBITDA

EBITDA/I (Pre IFRS16)EBITDA/I (Post IFRS16)EBIT/I (Pre IFRS16)EBIT/I (Post IFRS16)'Net Senior Debt'/EBITDA (Pre IFRS16)'Net Senior Debt'/EBITDA (Post IFRS16)

)/)/
Value7.05.82.32.03.884.23

Target>2.75>2.75>2.75>2.75<4.75<4.75

ResultPassPassFailFailPassPass

Notes[/

1/ 'EBITDA/I' calculations from my post 2810
2/ 'EBIT/I' calculations from my post 2803
3/ 'Net Debt' / 'EBITDA' calculations from my post 2802

Discussion

What to make of all of this?

There are two accepted ways of calculating 'Interest Coverage'. Since Chorus has not announced to the market that they have 'broken their banking covenants', I think it is fair to assume they are using EBITDA/I rather than EBIT/I. The banks would only accept this 'chosen' calculation method if near future capital expenditure costs were well below depreciation costs. Thankfully, because the assets of Chorus are generally 'long lasting' and nearer the beginning of their design life than at the end, this is the situation.

Post IFRS16, which is the standard that brings building leases onto the Balance Sheet, the 'Interest Coverage' ratio has deteriorated a little. This is a mathematical consequence of the 'Earnings', as a percentage of total earnings, in the numerator not increasing as fast as the 'Interest Payable', as a percentage of all interest payable, in the denominator. In fact under IFRS16, the numerical increment in both the numerator and denominator is the same, because the amount added to both ('lease interest payable') is the same. But as the old 'Net Interest Payable' starts from a smaller base than the old EBITDA, the effect of increasing both by the same numerical amount reduces the 'EBITDA' to 'I' ratio - in most instances. Putting my thinking cap on, if EBITDA was really low to the extent that the company was barely breaking even on a 'day to day' cash basis, but still had significant rent expenses (= 'lease interest payable' under IFRS16), then I could imagine a situation where adopting IFRS16 would improve the[/ Interest Coverage Ratio. However if things had got that bad, the bank would have probably intervened already. So I think it is fair to say that in the real world, adopting IFRS16 has made complying with any fixed Interest Coverage Ratio banking covenant a little tougher.

On the topic of 'Debt to Income' ratios, utility type companies with capital intensive assets yet relatively predictable cashflows tend to have high debts. This is usually the result of seeking 'shareholder capital efficiency', rather than underlying past managerial incompetence. Under IFRS16, multi year rent contracts that traditionally did not feature on balance sheets are now brought onto the balance sheet as 'lease payable' liabilities. You might imagine that:

1/ Having a future ten year capitalised rent bill on the numerator side of this particular covenant, with
2/ the 'offset effect' adding to EBITDA being just one year of 'lease interest' (a proxy for rent) increasing the denominator part of this statistic

might make it harder to repay the debt as depicted. In practice this is what has happened with the 'Debt to EBITDA' ratio getting [/worse on the adoption of IFRS16.

A curious point, which I discuss in post 2807 is that if I use EBITDA/I as 'Interest Coverage' this ratio becomes very closely coupled to the 'Net Senior Debt/ EBITDA' which is in effect a debt to income ratio. In fact if interest rates were permanently fixed at a single interest value, these two covenant ratios would be slightly different ways of looking at the same thing. In the real world interest rates do go up and down though. And I would suggest that interest rates are far more likely to go up from where we sit right now. So with today's very low interest rates, I would expect the Interest Coverage Ratio to be far less of a worry for bankers than the Debt to ear[/nings Ratio, simply because the Interest Coverage Ratio was designed in days where interest rates were generally much higher than today. It is likely the Interest Rate Coverage Ratio has been set by the banks (albeit unconsciously) expecting a rebound in interest rates. Sure enough when you compare the 'value' to the 'target' figure in the table above, EBITDA/I comes out at just over two times the target (a 100% safety margin). Whereas with 'Net Senior Debt'/ EBITDA, the safety margin is just (4.75-4.23) /4.75 = just 11%. Unless interest rate charges triple, we aren't going to get anywhere near the historic Interest Rate Coverage restrictions. So I guess this is why we don't hear much about 'Interest Coverage' as a lending covenant restriction these days. Perpetual very low interest rates have rendered 'Interest Coverage' largely irrelevant from a banker's investment perspective.

SNOOPY

Aaron

09-11-2021, 09:10 AM

About time. I thought Spark was being a bit misleading years ago when they rang and asked if I would like better broadband. I only clicked when they said I wouldn't lose my landline number but it would be linked to my mobile number.

Very deceptive playing on peoples ignorance. I only realised as I was looking at investing in Chorus.

Although Chorus lazily/stupidly thought it could drop the cables in the ground and wait for Spark and Vodafone to start signing up the customers.

I would have thought the horse has already bolted but with changes coming a few more people might be forced to choose. Hopefully Chorus can educate them before spark and vodafone sign them up to their wireless networks.

https://www.nzherald.co.nz/business/commerce-commission-tells-telcos-to-create-new-code-to-reduce-consumer-confusion-within-60-days/VVRWEORUWPNZDC3XBTWTICUWW4/

It is a shame we live in a world that accepts lying and deception.

Sideshow Bob

22-08-2022, 08:38 AM

2022 Full Year results, annual and sustainability reports - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/397306)

Summary
• UFB uptake is 69 per cent; Chorus’ fibre rollout is 98 per cent complete
• 88,000 fibre connections added, a total of 959,000 connections
• Over 90% of fibre consumers are on 300 Mbps or above services
• Reported revenue was $965m (restated FY21: $955m)
• Earnings before interest and tax of $248m (FY21: $230m)
• Net profit after tax was $64m (restated FY21: $51m)
• FY22 dividend 35 cents per share; guidance for FY23 and FY24 increased

Nor

22-08-2022, 09:04 AM

No imputation credit is a bit rough.

nztx

22-08-2022, 04:16 PM

No imputation credit is a bit rough.

Not wrong there .. what's happened that no tax credits are available from CNU to
add to dividends ?

Past history suggests fully imputed dividends from Oct 12 through to April 22
then bang - Nada credits available ..

Nor

22-08-2022, 05:20 PM

Not wrong there .. what's happened that no tax credits are available from CNU to
add to dividends ?

Past history suggests fully imputed dividends from Oct 12 through to April 22
then bang - Nada credits available ..

They say none in the short or medium term. I don't even really know where they come from, previous losses? They must have some of those. Tax paid profits? Didn't they make any? (I do have an investment style but it just doesn't bother much with the nitty gritty.)

Nor

23-08-2022, 12:52 PM

There are three key factors that determine how many imputation credits a company has to distribute to shareholders:

The proportion of profits earned in New Zealand. Companies that generate a substantial portion of their profits in New Zealand will likely have a more highly imputed dividend than those that derive profits offshore and therefore pay tax in other jurisdictions.

The amount of reported profit. Some companies have lower reported profits than the cash flow from which they can pay dividends. This could be due to, for example, high levels of depreciation which is a non-cash expense, lowering profit but not affecting cash flows. As profits are lower, tax is lower, and these companies therefore have fewer imputation credits to attach to their dividends.

Dividend payout ratios. Companies that pay out a lower amount of their profits as dividends are likely to have a more highly imputed dividend than those that pay out more.

Gettin edicated.

Snoopy

21-10-2022, 09:14 AM

What's happened that no tax credits are available from CNU to add to dividends ?

Past history suggests fully imputed dividends from Oct 12 through to April 22
then bang - Nada credits available ..

There are three key factors that determine how many imputation credits a company has to distribute to shareholders:

1/ The proportion of profits earned in New Zealand. Companies that generate a substantial portion of their profits in New Zealand will likely have a more highly imputed dividend than those that derive profits offshore and therefore pay tax in other jurisdictions.

2/ The amount of reported profit. Some companies have lower reported profits than the cash flow from which they can pay dividends. This could be due to, for example, high levels of depreciation which is a non-cash expense, lowering profit but not affecting cash flows. As profits are lower, tax is lower, and these companies therefore have fewer imputation credits to attach to their dividends.

3/ Dividend payout ratios. Companies that pay out a lower amount of their profits as dividends are likely to have a more highly imputed dividend than those that pay out more.

Good question from nztx, and a good explanation of possible answers from Nor. There is a fourth possible reason for no imputation credits too. That being that although the company is making a profit and has generated a tax bill, they haven't got around to paying the tax yet. So let's look and some data to try and get to the bottom of this.

FY2018FY2019FY2020FY2021FY2022Total

Net Profit Before Tax$122m$78m$73m$72m$106m

Income Tax Expense($37m)($25m)($21m)($25m)($42m)($150m)

Net Profit After Tax$85m$53m$52m$47m$64m$301m

Tax rate29.8%-30.9%31.2%-32.9%27.9%-29.7%33.8%-35.7%39.0%-40.3%

Actual tax Paid($30m)($3m)($12m)($1m)($14m)($60m)

Depreciation$283m$303m$319m$331m$335m$1,571m

Capital Expenditure$810m$804m$663m$672m$492m$3,441m

Operating Free Cashflow$508m$496m$474m$556m$570m$2,604m

Dividends Paid$43m$49m$76m$86m$97m$351m

Dividend Payout ratio51%92%146%183%136%

Notes

1/ A fully imputed dividend may be paid if the tax rate has been assessed as an income tax expense at 28%, and the bill has been paid.
2/ I have calculated the actual tax as assessed within a range, as -given the raw data declared- it is not possible to determine what the assessed tax rate is any more accurately.
2a/ Sample Tax Rate Calculation As an example, over FY2022, the income tax expense was declared at $42m. However due to the rounding error applied to this figure, all we can say is that the actual quantum of tax assessed was between $41.5m and $42.5m. Likewise net profit before tax of $106m as declared, means that the actual net profit was between $105.5m and $106.5m. Thus the actual rate of tax paid was between:

$41.5m/$106.5m = 39.0% (lower bound)
$42.5m/$105.5m = 40.3% (higher bound)

We know for sure that the actual assessed tax rate was between those two percentage figures. But we don't know exactly where it sits. Why was the actual tax bill levied above the 28% levied on NZ companies? It can vary from year to year as the cash impact of a tax bill is not paid entirely in the year in which the underlying earnings were taxed. But generally if your tax bill ends up being higher than the standard tax rate, it means your actual income is shrinking (because provisional tax is based on previous years higher earnings). However earnings are not shrinking at Chorus. So I am mystified as tp why the booked tax rate remains higher than the legislated 28%.

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

Discussion

Chorus operates entirely within New Zealand. So we can rule out Nor's first possibility of profits being generated overseas not generating sufficient earnings within NZ to pay fully imputed dividends.

Nor's second conjecture that the available cashflow for distribution far exceeds profits looks to be true from the figures above. But this doesn't tell the full story. Alongside their day to day operations, Chorus have been indulged in a huge build out of their broadband cable network which has been highly consuming of their 'spare' cashflow. It is really only over the last year that Chorus's nationwide broadband roll out has neared completion. Considering the last five years, it is only over FY2022 that operating cashflow has exceeded capital expenditure, thus opening the window for higher dividends to be considered.

The converse of Nor's third conjecture, that companies that pay out more than their earnings as dividends will not have the imputation credits to cover those dividends also applies here. But that only explains why the rate of dividend imputation has to be reduced. It doesn't explain why imputation credits have disappeared entirely.

Finally my own conjecture that Chorus simply has not paid their assessed tax bills in full over recent years appears to also be true. How they have got away with not paying their tax is another unsolved question though.

At last it looks like we have the answer to nztx's question. Chorus must have had a stack of imputation credits that, until the dividend before last, allowed them to pay 'fully imputed dividends'. However once they burned through those, they didn't pay their tax on time and so had no imputation credits to pay out, notwithstanding the fact that one third of their dividend payout was from cashflow above earnings. (Cashflows in excess of earnings have no imputation credits attached to them anyway.)

SNOOPY

Snoopy

28-10-2022, 02:04 PM

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

With the winding down of the 'Ultra fast Broadband 1' ('UFB1') and 'UFB2' fibre broadband network construction joint agreements with the government, for:

a/ The initial nationwide roll out of a fibre broadband network (UFB1) AND
b/ Subsequent extension of that to smaller centres (UFB2),

Chorus has now entered a new phase of its operation: Owner and operator of New Zealand's largest nationwide wholesale fibre broadband network.

Did I say nationwide? In fact there are are three substantial geographic regions where the fibre broadband infrastructure has been built by others:

1/ Greater Christchurch City: Built and owned by the Christchurch City Council owned 'Enable Networks'.
2/ Northern cities of Whangarei and Kerikeri, built and owned by the local electricity lines company 'Northpower', in turn 100% owned by electricity consumers of those northern regions.
3/ North Island central cities of Hamilton, Cambridge, Te Awamutu, Tauranga, Tokoroa, Hawera, New Plymouth and Whanganui built and owned by 'Tuatahi Fibre' (formerly 'Ultra Fast Fibre') owned by 'Igneo Infrastructure Partners'. Igneo is a sub brand of 'First Sentier Investors Group' created as a vehicle to hold and manage- at arms length - wholly owned businesses owned by First Sentier. Igneo specialises in owning mature infrastructure assets. First Sentier is a leading manager of global infrastructure assets, and manages capital on behalf of more than 120 institutions representing over 365 million pension fund members and policy holders from all over the world (although 37% of investors are geographically domiciled in Australia and 36% are in Europe).

Nevertheless Chorus is also owner of the legacy telecommunications copper network. Thus as the nationwide copper network is gradually and largely retired, we can expect the former copper network Chorus customers in the three regions listed above to migrate to these other fibre network operators.

Chorus faces broadband competition from the so called 'fixed wireless services' operated over the mobile networks owned by big NZ domestic telecommunications retailers Spark, Vodaphone NZ and 2 degrees. But the big telecommunications retailers remain resellers of Chorus's offering as well, an arrangement that can create perverse incentives on which broadband technology a consumer might be steered towards.

Growth prospects for Chorus are the 30% of homes that lie within the current Chorus fibre footprint but have not (yet?) chosen it. Furthermore there is a prospect of greater use of adjunct WIFI technology as more spectrum becomes available.

Conclusion: As

a/ The pre-emanant broadband provider of all broadband technologies by market share AND
b/ Monopoly fibre provider in all regions in which Chorus has their fibre rolled out, AND
c/ As monopoly provider nationwide of the legacy copper technology,

Chorus is the number one player in all markets in which they choose to participate. 'PASS TEST.'

SNOOPY

Snoopy

28-10-2022, 04:17 PM

Time to update the earnings per share trend for the current financial year.

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.

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+$3m-$3m ) - $5m) / 444.492m = 13.9cps

FY2021: ($47m + 0.72( $2m+$1m-$4m+$7m ) +$1m) / 447.025m = 11.7cps

Notes

1/ 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.

2/ 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.

3/ 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.

4/ Normalised FY2020 removes a combined $2m Covid-19 relief payment encompassing 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 (adding to a total $13m of Covid-19 relief response), an incremental $2m increase in consultancy fees related to the regulatory transition, a $1m one off expense for restructuring forward dated interest rate swaps. I have 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 $3m, 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. I subtract $5m from NPAT, to account for the one off $5m tax refund resulting from the resumption of building depreciation. Finally my normalised FY2020 now removes a favourable $3m one off settlement (not mentioned in AR2020 specifically, but see AR2021 p17))

5/ Normalised FY2021 profit adjusts for a $1m value Added Network one off dispute settlement (assumed non taxable), a $2m one off restructuring labour costs, as a result of the ongoing transition from a 'build it' to a 'manage it' network, and $1m of costs relating to the decommissioning of legacy copper network equipment in Spark exchanges. I have subtracted a $4m reduction of interest costs relating to the "Ineffective portion of changes in fair value of cash flow hedges" and added back $7m interest charge arising from interest rate swap resets.

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. There is a steady trend apparent here, but unfortunately the earnings per share trend is steadily down. I can see Warren over there. He is looking even less impressed than last year!

Conclusion: FAIL TEST

Time to update the earnings per share trend for the current financial year.

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.

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+$3m-$3m ) - $5m) / 444.492m = 13.9cps

FY2021: ($47m + 0.72( $2m+$1m-$4m+$7m ) +$1m) / 447.025m = 11.7cps

FY2022: ($64m - $9m -$3m - $3m + 0.72(-$3m+$1m+$1m+$7m-$7m) ) / 446.512m = 10.8cps

Notes

1/ 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.

2/ 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.

3/ Normalised FY2020 removes a combined $2m Covid-19 relief payment encompassing 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 (adding to a total $13m of Covid-19 relief response), an incremental $2m increase in consultancy fees related to the regulatory transition, a $1m one off expense for restructuring forward dated interest rate swaps. I have 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 $3m, 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. I subtract $5m from NPAT, to account for the one off $5m tax refund resulting from the resumption of building depreciation. Finally my normalised FY2020 now removes a favourable $3m one off settlement (not mentioned in AR2020 specifically, but see AR2021 p17))

4/ Normalised FY2021 profit adjusts for a $1m value Added Network one off dispute settlement (assumed non taxable), a $2m one off restructuring labour costs, as a result of the ongoing transition from a 'build it' to a 'manage it' network, and $1m of costs relating to the decommissioning of legacy copper network equipment in Spark exchanges. I have subtracted a $4m reduction of interest costs relating to the "Ineffective portion of changes in fair value of cash flow hedges" and added back $7m interest charge arising from interest rate swap resets.

5/ Normalised FY2022 profit subtracts $9m, from a one off benefit following a judicial review of a one off interpretation of the Holiday's Act, subtracts $3m from a surplus property sale and subtracts $3m form a legal settlement. Further adjustments where tax effects should be considered include a $3m benefit from a change of lease contract (normalisation reverses this), adding back $1m of make good costs relating to office moving and renovation, adding back $1m spent on external consultants advising on transitioning to the new regulated operating framework, adding back the $7m finance expense credit resulting from ineffective cash flow hedging and subtracting $7m of finance expenses relating to an adjustment of interest swap resets.

Conclusion: FAIL TEST

SNOOPY

Snoopy

28-10-2022, 05:25 PM

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

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

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

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

FY2020: $62.0m / $927m = 6.7%

FY2021: $52.3m / $948m = 5.5%

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

Conclusion: FAIL TEST

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

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

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

FY2020: $62.0m / $927m = 6.7%

FY2021: $52.3m / $948m = 5.5%

FY2022: $48.3m / $1,029m = 4.7%

At no time over the last five years has 'Return On Equity' exceeded 15%. And I don't like the multi-year trend.

Conclusion: FAIL TEST

SNOOPY

Snoopy

28-10-2022, 05:33 PM

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

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

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

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

FY2020: $62.0m / $959m = 6.5%

FY2021: $52.3m / $947m = 5.5%

A long commentary for FY2020. A somewhat shorter assessment for FY2021: Yikes!

Conclusion: FAIL TEST

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

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

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

FY2020: $62.0m / $959m = 6.5%

FY2021: $52.3m / $947m = 5.5%

FY2022: $48.3m / $965m = 5.0%

Pretty hard to see any ability to raise margins when the trend is relentlessly down over five years.

Conclusion: FAIL TEST

SNOOPY

Snoopy

29-10-2022, 08:58 AM

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.

Ok time to come clean. Evaluating Chorus against he Buffett criteria was a set up for failure. Why? Because the key to a Buffett style halo company is efficient use of assets. Clearly if you have just made a massive capital investment, as Chorus have done in their broadband network, -ahead of demand-, that network will not be used efficiently from day 1. Furthermore other 'network companies', like the power distribution companies, have built up their assets over decades. Many of those assets will be on the balance sheet at 'historical cost'. It doesn't take a genius to figure out that if your costs are largely historical, but your income is in present day dollars, that is a superior business model to Chorus.

Like the gentailers, Chorus is now a 'cashflow story'. If we evaluate Chorus against the more traditional metric of 'underlying earnings' (or 'normalised earnings' as I put it), Chorus, at $7.85, is currently trading on a PE ratio north of 70. No that is not a misprint!

If we look at the headline profit trend, Chorus is now climbing out of the profit dip that occurred when the network building costs were at their peak. However, once I normalise that profit for each year, this is not the case. Normalised Chorus profits hit new lows over FY2022. The fact that imputation credits on dividends have vanished is indicative of a company making next to nil real money in 'profit' terms. I contacted the CFO of Chorus about this and he claimed it was a 'depreciation issue', and that ultimately imputation credits would return. He was very coy as to when that might be though!

For reasons I have just outlined, I am not too worried about return on equity being low. What is of more concern is the ever reducing net profit margin on revenue that is not growing. I can forgive profit going down if it is a depreciation issue. But I am concerned about the flat revenue. One aspect of this is that -perversely-, the more people nationwide that move to fibre broadband (the barrow that Chorus is pushing), the more people who will move away from Chorus copper onto one of the regional fibre networks that Chorus does not own. And when 'regions' not fiberised by Chorus encompass such populous areas as Christchurch and Hamilton, that will hurt Chorus.

From my brief brush with members of the Chorus leadership team, my feeling is that the company is being run on a 'build it and they will come' mentality. There is nothing wrong with that, provided forward sales projections are realistic. The Australian equivalent company, NBN (National Broadband Network) is not so technology tunnel visioned. NBN use a couple of geo-centered satellites and wireless broadband to cover remote communities. So NBN is a 'technology agnostic' company. Personally I think the threat of wireless broadband is being underestimated by Chorus, and that they will have trouble convincing many 'hold outs' from fibre to switch over. On top of this we have the heavy hand of government regulation that caps overall revenue that may be taken by Chorus over a financial year. And the, according to Chorus, unrealistic cost of capital assumptions that have lead to such revenue caps.

The wrap: Chorus is clearly not a Warren Buffett style target investment. Whether it is a good cashflow style investment will require some more digging on my part. Stay tuned.

SNOOPY

Snoopy

31-10-2022, 11:16 AM

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?

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?

Some more thoughts on this more than 18 months on.

I have established that all of the Crown Infrastructure Partners (CIP) funding that has been used to partially fund the construction of the Chorus broadband network will have to be repaid to the crown in full. For IFRS accounting reporting purposes, interest free funding (which is what the CIP funding is, until repayments become due) is deemed to distort the operational picture of Chorus. Thus, for IFRS reporting purposes, Chorus is forced to introduce the concept of 'notional interest' (which in the operating world is never charged nor paid, as evidenced by the fact that the IRD has ruled it is not tax deductible) to reflect what would happen if these funds were borrowed on more commercial terms.

Whatever is presented via the annual report to Chorus shareholders, the equivalent year annual accounts submitted to the IRD will be different set: a set with all of the 'notional entries' removed (or more correctly never created in the first place). This is IMV, one of the reasons that Chorus is 'apparently' paying a higher tax rate than the statutory 28% corporate rate. One driving part being the 'notional interest' that is so carefully added to the interest bill in the shareholder accounts, - is (from the perspective of the IRD), actually supplementary 'hidden profit' that needs to be taxed. More correctly 'notional interest' should be referred to as a non-deductible expense. IOW it is an expense in the books that cannot be claimed as a deduction for the purposes of calculating the year end income tax expense and would not form part of anything submitted to the IRD. Simplistically, the tax calculation is expressed: NPBT + non-deductible items = taxable profit.

Similarly the 'reduction in depreciation', brought about by crown funding via CIP, I do not believe is real either. (AR2022 p20: "depreciation credit recognised in the profit and loss in relation to CIP securities are non‑taxable"). It is untenable to me to imagine that the boffins at IRD should agree that the rules on depreciation of assets should be altered, simply because some of the funding of the building of those assets is 'interest free' via CIP. From a Chorus shareholder perspective, this means that the 'discounted' portion of depreciation is being time shifted further out into the future. The discounted depreciation will still be claimable in the future. But for now, profits declared today from a Chorus shareholder perspective are increased because of this IFRS mandated adjustment.

My next step will be to create an 'alternative profit picture', similar to that I believe is seen by the IRD, where I add the notional interest back onto income and restore the depreciation claimed back to what would have been claimed had no CIP implied 'depreciation discounts' ever existed.

SNOOPY

Snoopy

31-10-2022, 12:20 PM

My next step will be to create an 'alternative profit picture', similar to that I believe is seen by the IRD, where I add the notional interest back onto income and restore the depreciation claimed back to what would have been claimed had no CIP implied 'depreciation discounts' ever existed.

FY2018FY2019FY2020FY2021FY2022Total

Net Profit After Tax (Declared)$85m$53m$52m$47m$64m

add CIP Notional Interest Deducted0.72x $17m0.72x $22m0.72x $29m0.72x $34m0.72x $39m

subtract Depreciation Discount0.72x ($22m)0.72x ($25m)0.72x ($27m)0.72x ($29m)0.72x ($27m)

equals IRD Adjusted NPAT
$81m$51m$53m$51m$73m

Implied Income Tax Expense (@28%)
($32m)($20m)($21m)($20m)($28m)

add Reinstatement of tax on Building Depreciation$5m

subtract Prior Period Tax Adjustment($6m)

add Other Non-taxable adjustments($2m)($3m)($5m)($5m)($6m)

equals IRD Adjusted Tax total (As calculated)
($34m)($23m)($21m)($25m)($40m)($143m)

Income Tax Expense (Declared)($37m)($25m)($21m)($25m)($42m)($150m)

Tax Paid Actual (Declared in cashflow)($30m)($3m)($12m)($1m)($14m)($60m)

Current Tax Expense (Tax Note 14)($16m)($6m)($1m)($1m)$3m($21m)

Notes

1/ To calculate the 'Implied Income Tax Expense' at 28% from NPAT: (NPAT)/(1-0.28) - (NPAT) = 'answer'
2/ Numbers referred to in the above table as 'declared' are from the respective Profit & Loss statements.
3/ 'Other non-taxable adjustments are taken from section 14 'Taxation' of the respective annual reports.

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

Discussion

Please note that I am using some of the information from Ferg's post 2826 (thanks Ferg) to more correctly explain some of the terms and concepts in more recognised accounting terms.

I am working on the assumption that 'income tax declared' cannot be fudged by IFRS. IOW the amount of tax paid to the IRD is the same, no matter what perspective a company takes on how, and over what timeframe, other costs should be attributed. That means the figures of the second to last two rows of the table above should be the same.

One explanation of a deviation in the numbers reported between each of the two referred to rows could occur because I haven't accounted for tax payments from one year spilling over into adjacent years. Specifically I am thinking about payments made in advance called 'provisional tax' and payments in arrears called 'terminal tax'. The timing of such tax payments differ to the income tax expense declared in the annual report. But I am hoping that because Chorus is a closely defined predictable business, any such errors caused because of tax payment timing will be minor.

'Other non-taxable adjustments' (as tabulated above) that increase the actual tax paid above the statutory rate are unspecified but could include items like:

a) Permanent differences which are non-deductible items (such as some legal fees, 50% of entertainment, some IFRS adjustments etc). Note that I have included one class of permanent difference 'notional interest' in its own separate row, further up the table, AND

b) Timing differences claims which vary 'year to year' and usually unwind to a net impact of zero over a long enough time horizon (e.g. asset depreciation may be accelerated or retarded for IRD purposes vs accounting purposes, and the deductibility of holiday pay liabilities are subject to non-straightforward rules etc.) Note that I have reversed the contrary 'slowed depreciation rate', that is a consequence of CIP crown funding, in a separate line in the table above.

A separate issue is the 'Rural Broadband Initiative' (RBI) assets, funded by non‑taxable government grants. The accounting amortisation of RBI government grants and RBI accounting depreciation recognised in the profit and loss are non‑taxable and tax depreciation is not claimed (Refer AR2022 p20).

Conclusion

My measure of how well I understand the tax, and hence tax credit, position of Chorus is how well the third and fourth to last lines in the above table agree. FY2020 and FY2021 are in agreement, FY2022 and FY2019 are out by $2m and FY2018 is out by $3m. Reporting rounding errors could account for around $1m of those differences. Temporary differences from moving tax expenses could account for the rest. However, if temporary differences were the explanation, I would expect that over the years these differences in overpayments and underpayments would balance out. If you inspect the picture of the last five years by comparing the totals of the second and third to last table rows, it looks like underpayment of income taxes is entrenched.

Furthermore I would expect a Rural Broadband Initiative (RBI) effect, where construction is funded by grants and no depreciation is claimed. From AR2022 p20:

"RBI assets were funded by non‑taxable government grants. The accounting amortisation of RBI government grants and RBI accounting depreciation recognised in the profit and loss are non‑taxable and tax depreciation is not claimed."

If depreciation of RBI is not claimed, does that not mean that profits will increase in that arm of the business? Thus more tax will be paid on any RBI profits, thus increasing the tax bill above the statutory 28% rate?

I admit that I am speculating and I don't fully understand what is happening with the tax bills here. Nevertheless, I consider that I have identified enough 'wriggle room' in the taxation picture that could explain why my calculated 'IRD Adjusted Tax total' and the declared 'Income Tax Expense' are not in perfect agreement. Thus I believe my adjusted net profit figures, where notional interest and depreciation discounts are removed, provide a better representation of where the company is headed profit and tax wise than the IFRS reporting sanctioned and massaged 'official' NPAT figures.

SNOOPY

Ferg

31-10-2022, 05:32 PM

Snoopy

I imagine the CNU tax will take quite some time to unpick so I'm not going to try, but I have a couple of pointers.

1/ Ensure your phraseology is correct in that tax "declared" and tax "paid" will be 2 different numbers. Payments made in advance are called provisional tax plus there are payments in arrears called terminal tax. The timing of such tax payments differs to the income tax expense declared in the annual report. Information on payments will be sourced from the cash flow and should not go anywhere near your analysis (I suspect they have not). Instead you want to work with the numbers in the P&L and the notes.

1a/ I would say ignore the Balance Sheet numbers and accompanying notes - this is where timing differences between the declared expense in the P&L and tax payments appear. But on reflection, if this shows the amount declared to the IRD for the year, before the deduction of any payments for that year, you might get the amount declared to the IRD from these notes.

2/ When you say this:

One driving part being the 'notional interest' that is so carefully added to the interest bill in the shareholder accounts, - is (from the perspective of the IRD), actually supplementary 'hidden profit' that needs to be taxed.
Whilst the concept is correct, the phraseology is not quite right. It is not "hidden profit" per se; rather it is a non-deductible expense. IOW it is an expense in the books that cannot be claimed as a deduction for the purposes of calculating the year end income tax expense and would not form part of anything submitted to the IRD. Simplistically, the tax calculation normally looks like this: NPBT + non-deductible items = taxable profit.

3/ Remove the amount (if any) classified as deferred tax that has been included in the income tax expense note that supports the income tax expense value in the P&L. Normally it is split between "deferred tax" (more on that later) and "current tax". You want to work with the "current tax" value only. I believe that will usually be the figure declared to the IRD, unless there are other 1 off adjustments which I see you have noted. Per note 1a above this should match the value that was added to the "income tax liability" account per the notes to the Balance Sheet.

4/ There will be other non-deductible expenses (much like the CIP interest) that will muddy the waters. There are two types, being
a) permanent differences which are non-deductible items (such as some legal fees, 50% of entertainment, notional interest, some IFRS adjustments etc), and
b) timing differences claims which vary year to year and usually unwind to a nett impact of zero over a long enough time horizon (e.g. asset depreciation may be accelerated or retarded for IRD purposes vs accounting purposes, and the deductibility of holiday pay liabilities are subject to funny rules etc.) Such timing differences are usually detailed in the deferred tax notes and these differences give rise to the deferred tax liability (and in some cases a deferred tax asset).

I suspect IFRS 16 might also muddy the waters. And sometimes there is non-assessable "income" (per the RV's) etc. which is unlikely in this case. But the point is that there may be any number of adjustments which are not separately disclosed in the accounts, but you may find a summary of these in the notes to the accounts that support the value for "income tax expense" in the P&L.

5/ I recommend find the tax liability declared to the IRD, which is probably the "current tax" portion of the income tax expense (note this is not the prima facie value per the tax calc note). Once you have that work backwards to see what is the taxable NPBT versus the declared NPBT per the annual report. Then work on pre-tax values for the differences between the two (pre tax is easier) as CNU will have done in their note supporting income tax expense in the P&L. Also double/triple check you have all your signs round the right way.

6/ I presume CNU is 100% NZ income and has no income from a higher tax jurisdiction? If there is overseas income, this could be at a different tax rate.

Lots to unpick so good luck.

Snoopy

01-11-2022, 05:45 PM

Snoopy

01-11-2022, 06:13 PM

3/ Remove the amount (if any) classified as deferred tax that has been included in the income tax expense note that supports the income tax expense value in the P&L. Normally it is split between "deferred tax" (more on that later) and "current tax". You want to work with the "current tax" value only. I believe that will usually be the figure declared to the IRD, unless there are other 1 off adjustments which I see you have noted. Per note 1a above this should match the value that was added to the "income tax liability" account per the notes to the Balance Sheet.

5/ I recommend find the tax liability declared to the IRD, which is probably the "current tax" portion of the income tax expense (note this is not the prima facie value per the tax calc note). Once you have that work backwards to see what is the taxable NPBT versus the declared NPBT per the annual report. Then work on pre-tax values for the differences between the two (pre tax is easier) as CNU will have done in their note supporting income tax expense in the P&L. Also double/triple check you have all your signs round the right way.

FY2018FY2019FY2020FY2021FY2022Total

Deferred Tax Expense (Adjustments wrt Prior Periods)$4m$2m($14m)($8m)

add Deferred Tax Expense (Depreciations, provisions, accruals, leases & other)($25m)($21m)($20m)($24m)($31m)($121m)

add Current Tax Expense (Tax Note 14)($16m)($6m)($1m)($1m)$3m($21m)

equals Income Tax Expense (Declared)($37m)($25m)($21m)($25m)($42m)($150m)

Notes

1/ Deferred tax figures taken from Note 14 'Taxation'

6/ I presume CNU is 100% NZ income and has no income from a higher tax jurisdiction? If there is overseas income, this could be at a different tax rate.

Yes, no overseas income. All income billed by Chorus comes from New Zealand sources.

SNOOPY

Ferg

01-11-2022, 10:14 PM

FY2018
FY2019
FY2020
FY2021
FY2022
Total

Deferred Tax Expense (Adjustments wrt Prior Periods)
$4m
$2m

($14m)
($8m)

add Deferred Tax Expense (Depreciations, provisions, accruals, leases & other)
($25m)
($21m)
($20m)
($24m)
($31m)
($121m)

add Current Tax Expense (Tax Note 14)
($16m)
($6m)
($1m)
($1m)
$3m
($21m)

equals Income Tax Expense (Declared)
($37m)
($25m)
($21m)
($25m)
($42m)
($150m)

The bold line per your analysis titled "Current Tax Expense" is what has been declared to the IRD. That is exactly the line you want to work with if you are trying to work out taxable profit etc. I recommend take the $3m refund for the last fiscal year, divide by 0.28 to get a pre tax loss of $11m. I think you are trying to reconcile that number to the pre tax profit figure per the annual report. Given that is a loss and prior years are so low, that will explain why there are no imputation credits - IOW there is no taxable profit hence no tax payments -> no imputation credits.

Per this earlier post:

The tax note (AR Note 14) contains 'Current Tax Expense' split between the 'current year' (which I am guessing is provisional tax) and 'adjustments in respect of prior periods' (which I am am guessing is terminal tax). I have summed these two figures for each of the five years and added the totals to the bottom of my table, as a curiosity. However, these figures are not representative of the 'Declared tax' from the income statement.

WRT a specific financial year, provisional tax payments are payments made in advance on the current tax amount. And terminal tax payments are payments made in arrears also on the current tax amount. Deferred tax is never paid - that is why it is 'deferred'.

Snoopy

02-11-2022, 01:31 PM

The bold line per your analysis titled "Current Tax Expense" is what has been declared to the IRD. That is exactly the line you want to work with if you are trying to work out taxable profit etc. I recommend take the $3m refund for the last fiscal year, divide by 0.28 to get a pre tax loss of $11m. I think you are trying to reconcile that number to the pre tax profit figure per the annual report. Given that is a loss and prior years are so low, that will explain why there are no imputation credits - IOW there is no taxable profit hence no tax payments -> no imputation credits.

This very sobering moment in the analysis of Chorus's FY2022 result deserves its own one liner, particularly in the context of the AGM addresses which were along the lines of: "Dammit we are doing well!"

"Pre-tax profit declared to shareholders: $106m. Pre tax loss declared to Inland Revenue: ($11m)"

What the ..??##$$!!!!!!.....

SNOOPY

Snoopy

02-11-2022, 01:58 PM

I think you are trying to reconcile that number to the pre tax profit figure per the annual report. Given that is a loss and prior years are so low, that will explain why there are no imputation credits - IOW there is no taxable profit hence no tax payments -> no imputation credits.

You think right, and here are the last five years of results as declared to the IRD, compared to what shareholders were told.

FY2018FY2019FY2020FY2021FY2022Total

Current Tax Expense (Tax Note 14)($16m)($6m)($1m)($1m)$3m($21m)

Pre-tax profit declared to IRD$57m$21m$3.6m$3.6m($11m)$74m

Pre-tax profit declared to shareholders$122m$78m$73m$72m$106m$451m

Notes

1/ Pre-tax profit declared to IRD = 'Current Tax' / 0.28
2/ Pre tax profit declared to shareholders is from the respective Annual Reports

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

I have to admit that I am in shock at the diversity of the two profit pictures being prepared: For the IRD and shareholders respectively.

SNOOPY

Ferg

02-11-2022, 06:48 PM

Wow, that is a lot of timing and permanent differences. Very sobering indeed.

That is too much (and the wrong way round) to be attributable to non-deductible expenditure.

There must be something classified as revenue in the P&L that is not income that is assessable for income tax. It might be those Government grants we discussed some months/years ago - perhaps they are being counted as income in the AR but are not taxable income...?
IOW : reported profit - non taxable income = taxable profit

I presume there is only the NZ tax jurisdiction? (which means the /0.28 method is correct) Secondly, I'm guessing there are no imputation credits - is that correct and is that what prompted your analysis?

Snoopy

03-11-2022, 08:41 AM

I presume there is only the NZ tax jurisdiction? (which means the /0.28 method is correct) Secondly, I'm guessing there are no imputation credits - is that correct and is that what prompted your analysis?

Yes, all income was earned in the NZ tax jurisdiction. And yes, every Chorus dividend since the first in 2012 has been faithfully fully imputed. Except for this last dividend paid on 11th October 2022 where the imputation credits suddenly disappeared completely. And despite forecasting increasing dividends into the future (HYR2022 p1), there is no expectation that any form of dividend imputation will return within the next two years.

Wow, that is a lot of timing and permanent differences. Very sobering indeed.

That is too much (and the wrong way round) to be attributable to non-deductible expenditure.

Yes the AR2022 accounted for CIP funding 'interest repayments', which we have both agreed are 'not real' (merely accounting constructs), mean that over the current year the 'declared profit', as supplied in the income statement of the Annual Report 2022 will be lower than the IRD submitted profit. But offsetting that effect, is the 'depreciation discount' which has also come into the accounts because of crown funding. If the depreciation is reduced over a year, that means the resultant 'declared net profit', as seen in the annual report, will increase over and above what it otherwise would be. But I don't believe the 'depreciation discount' is real either (see my post 2825 as evidence of this). The 'depreciation discount' in the annual accounts means that the AR2022 income statement profit is higher than it would otherwise be.

I have a feeling a third factor could be coming into play here as well: accelerated depreciation. Chorus are saying with the success of their broadband roll out (p19 AR2022)

"With the commencement of the Chorus copper withdrawal programme, Chorus has revised the depreciation profile of copper cables in areas where there is fibre available (Snoopy comment: i.e. most areas). Depreciation of copper cables will be accelerated from FY23 so that those in UFB2 areas will be fully depreciated by June 2025 and those in local fibre company areas will be fully depreciated by June 2026."

That follows on from a similar comment made on p19 of AR2021.
"Chorus has considered the useful life of copper cables in UFB1 and UFB2 areas. Due to strong fibre uptake depreciation of these cables is being accelerated at a rate of approximately $11m and $4m per annum respectively. This means copper cables will be fully depreciated by UFB1 by 30 June 2025 and UFB2 by 30 June 2027."

Given the tone of those comments, I am not sure why the extra depreciation on copper in UFB1 areas has been rolled back by a year (now being fully depreciated by 30-06-2026, not 30-06-2025). But I suspect that, short of Chorus declaring itself bankrupt, the IRD would not allow any such 'accelerated depreciation' in accounts submitted to them. If Chorus 'declares' to shareholders that their depreciation is much higher than it really is, that means that Chorus will also 'declare' to shareholders a profit much lower than it really is (from an IRD perspective). And we all know the IRD is the ultimate 'pulpit of truth' for finances, right?

So if Chorus really has slowed again their copper depreciation in UFB1 areas (i.e. most of the country) over FY2022 (as indicated in my two quotes above), then that would increase their AR2022 reported profits (while there would be no change in their IRD reported profits).

There must be something classified as revenue in the P&L that is not income that is assessable for income tax. It might be those Government grants we discussed some months/years ago - perhaps they are being counted as income in the AR but are not taxable income...?
IOW : reported profit - non taxable income = taxable profit

Yes, I agree, I must be missing 'something'. Perhaps if I produce a detailed income statement from both FY2018 and FY2022, that would offer a clue as to where such 'non taxable' revenue might have come from?

SNOOPY

Snoopy

03-11-2022, 11:31 AM

I must be missing 'something'. Perhaps if I produce a detailed income statement from both FY2018 and FY2022, that would offer a clue as to where such 'non taxable' revenue might have come from?

Income Statement Comparison

FY2018FY2022

Operating Revenue Fibre$276m$614m

Operating Revenue Copper$581m$211m

Operating Revenue Backhaul Infrastructure$126m$128m

Operating Revenue Other$7m$12m

Operating Expenses($337m)($290m)

EBITDA$653m$675m

Depreciation Fibre Cables($78m)($122m)

(*?) Depreciation Copper Cable($51m)($61m)

Depreciation Network Electronics($65m)($62m)

Depreciation Other($111m)($117m)

(*) Depreciation Crown Discount$22m$27m

Amortisation (Software & Customer Retention Assets)($104m)($92m)

EBIT$266m$248m

Finance Income$7m$0m

Finance Expense (excluding CIP notional interest)($134m)($103m)

(*) Finance Expense: CIP notional interest($17m)($39m)

NPBT$122m$106m

Income Tax Expense (Current)($16m)$3m

(*) Income Tax Expense (Deferred)($21m)($45m)

NPAT$85m$64m

Notes

1/ The above numbers are sourced from the respective annual reports.
2/ The lines marked with an asterisk, I suspect are the ones that the IRD would regard as 'not real' for income tax purposes.
3/ p19 AR2021 notes that depreciation of the copper network has been increased by a total of $15m from FY2021. So it could be that $15m of that copper cable depreciation for FY2022 is 'not real' either (from an IRD perspective).
4/ Depreciation of fibre cables is not an 'apples with apples' comparison between FY2018 and FY2022..

Operational YearFY2016FY2017FY2018FY2019
FY2020FY2021FY2022

Capital Expenditure Fibre$486m$503m$620m$664m$548m$567m$403m

The above table shows that since EOFY2018 the $1.782b of fibre on the books has more than doubled in value, with an extra: $664m + $548m + $567m + $403m = $2,182b in fibre investment made over the four ensuing years. We expect the depreciation charge of fibre to increase consummately over that time.

5/ Total debt (excluding CIP debt) was $2.322b at EOFY2022, verses $1.807b EOFY2018. Despite the 29% increase in the debt balance over four years, the weighted average interest rate (including the effect of derivative financial instruments and facility fees) dropped from 5.96% to 3.77% over that same period. That equates to a 37% reduction in debt servicing costs on a constant balance basis. The net effect being 1.29 x 0.63 = 0.81, a 19% fall in debt servicing costs.

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

Discussion

The purpose of looking at these two income statements five reporting years apart is to answer the question:

"What has changed, that has seen Chorus go from a fully imputed dividend payer, to a company that has no imputation credits?"

The trite answer is "Because they haven't paid enough tax." But why would that be? I was hoping a 'line by line' comparison between an income statement from Chorus's full tax paying days back in FY2018, and FY2022, where apparently no tax was owing, might provide a clue. Unfortunately after going through the two income statements line by line, I am none the wiser about the 'time shifting' or the 'quantum of tax payments' changing over that four year comparative period.

If I adjust the 'declared net profit' by the asterisked row entries in the table, then I get an IRD sanctioned net profit before tax for FY2022 of:

$106m + ($15m - $27m +$39m) = $133m

The bold line per your analysis titled "Current Tax Expense" is what has been declared to the IRD. That is exactly the line you want to work with if you are trying to work out taxable profit etc. I recommend take the $3m refund for the last fiscal year, divide by 0.28 to get a pre tax loss of $11m. I think you are trying to reconcile that number to the pre tax profit figure per the annual report.

So my adjusted profit figure of $133m lines up against the tax figure implied NPBT figure of an ($11m) loss. Needless to say my reconciliation has not gone well :-(.

SNOOPY

Snoopy

03-11-2022, 02:14 PM

The difference between 'total capital expenditure' and 'sustaining capital expenditure' is set to become critical in determining the future dividend returns from Chorus shareholders. From the 17th November 2020 Presentation, Slide 33:

"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."

The following table is compiled from information in:

a/ Slide 43 of the 23rd August 2021 presentation.
b/ AR2021 p21

Capex over 2021SustainingDevelopmentSub Total

Fibre Layer 2 Sustaining$31m

Fibre Products & Systems Sustaining$11m

Fibre 'Other Fibre Connections' Sustaining$22m

Fibre Customer Retention Sustaining$11m

Fibre UFB Communal Development$147m

Fibre Connections & Layer 2 Development$244m

Other Fibre Connections & Growth Development$83m

Fibre Customer Retention Development$18m

Fibre Total$567m

Copper Network Sustaining$29m

Copper Layer 2 Sustaining$4m

Copper Customer Retention Sustaining$11m

Copper Connections Sustaining$1m

Copper Development$0m

Copper Total$45m

Common IT Sustaining$46m

Common Building & Engineering Services Sustaining$14m

Common Development$0m

Common Total$60m

Sustaining Total$180m

Development Total$492m

Overall Total$672m

The year to year comparison with the quoted post above shows a $6m reduction is 'sustaining capital expenditure'. But that includes $10m in sustaining costs less spent on the copper network. So sustaining capex for the fibre network has gone up over the year, although that is in the face of a fibre network that is still growing. Nevertheless as long as the overall sustaining capex comes down,

free cash flow = net cash flows from operating activities - sustaining capex

then free cashflow goes up. Since dividends going forwards will be based on 'free cashflow', this is a good thing for shareholders.

The difference between 'total capital expenditure' and 'sustaining capital expenditure' is now critical in determining the future dividend returns for Chorus shareholders. From the 17th November 2020 Presentation, Slide 33:

"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."

The following table is compiled from information in:

a/ Slide 40 of the 22nd August 2022 presentation.
b/ AR2022 p21

Capex over 2022SustainingDevelopmentSub Total

Fibre Layer 2 Sustaining$29m

Fibre Products & Systems Sustaining$7m

Fibre Network & 'Other Fibre Connections' Sustaining$23m

Fibre Customer Retention Sustaining$13m

Fibre UFB Communal Development$77m

Fibre Connections & Layer 2 Development$166m

Other Fibre Connections & Growth Development$74m

Fibre Customer Retention Development$14m

Fibre Total$403m

Copper Network Sustaining$27m

Copper Layer 2 Sustaining$3m

Copper Customer Retention Sustaining$7m

Copper Connections Sustaining$1m

Copper Development$0m

Copper Total$38m

Common IT Sustaining$32m

Common Building & Engineering Services Sustaining$19m

Common Development$0m

Common Total$51m

Sustaining Total$161m

Development Total$331m

Overall Total$492m

The year to year comparison with the quoted post above shows a $19m reduction is 'sustaining capital expenditure'. That includes $7m in sustaining costs less spent on the copper network. So sustaining capex for the fibre network has gone down over the year by $12m. This is an indicator as to why management has decided they can increase their dividend for FY2022. The reason being that -at last- the broadband network is generating more cash than it consumes

Dividends going forwards are based on 'free cashflow'. Note that 'based on free cashflow' does not mean paying out 100% of free cashflow as dividends!

Free cash flow = net cash flows from operating activities - sustaining capex = $570m-$161m = $405m

On a per share basis: $405m/446.512m = 92cps.

This more than covers the 14cps (or 14cps/0.72 = 19.4cps before tax) and 21cps unimputed dividend based on FY2022 free cashflows: 92cps - (19.4cps + 21cps) = 51.6cps 'cashflow left over'.

That cashflow also makes the 40cps dividend forecast for FY2023 and the 45cps dividend forecast for FY2024 look do-able (even if probably without imputation credits). Although I do note that projected increase in dividend over the year from 35c to 40c for 2023 will be entirely negated by the loss of imputation credits! At today's $7.83 closing share price, that means we are looking at a forecast gross yield of 5.1% for FY2023, rising to 5.7% for FY2024.

SNOOPY

Snoopy

05-11-2022, 11:24 AM

All of this 'CIP debt security' 'discounted debt' will eventually have to be repaid at face value. As for the 'CIP equity' (preference shares) these will either:

1/ Have to be repaid at face value OR
2/ Be settled by converting the preference shares to ordinary shares, and that process will diluting existing shareholders' interests.

I don't sleep easy with either prospect. This debt does not come into any banking covenant calculations, because the bank as they are entitled to do, regards the CIP Preference Shares as equity. I don't like it.

I had a brief chat with senior management about the upcoming $170m of CIP debt and CIP preference share maturity coming in 2025. The thinking at this stage is that both the CIP debt and the CIP preference shares will be refinanced with other debt, with no net company debt reduction. There is no hurry to do this as no commercial deal can match 'interest free' government funding. But the CIP debt coupon rate, when it comes into force in 2025, is the 180 day bank bill rate plus 6% (a condition set eleven years ago). I can no longer find any reference to a 180 day bank bill rate in NZ (anyone know what happened to this metric?). But taking the 90 day bank bill rate as a proxy, (4.17% as I write this), that equates to a coupon rate of over 10% - positively usurious, even in these days of higher interest rates.

Chorus seemed pretty pleased with their most recent EURO note financing deal, taken out over FY2020: EURO 300m in notes at 0.88%, with repayments fully hedged back to the NZD (from FY2021 at least). The implication being that -come 2025, and the first CIP coupon activation date-, Chorus will be able to strike a similarly good refinancing deal. I sure hope that is true. And hope is a legitimate investment strategy - I learned that from this forum!

International agencies seem keen to give Chorus more and more debt rope. This was the last remark in the 'capital management' section of HYR2022 p3

"In early 2022 Moody's Investors Service and S&P increased their debt/EBITDA credit rating downgrade thresholds to 5.25 times and 5.0 times respectively.for Chorus. Following this increase, it is Chorus's intention that in normal circumstances the ratio of net debt to EBITDA will not materially exceed 4.75 times."

This remark comes after Chorus and their bankers had previously 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."

It looks like those bankers and their credit rating sidekicks have raised their 'borrowgestioning' strategy as regards Chorus to new heights: "Borrow, borrow, borrow!" "There is no risk for we bankers here." (as long as you pay us your interest payments on time, of course).

SNOOPY

Snoopy

05-11-2022, 01:28 PM

AR2021 p20 tells us that :

1/ 'Other interest expense' includes $20m of 'lease interest', from a total of $30m.

Our objective: To ensure that the effect of 'lease interest' is not 'double counted' when calculating banking covenants. 'Lease interest' is part of what used to be considered 'rent' in the pre-IFRS16 days. So when we use EBITDA as part of a banking covenant calculation, we should calculate this for Chorus as : 'Declared EBITDA' - 'Lease Interest'.

For Chorus over FY2021, this means, for banking covenant purposes: EBITDA = $649m - $20m = $629m

AR2022 p20 tells us that :

1/ 'Other interest expense' includes $15m of 'lease interest', from a total of $23m.

Our objective: To ensure that the effect of 'lease interest' is not 'double counted' when calculating banking covenants. 'Lease interest' is part of what used to be considered 'rent' in the pre-IFRS16 days. So when we use EBITDA as part of a banking covenant calculation, we should calculate this for Chorus as : 'Declared EBITDA' - 'Lease Interest'.

For Chorus over FY2022, this means, for banking covenant purposes: EBITDA = $675m - $15m = $660m

SNOOPY

Snoopy

06-11-2022, 09:29 AM

This has become a bit of an 'old chestnut' of mine: The representation of the 'Crown Infrastructure Partner Securities', incorporating both 'CIP Debt' and 'CIP Equity' (actually preference shares) on the Chorus balance sheet. First of all, hats off for Chorus listing the 'preference share equity' as debt. But as for the way the balance is discounted back to present day values using an ultra high (IMO) 8.5% discount rate....

CIP Debt Facilities

Chorus have used the face value of the debt facilities issued (Slide 21, August 2021 Presentation) and used an 8.5% annual discount factor (AR2021 p43) to get their 'present value' of CIP debt:

$85m / 1.085^4 + $86m / 1.085^9 + $128m / 1.085^12 + $163m / 1.085^15 = $198.6m

The undiscounted value of that CIP debt is: $85m+$86m+$128m+$163m = $462m, equal to the total value of the UFB1 debt - exactly the same situation as last year (Slide 21, August 2021 presentation). The UFB1 construction project is now complete, as it was last year (which no doubt explains why the ultimate repayment value of UFB1 debt has not changed). I noted this, but wondered why the still under construction related UFB2 funding was left out of the 'Chorus Debt Facilities' picture?

-On a separate note, I see the UFB2 equity drawn by Chorus has increased from $143m to $265m over FY2021, an increase of $122m as the UFB2 roll out passed another 70,000 premises during the financial year (PR2021 slide 6)-.

Back to my question, the UFB2 roll out during the year was all funded by 'UFB2 equity' (sic), not 'UFB2 debt'. This answers my question regarding why the UFB2 debt funding has been left out of the debt picture (Slide 21, August 2021 presentation - there isn't any UFB2 debt funding as yet the UFB2 $105m debt facility remains untouched).

CIP Equity Facilities

The total of $545m on the balance sheet listed as "Crown Infrastructure Partners (CIP) securities" represents both 'CIP equity' ($306m) and 'CIP debt' ($209m) (See AR2021 p44). 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, the listed total "Crown Infrastructure Partners (CIP) securities" liability of $545m is discounted from the ultimate repayment amount, as accounting standards allow. Nonertheless all of this 'CIP debt security' 'discounted debt' will eventually have to be repaid at face value. As for the 'CIP equity' (preference shares) these will either:

1/ Have to be repaid at face value OR
2/ Be settled by converting the preference shares to ordinary shares, and that process will diluting existing shareholders' interests.

I don't sleep easy with either prospect. This debt does not come into any banking covenant calculations, because the bank as they are entitled to do, regards the CIP Preference Shares as equity. I don't like it.

This has become a bit of an 'old chestnut' of mine: The representation of the 'Crown Infrastructure Partner Securities', incorporating both 'CIP Debt' and 'CIP Equity' (actually preference shares) on the Chorus balance sheet. First of all, hats off for Chorus listing the 'preference share equity' as debt. But as for the way the balance is discounted back to present day values using an ultra high (IMO) 8.5% discount rate....

CIP Debt Facilities

Chorus have used the face value of the debt facilities issued (Slide 27, August 2022 Presentation) and I have used an 8.5% annual discount factor (AR2021 p43, discount rate not disclosed in AR2022) to get their 'present value' of CIP debt:

$85m / 1.085^3 + $90m / 1.085^8 + $137m / 1.085^11 + $174m / 1.085^14 = $224.7m

The undiscounted value of that CIP debt is: $85m+$90m+$137m+$174m = $486m, more than the total value of the UFB1 debt. The UFB1 construction project is now complete, with $462m of CIP debt incurred. Therefore, I presume any additional debt is because some UFB2 debt has been brought under the 'Chorus Debt Facilities' umbrella?

On a separate note, I see the UFB2 equity drawn by Chorus has increased from $265m at EOFY2021 (PR2021 s21) to $306 + $24m = $330m as at EOFY2022 (PR2022 s17), an increase of $65m. At the same time the UFB2 roll out passed another 1,324,000 - 1,282,000 = 42,000 premises during the financial year (PR2022 slide 5).

CIP Equity Facilities

The total of $613m on the balance sheet listed as "Crown Infrastructure Partners (CIP) securities" represents both 'CIP equity' ($346m) and 'CIP debt' ($267m) (See AR2022 p44). 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, the listed total "Crown Infrastructure Partners (CIP) securities" liability of $613m is discounted from the ultimate repayment amount, as accounting standards allow. Nonetheless all of this 'CIP debt security' 'discounted debt' will eventually have to be repaid at face value. As for the 'CIP equity' (preference shares) these will either:

1/ Have to be repaid at face value OR
2/ Be settled by converting the preference shares to ordinary shares, and that process will diluting existing shareholders' interests. OR
3/ Be refinanced as additional debt on commercial terms.

This debt does not come into any banking covenant calculations, because the bank as they are entitled to do, regards the CIP Preference Shares as 'equity'.

I am a little nervous of companies with large amounts of debt in general on their balance sheet in a rising interest rate environment. Management's preferred formula for ultimately exiting CIP funding is 'option 3', to refinance it all as 'additional debt'. Furthermore the banks seem prepared to play along with this strategy, at least for now (see my post 2836). Whether 'global financiers' feel the same, we shareholders get to find out before October 2023. That date is when a 500 million euro note funding arrangement, with a coupon rate of 1.13%, comes to an end. I wonder what coupon rate that 500m euro quantum of debt will be able to be refinanced at?

SNOOPY

Ferg

06-11-2022, 06:03 PM

Some fair comments, but I want to add to this part:

I am a little nervous of companies with large amounts of debt in general on their balance sheet in a rising interest rate environment.

...that I would be more than nervous of a NZ-domiciled company with 100% on-shore earnings, borrowing in a currency other than NZD. AFAIK there is no "natural hedge" available to CNU when borrowing in Euros. That makes zero sense to me and exposes CNU (and shareholders) to FX risk where none should exist.

Snoopy

06-11-2022, 08:49 PM

I am using the calculation method shown on Slide 22 from PR2021 (August)

FY2021
Chorus View (Pre IFRS16)
Chorus View (Post IFRS16)
Reference
Snoopy View

Bank and Note Debt (1)
$2,339m
$2,339m
(Slide 21 PR2021)
$2,339m

add PV of CIP Debt Securities (Senior)
$198m
$198m
(my post 2799)
$462m (2)
(Slide 21, PR2021)

add Net Leases Payable

$264m
(Note 5 AR2021)

equals Total Selected Debt
$2,537m
$2,801m

$2,801m

less cash
$53m
$53m

$53m

equals Total Net Selected Debt
$2,484m
$2,748m

$2,748m

divided by EBITDA
$629m
$649m

$629m

equals 'Net Selected Debt' / EBITDA
3.95
4.23

4.37

Notes

1/ Total net bank and other senior debt = $140m+($858m+$511m-$70m)+($200m+$500m+$182m)+$18m = $2,339m.
The $70m decrease in balance sheet value of the Euro bonds is because of a change in end of year value of an associated hedging instrument, the cross currency interest rate swaps used to hedge the Euro bonds (AR2021 p54). Likewise the $18m adjustment upwards in the value of the NZ bonds is because of the offsetting $18m decrease in value of interest rate swaps that are used to ensure hedge effectiveness (AR2021 p54).
2/ I don't like the accounting standard that lets a company discount debt that ultimately has to be repaid. So I am assuming a PV discount rate of 0%.

My 'Snoopy' view of this calculation removes the 'lease interest expense' (a part of rent) from EBITDA (so EBITDA is lowered). But I have also removed the 'Net Leases Payable' (a construct of IFRS16) as a liability, as I don't consider that a debt in a pre-IFRS16 sense. I don't consider my approach better than the approach Chorus has used. But my approach aligns better with the old way of assessing this banking covenant.

The other controversial thing that I have done is to disallow any discounting of CIP debt, in addition to removing the 'Net Leases payable' debt. By pure chance the effect of doing each of those two things separately has exactly cancelled out any overall debt change. Nothing should be read into this, as it is just a case of two unrelated changes unexpectedly neutralizing each other.

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. Personally I don't believe Chorus do deserve a credit upgrade, based on my retro calculation that shows the company is a slightly less favourable debt position.

I am a little nervous of companies with large amounts of debt in general on their balance sheet in a rising interest rate environment.

It is important to respond to my quote immediately above, because even an established utility provider can come unstuck if the debt position gets out of hand. To check this out, I will use the same yardstick that the banks use. That consists of figuring out how well the total bank debt taken on by the business covers (or smothers?) its gross earning capacity (EBITDA). The lower the (Net Debt)/EBITDA ratio the better.

I am using the calculation method shown on Slide 18 from PR2022 (August 2022)

FY2022
Chorus View (Pre IFRS16)
Chorus View (Post IFRS16)
Reference
Snoopy View

Bank and Note Debt (1)
$2,389m
$2,389m
(Slide 18 PR2022)
$2,389m

add PV of CIP Debt Securities (Senior)
$225m
$225m
(Slide 18, PR2022)
$486m (2)
(my post 2838)

add Net Leases Payable

$187m
(Note 5 AR2022)

equals Total Selected Debt
$2,614m
$2,801m

$2,875m

less cash
$88m
$88m

$88m

equals Total Net Selected Debt
$2,526m
$2,713m

$2,787m

divided by EBITDA
$660m
$675m

$660m

equals 'Net Selected Debt' / EBITDA
3.83
4.02

4.22

Notes

1/ Total net bank and other senior debt = $190m+($828m+$464m-$42m)+($200m+$500m+$154m+$45)m = $2,339m.
The $42m decrease in balance sheet value of the Euro bonds is because of a change in end of year value of an associated hedging instrument, the cross currency interest rate swaps used to hedge the Euro bonds (AR2022 p55). Likewise the $45m adjustment upwards in the value of the NZ bonds is because of the offsetting $45m decrease in value of interest rate swaps that are used to ensure hedge effectiveness (AR2022 p55).
2/ I don't like the accounting standard that lets a company discount debt that ultimately has to be repaid. So I am assuming a PV discount rate of 0%.

My third column 'Snoopy' view of this calculation removes the 'lease interest expense' (a part of rent, now reclassified as an interest payment under IFRS16) from EBITDA (so EBITDA is lowered). But I have also removed the 'Net Leases Payable' (a construct of IFRS16, representing rent contracts committed to over several periods) as a 'finance liability', as it wasn't a finance debt in a pre-IFRS16 sense. I don't consider my approach better than the approach Chorus has used. But my approach aligns better with the old way of assessing this banking covenant.

The other controversial thing that I have done is to disallow any discounting of CIP debt.

The covenant number that Chorus are targeting is anything under 4.75.. Anything over 5.25 ( Moody's ) and 5.00 ( S&P ) - see my post 2836 - are the trigger ratings for a credit downgrade. To avoid such a thing, Chorus would have to take some remedial action, like raise some more capital. My Snoopy retro calculation shows that - even if the company replaced their CIP debt with an equivalent quantum of commercial debt-, they would still be noticeably below this specific debt covenant ceiling. That's good. But it is all on the precept that net revenue remains at current levels. Is this likely?

SNOOPY

Snoopy

07-11-2022, 10:45 AM

Some fair comments, but I want to add:

...that I would be more than nervous of a NZ-domiciled company with 100% on-shore earnings, borrowing in a currency other than NZD. AFAIK there is no "natural hedge" available to CNU when borrowing in Euros. That makes zero sense to me and exposes CNU (and shareholders) to FX risk where none should exist.

I suspect the lure of EURO funding may be 'supply side initiated'. Getting 1.13% on your invested capital may not sound like a good deal to you in NZ. But if you are a Belgian dentist, who is staring down the barrel of a 'negative 1%' coupon rate on an investment bond, that dentist might think she is onto a good deal!

Of course, FX exposure at Chorus is managed. From AR2022 p41:
"Chorus holds cross currency interest rate swaps to hedge the foreign currency exposure to the European Medium Term Notes (EMTN). The cross currency interest rate swaps entitle Chorus to receive EUR principal and EUR fixed coupon payments for NZD principal and NZD floating interest payments (*)."

(*) This sentence doesn't read right to me. Chorus are receiving EUR principal to debt fund their business (I get that bit). But I would I assume they are making EUR fixed coupon (i.e. interest?) payments because of this, not receiving EUR fixed coupon payments. Either that quoted sentence is poorly worded, or I am just dumb, not really understanding how these interest rate swaps work (a possibility I do not rule out).

The slightly strange wording then continues.
"The EUR cross currency interest rate swaps (notional amount EUR 800 million) are partially hedged for NZD interest rate payments using interest rate swaps."

EUR 800 million is the actual amount of the euro debt. This quote is saying that an equivalent sized interest rate swap is - I think- brought into being to allow this money to be accessed as NZD, without capital exchange rate risk. But I am guessing that this cross currency interest rate swap, while cancelling itself out against the underlying loan at the end of the loan contract, must be valued in the intermediate years as a non-net zero (accounting rule priced) offset. Thus for annual account valuation purposes, it has an accounting value adjusted from EUR 800 million, even though the ultimate 'destination value' of this interest rate swap, once the EURO notes are due for repayment, remains at EUR 800m.

This is my best effort at explaining how this EURO funding at Chorus works. I am happy to be corrected if I have got it wrong.

SNOOPY

Snoopy

07-11-2022, 12:10 PM

The actual FY2021 revenue figures have been published. So it is time to update my revenue forecasting table.

Chorus has been locked in a regulatory battle with the Commerce Commission on how much 'maximum allowable revenue' (MAR) their 'regulated asset base' of fibre broadband assets will be allowed to charge their downstream retail customers over FY2022 through to FY2024, otherwise known as the 'Price Quality (PQ) Period - First.' (PQP1)

1/ The initial Commerce Commission proposal on 26-03-2021 was a rising sum starting from $715m (FY2022) rising to $755m (FY2024).
2/ A revised proposal on 27-05-2021 reduced this to a range from $689m to $786m.
3/ A further comment on 19-08-2021 from the Commerce Commission stated.

"The Commission has noted in its draft RAB (Regulated Asset Base) decision today that “If all other aspects of our draft PQ decision remained unchanged, our indicative estimate of the combined impact of these decisions would lead to a 2%-2.5% reduction in allowable revenue over the PQP1 period. This figure also includes the impact of updated WACC values applied in the pre-implementation period.”

The market took this to mean that the revised downwards regulated revenue rates may yet be increased again by the time the final decision in December comes out. The case Chorus made to the Commerce Commission was for a regulated rate range between $720m to $820m. I am doubtful that the Commerce Commission will be that generous in their final regulated outcome figures. So for the purpose of this update I am going to assume that the Commerce Commission raises the allowable revenue figures back to the range of the 26-03-2021 proposal: $715m (FY2022) rising to $755m (FY2024) [Forecast fibre revenue from 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2023 values interpolated).]

My table of forecast 'total change of revenue' over the period of interest is as follows.

FY2016
FY2017
FY2018FY2019FY2020
FY2021FY2022FFY2023FFY2024F

Fibre Revenue
$133m
$202m
$276m$368m$466m
$545m$715m$735m$755m

Fibre Revenue Increment

+$69m
+$74m+$92m+$98m
+$79m+$170m+$20m+$20m

Fibre Revenue Increment Percentage

+51.9%
+36.6%+33.3%+26.6%
+17.0%+31.2%+2.8%+2.7%

Non-Fibre Revenue
$875m
$838m
$714m$602m$493m
$402m$332m$272m$222m

Non-Fibre Revenue Decrement

-$37m
-$124m-$112m-$109m
-$91m-$70m-$60m-$50m

Non-Fibre Revenue Decrement Percentage

-4.3%
-14.8%-15.7%-18.1%
-18.5%-17.4%-18.1%-18.4%

Total Revenue
$1,008m1/ The initial Commerce Commission proposal on 26-03-2021 was a rising sum starting from $715m (FY2022) rising to $755m (FY2024).
2/ A revised proposal on 27-05-2021 reduced this to a range from $689m to $786m.
3/ A further comment on 19-08-2021 from the Commerce Commission stated.

"T
$1,040m
$990m$970m$959m
$947m$1,047m$1,007m$977m

Notes

1/ 'Non-fibre revenue' up until and including FY2021 has been calculated by subtracting 'Fibre revenue' from 'Total revenue'.

2/ 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:

a/ 'copper connected revenue' and
b/ 'field services, value add network services and infrastructure'

as two groups. The latter group I am forecasting constant revenue of $120m over FY2022 to FY2024 inclusive (Actual figures were $118m over FY2020 and $119m over FY2021). The 'copper connected revenue', comprising 'copper based broadband', 'copper based voice' and 'data services copper' have taken an $91m decline over FY2021. So I am forecasting declining revenue to continue: down $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.

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

So what to make of this? IF you compare the actual fibre revenue over FY2021 of $545m with

a/ the forecast regulated fibre revenue for FY2021 (slide 24 PRHY2021) $620m (interpreted from graph), OR
b/ my linearly interpolated FY2021 fibre revenue of $592m (being the arithmetic average of the previous year's fibre revenue used figure of $468m and the prescribed first year of MAR $715m).

THEN that actual revenue represents $47m to $75m less revenue than forecast just six months ago. That seems to be an astonishing drop in projected annual fibre revenue in just six months, which has to call into question the forecasting ability of Chorus. Have I got that observation right?

Even if the company replaced their CIP debt with an equivalent quantum of commercial debt-, they would still be noticeably below this specific debt covenant ceiling. That's good. But it is all on the precept that net revenue remains at current levels. Is this likely?

The actual FY2022 revenue figures have been published as I write this. So it is time to update my revenue forecasting table.

From 1st January 2022, Chorus has been operating under the 'regulated utility model', that regulates how much Chorus will be allowed to charge their downstream wholesale fibre customers over CY2022 through to CY2024, otherwise known as the 'Price Quality (PQ) Period - First.' (PQP1).

The aggregate Maximum Allowable Revenue (MAR) for fibre for the 3 years is $2.2 billion, split up into $690.2m (CY2022), $747.4m (CY2023), and $789.5m (CY2024). Forecasts by Chorus themselves for CY2022 were for fibre revenues of $657m (AR2022 p10). Where actual revenues fall below the MAR cap, the difference is added to the MAR for the next period.

There is a six month gap between the end of the reporting year and the end of the calendar year. This means we can make an educated guess at the MAR revenue in the financial year by splitting the difference between forecasts for adjacent calendar years.

MAR Revenue for FY2022: ($545m+$690.2)/2= $617.6m
MAR Revenue for FY2023: ($690.2+$747.4)/2= $718.7m
MAR Revenue for FY2024: ($747.4+$789.5)/2= $768.5m

My table of historic and forecast 'total change of revenue' over the years of interest is now as follows.

FY2016
FY2017
FY2018FY2019FY2020
FY2021FY2022FY2023FFY2024F

Fibre Revenue
$133m
$202m
$276m$368m$466m
$545m$614m$719m$769m

Fibre Revenue Increment

+$69m
+$74m+$92m+$98m
+$79m+$69m+$105m+$50m
[/TR]

Fibre Revenue Increment Percentage

+51.9%
+36.6%+33.3%+26.6%
+17.0%+12.7%+17.1%+7.0%

Non-Fibre Revenue
$875m
$838m
$714m$602m$493m
$402m$351m$291m$241m

Non-Fibre Revenue Decrement

-$37m
-$124m-$112m-$109m
-$91m-$51m-$60m-$50m

Non-Fibre Revenue Decrement Percentage

-4.3%
-14.8%-15.7%-18.1%
-18.5%-12.7%-17.1%-17.2%

Total Revenue
$1,008m
$1,040m
$990m$970m$959m
$947m$965m$1,010m$1,010m

Notes

1/ 'Non-fibre revenue' up until and including FY2022 has been calculated by subtracting 'Fibre revenue' from 'Total revenue'.

2/ 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:

a/ 'copper connected revenue' and
b/ 'field services, value add network services and infrastructure'

as two groups. The latter group I am forecasting constant revenue of $120m over FY2023 and FY2024. (Actual figures were $118m (FY2020), $118m (FY2021) and $128m over FY2022). The 'copper connected revenue', comprising 'copper based broadband', 'copper based voice' and 'data services copper' have taken an $91m decline over FY2021 and a further $69m over FY2022 So I am forecasting the decline of non-fibre revenue to continue: down $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.

'Total revenue' for the forecast years is calculated by adding the forecast fibre revenue to my own modelling of the non-fibre revenue as described above.

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

So what to make of this? IF you compare the actual fibre revenue over FY2022 of $614m with

a/ the forecast regulated fibre revenue for FY2022 (slide 24 HYR2021, 22-02-2021) $680m (interpreted from graph), AND
b/ A more recent linearly interpolated FY2022 fibre revenue of $618m (being the arithmetic average of the previous year's fibre revenue used figure of $545m and the prescribed first year of MAR $690.2m).

THEN that actual revenue for FY2022 represents a $62m revenue drop, compared to the forecast just a year earlier. This seems very similar to FY2021 when a big jump in revenue was projected, However, when that big jump did not occur, the big jump forecast was pushed out into he subsequent year. Nevertheless even if revenue in FY2023 disappoints (as happened when forecasting 'next years' revenue over the previous two years), I don't see an FY2023 scenario where the revenue does not increase, at least a little. So it looks like from a revenue perspective, Chorus is on track to raise their dividend for FY2023. Yet ultimately we shareholders want to know about profit trends, as well as revenue trends. What is happening to ARPU (Average Revenue per User)?

SNOOPY

Snoopy

08-11-2022, 08:23 AM

It looks like from a revenue perspective, Chorus is on track to raise their dividend for FY2023. Yet ultimately we shareholders want to know about profit trends, as well as revenue trends. What is happening to ARPU (Average Revenue per User)?

The following revenue figures for 'fibre broadband' and 'copper broadband' are largely taken from the 'Management Commentary' section of the respective annual reports. The 'In summary' table lists the number of connections, whereas the 'Revenue Commentary' lists the revenue attributable to each type of broadband.

Year
Broadband (GPON) RevenueBroadband (GPON) ConnectionsARPU (F)low
Copper Broadband RevenueCopper Broadband ConnectionsARPU (C)$47.15/m (from 01/10/2021, +2.5%)

FY2015
$29m75,000$?
$268m1,132,000$?

FY2016
$60m167,000$37.19
$456m1,059,000$34.69

FY2017
$123m$]292,000$44.66
$501m$]894,000$42.75

FY2018$]
$198m433,000$45.52
$421m754,000$42.58

FY2019
$294m599,000$47.48
$344m597,000$42.44

FY2020
$393m740,000$48.92
$271m466,000$42.49

FY2021
$477m860,000$49.69
$203m320,000$43.04

FY2022
$548m949,000$50.49
$153m240,000$45.54

Notes

1/ Sample ARPU calculation for Fibre Broadband 'Gigabit Passive Optical Network' (GPON) for FY2022:

ARPU = 1/12 x ($548m/ (0.5x(0.949m + 0.860m)) = $50.49

2/ Fibre GPON customers for FY2016 = Fibre 'Mass market' Customers for FY2016
Fibre GPON Revenue for FY2016 and FY2015 taken from Appendix 3, Slide 36 , in PR2017.

3/ Fibre GPON customers for FY2015 estimated as: 88,000 - 13,000 = 75,000

4/ Copper broadband numbers for FY2016 and FY2015 are from Slide 5 of the Chorus PR2016.

5/ Copper broadband revenues for FY2016 and FY2015 are from Appendix 3, Slide 36, in PR2017

6/ Actual ARPU for FY2021 listed on slide 15 of PR2021 to be $49.87, a little higher than the $49.69 that I have calculated above. However Chorus has used a different calculation method
"ARPU is total GPON revenue for the June month, divided by the average of May and June connection."
I have used an average connection for the full year, not just May and June.

Discussion

Why is this table important? The first ARPU column is representative of the business being gained as fibre broadband is being rolled out across the country. The second ARPU column represents business being lost as copper broadband is gradually retired and replaced with fibre broadband. It is heartening to see the ARPU being gained is greater than the ARPU being lost, even if such a superficial statement does not tell the full story.

I talk of copper broadband as a 'legacy technology'. Yet it is surprising how recently the likes of copper VDSL was the latest in broadband technology and still in its growth phase (revenues sharply rose between FY2015 and FY2017). The calculated ARPU is consistent with the wholesale /Dial Up (remember that?)/ ADSL/VDSL/ bill being fairly steady over the time-frame of this table up to FY2022 at least. By contrast the ARPU for Fibre GPON is steadily rising. This is consistent with, on average, with allowable inflation adjustments and a higher number of higher specification Fibre Broadband plans being sold as the years go by.

SNOOPY

Nor

08-11-2022, 08:51 AM

Snoopy
You reckon this is a hold or even a buy now?
I had the impression that you were negative earlier on.

Snoopy

08-11-2022, 09:37 AM

Snoopy
You reckon this is a hold or even a buy now? I had the impression that you were negative earlier on.

It is a good question Nor. Looking back over the last year, I think it is true that I was looking to justify that Chorus was trading at a price where I should take my profits. You obviously picked up that vibe. But with another year of operating results out now, I am not so sure. The key post from the many I have made over the last few days is the one below

Dividends going forwards are based on 'free cashflow'. Note that 'based on free cashflow' does not mean paying out 100% of free cashflow as dividends!

Free cash flow = net cash flows from operating activities - sustaining capex = $570m-$161m = $405m

On a per share basis: $405m/446.512m = 92cps.

This more than covers the 14cps (or 14cps/0.72 = 19.4cps before tax) and 21cps unimputed dividend based on FY2022 free cashflows: 92cps - (19.4cps + 21cps) = 51.6cps 'cashflow left over'.

That cashflow also makes the 40cps dividend forecast for FY2023 and the 45cps dividend forecast for FY2024 look do-able (even if probably without imputation credits). Although I do note that projected increase in dividend over the year from 35c to 40c for 2023 will be entirely negated by the loss of imputation credits! At today's $7.83 closing share price, that means we are looking at a forecast gross yield of 5.1% for FY2023, rising to 5.7% for FY2024.

I don't want anyone to get too excited, because this isn't a get rich quick opportunity. However, I did roll over a one year bank term deposit at 4.5% the other day, a rate I thought 'quite good'. And with a prospective comparative yield of my Chorus shares sitting at 5.1%, possibly rising to 5.7% within two years I am thinking 'that looks a little better'.

Then I look across to my other utility type investments in Contact Energy and Mercury, which I believe have better growth prospects. But if Onslow gets the go ahead, then this could really take the shine off some of those electricity market trading opportunities that have boosted the gentailer profits in recent years. So all of a sudden my smallest NZX investment (my shares in Chorus) is looking relatively more attractive. The credit rating industry seems more comfortable with those high Chorus debt levels too, now that it is transforming from a 'growth' company into a 'utility' company, and they take heart from the CIP government funding backing too.

So to answer your question, I think I have moved from a slightly worried/negative headspace into a more neutral position. It wouldn't surprise me, once I finish my 2022 deep dive into Chorus, that I come out with the finding that 'Mr Market' has the share price about right. Some would say that means I have wasted a lot of time finding out what Mr Market could have told me by just looking at the CNU trading price. But my mission is to try and find out what is driving this value. I see that as the edge I need if I am to sleep well holding Chorus shares into the future. In the short term, I think that rising interest rates are the biggest threat to a rising CNU share price.

SNOOPY

warthog

08-11-2022, 10:00 AM

... So to answer your question, I think I have moved from a slightly worried/negative headspace into a more neutral position. It wouldn't surprise me, once I finish my 2022 deep dive into Chorus, that I come out with the finding that 'Mr Market' has the share price about right. Some would say that means I have wasted a lot of time finding out what Mr Market could have told me by just looking at the CNU trading price. But my mission is to try and find out what is driving this value. I see that as the edge I need if I am to sleep well holding Chorus shares into the future. In the short term, I think that rising interest rates are the biggest threat to a rising CNU share price.

SNOOPY

Rising interest rates will reverse Q1 or Q2 2023.

The hog for one really appreciates the deep dives you've been doing all these years Snoopy. Take care and good fortunes.

Snoopy

08-11-2022, 12:21 PM

Wholesale Broadband Operator
%ge Nationwide Connections
EOFY2021 Connections {A}
EOFY 2021 Premises Passed {B}
%ge Regional Take Up {A}/{B}

Chorus
73%
837,000
1,282,000
65%

Northpower
2%
21,000
33,000
64%

Ultrafast fibre
14%
161,000
240,000
67%

Enable
11%
132,000
200,000
66%

Total
100%
1,151,000
1,755,000
65.6%

Notes

1/ The end of the financial year is, for all four operators, on 30th June.
2/ Ultrfastfibre was in May 2020 sold to Sentier Investments based in Australia but no doubt for one of their global infrastructure funds .

The most important figure in the above table, for Chorus investors, is the one in bold. Chorus owns 100% of the legacy copper network. So as users progress to fibre, they will eventually lose all of their copper legacy network customers, but only retain around 73% of the replacement fibre network customers. This means that although transitioning from the copper network will overall mean a boost in funding for pure fibre network owners, the expected 'gain' in revenue at Chorus is a little different.

Weighted Average Fibre Monthly Revenue Gain Per User 73% x $49.69= $36.13

less Weighted Average Monthly Copper Revenue Lost Per User 100% x $43.04= $43.04

equals Weighted Average Overall Monthly Revenue Change Per User -$6.91

Yes you did read that right. As the fibre transformation wave wafts over the country, Chorus can ultimately expect to lose on average $6.91 MRPU for every customer transitioned to fibre! In Australia they are forecasting around 70% of old copper network premises will eventually transition to fibre. The remainder will transition to fixed wireless or have no fixed line at all (relying instead on mobile communications not associated with any physical address).

If we use this 70 percent network transition target figure in an NZ context (an incremental 5% over where we are now), and assume we are sitting at at 65% take up rate right now, we can work out how much revenue Chorus can expect to lose from here on in, as 'NZ as a whole' transitions to fibre:

Forecast users transitioning in future: 0.7 x 1,282,000 - 837,000 = 60,400

$6.91 per month x 12 months x 60,400 users transitioning = -$5.0m over a year, but echoing down all future years as well, from the remaining copper users expecting to transition from copper to fibre.

Based on the FY2021 NPAT figure, that represents a permanent NPAT profit decline of (0.72 x $5.0m) / $47m = 7.7% ($3.6m in dollar terms).

This is in sharp contrast to the other broadband providers who are only making gains in the copper to fibre transition. To combat these impending ongoing revenue losses, Chorus will be under pressure to tackle their cost structure further.

It is heartening to see the ARPU being gained is greater than the ARPU being lost, even if such a superficial statement does not tell the full story.

Addressing my comment immediately above, 'the full story' must address the numbers of copper customers being lost, offset against the number of fibre customers being gained.

Wholesale Broadband Operator
%ge Nationwide Connections
EOFY2022 Connections {A}
EOFY 2022 Premises Passed {B}
%ge Regional Take Up {A}/{B}

Chorus
73%
919,000
1,324,000
69%

Northpower fibre
2%
22,624
33,000
69%

Tuatahi fast fibre
14%
173,000
240,000
72%

Enable
11%
143,331
193,000
74%

Total
100%
1,258,000
1,790,000
70.3%

Notes

1/ The end of the financial year is, for all four operators, on 30th June.
2/ Ultrafastfibre was in May 2020 sold to Sentier Investments based in Australia for one of their managed global infrastructure funds . Ultrafastfibre now trades under the name 'Tuatahi fast fibre' in New Zealand. The UFB2 and UFB2+ roll outs at Tuatahi were completed early in December 2019.

The most important figure in the above table, for Chorus investors, is the one in bold. Chorus owns 100% of the legacy copper network. So as users progress to fibre, they will eventually lose almost all of their copper legacy network customers, but only retain a maximum of around 73% of the nationwide replacement fibre network customers. This means that although transitioning from the copper network will overall mean a boost in customer receipts for pure fibre network owners, the expected 'gain' in revenue at Chorus is a little different.

Weighted Average Fibre Monthly Revenue Gain Per User 73% x $50.49= $36.86

less Weighted Average Monthly Copper Revenue Lost Per User 100% x $45.54= $45.54

equals Weighted Average Overall change in MRPU (Monthly Revenue Per User) -$8.68

Yes you did read that right. As the fibre transformation wave wafted over the country in FY2022, Chorus has lost on average $8.68 MRPU for every customer that transitioned to fibre! In Australia they are forecasting around 70% of old copper network premises will eventually transition to fibre. In New Zealand we will now track above that 70% 'migration to fibre' figure, (because of our superior fibre broadband infrastructure compared to Oz, we are at 70% now). But as a counterpoint to that, we now have three 'fixed wireless' broadband retailers (Spark, Vodaphone and 2 degrees) marketing their internally owned alternatives to fibre broadband at good discounts to fibre (albeit at reduced peak time speed). At least Chorus will get a meaningful inflation adjustment from their staunch fibre customers that will strengthen their cashflows this year.

I estimate the total revenue lost to Chorus over the FY2022 financial year, as a result of copper to fibre transition, to be:

0.27(1,258,000 - 1.151,000) x ($8.91/month x 12months) = $11.4m

If you regard all of that 'decremental revenue loss' as profit forgone, then this migration has reduced Chorus profit for the year by:

0.28 x -$11.4m = -$3.2m

Actual normalised profit drop between FY2021 and FY2022 was: $48.3m - $52.3m = -$4m

I could make an argument from this that most of the 'normalised profit drop' at Chorus over FY2022 has occurred as a result of the success of NZ's transition to fibre over that time!

SNOOPY

Snoopy

11-11-2022, 02:15 PM

Wholesale Broadband Operator
%ge Nationwide Connections
EOFY2022 Connections {A}
EOFY 2022 Premises Passed {B}
%ge Regional Take Up {A}/{B}

Chorus
73%
919,000
1,324,000
69%

Northpower fibre
2%
22,624
33,000
69%

Tuatahi fast fibre
14%
174,000
240,000
72%

Enable
11%
143,331
193,000
74%

Total
100%
1,258,000
1,790,000
70.3%

Notes

1/ The end of the financial year is, for all four operators, on 30th June.
2/ Ultrafastfibre was in May 2020 sold to Sentier Investments based in Australia for one of their managed global infrastructure funds . Ultrafastfibre now trades under the name 'Tuatahi fast fibre' in New Zealand. The UFB2 and UFB2+ roll outs at Tuatahi were completed early in December 2019.

I have been struggling to complete the above table in the previous post. So to avoid future angst, I thought it worth putting 'keyboard to the ether' to record for future reference how I solved the problem.

For the record, the above table was difficult to compile this year. The main problem was that Tuatahi, despite the native nomenclature, is now part of an unlisted company in 100% foreign hands. That means I couldn't find any reporting data as to the growth in network utilisation over FY2022. In the end it was 'Crown Infrastructure Partners' that came to my rescue. ('Crown Infrastructure Partners' is the government organisation that funded the whole UFB roll out ahead of consumer network demand.)

https://www.crowninfrastructure.govt.nz/about/publications/

Even then, the rather tardy release of the CIP FY2022 (ending 31st June 2022) annual report (4.5 months on and it isn't available) left me scratching around the site for information that I could use.

Method 1

The most recent 'quarterly connectivity update' in June 2022 told me that overall UFB uptake for the country was 70%. Given that

i/ The total incremental uptake was the sum of all the individual incremental uptakes AND
ii/ Given the total number of premises passed by fibre by Tuatahi had not significantly changed by EOCY2018

I could use the variables I did know to calculate the variable I didn't know. 'f' in the equation below is the fraction of premesis passed by fibre taken up by Tuatahi customers as at the 30th June 2022 reporting date.

0.69(1.324m) + 0.69(0.033m) + f(0.240m) + 0.74(0.193m) = 0.7(1.790m) => f=0.724 or 72.4%

Once I had calculated the utilisation rate at Tuatahi, and knowing the size of the network, that means I could calculate the number of Tuatahi fibre customers by EOFY2022. Furthermore, because I knew the number of customers from EOFY2021, the difference was the number of customers gained over FY2022.

Method 2

If I looked at each of the four CIP connectivity quarterly update reports relating to the full year ending 30th June 2022, the new UFB connections over the whole country add up as follows

30,056+28,797+25,061+24,518 = 108,074

If we look at the increase in connections over the same time period from the other three network owners we know about we get

Chorus
919,000-837,000=82,000

Northpowerfibre
-=1,624

Enable
143,331-132,000=11,331

Total
94,955

I am calling that total 95,000. If we subtract that number from the total number of new connections across all networks :

108,000 - 95,000 = 13,000

That 13,000 is the number of new fibre connections from from the one fibre market player we don't know about - Tuatahi. Because we know the number of customers at Tuatahi from the previous year, we can now work out the Tuatahi network utilisation:

(161,000 + 13,000) / 240,000 = 72.5%

Conclusion

Note that the result from method 2 is almost exactly the same as the result from method 1. When you come at the same problem from two different angles and come to the same result, this gives me confidence the result is right! It also makes sense that the market penetration at Tuatahi is closer to that of Enable than Chorus, because Chorus covers many more smaller rural towns that were further behind in their fibre network 'build to completion' program. To be conservative, I have rounded down the Tuatahi market penetration to 72% (instead of rounding it up to 73%).

SNOOPY

Sideshow Bob

20-02-2023, 08:37 AM

https://www.nzx.com/announcements/406952

Key results
• Fibre connections increased by 38,000 to 997,000
• Fibre uptake 71% in completed UFB areas
• 24% of mass-market fibre connections on gigabit or higher plans
• Operating revenue $487m (HY22: $483m)• EBITDA $342m (HY22: $347m)
• FY23 EBITDA guidance increased to $675m to $690m
• Net profit after tax $9m (HY22: $42m)
• Unimputed interim dividend of 17 cents per share

Snoopy

13-03-2023, 09:49 PM

.. what's happened that no tax credits are available from CNU to add to dividends ?

Past history suggests fully imputed dividends from Oct 12 through to April 22 then bang - Nada credits available ..

Nice concise explanation in the half yearly 2023 newsletter on page 2:
"Our dividends are expected to be unimputed for some time, because the substantial investment we have made in the fibre roll out has created a difference in timing between tax and accounting depreciation. This means tax payments are effectively deferred to the future and we do not have the imputation credits in the short term."

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

And now for the long answer.....

While I am not disagreeing with the explanation above, there are other ways to spin this story. Page 1 of the newsletter gives us a good clue on what is happening:

"Net profit decreased .....

Part 1/ largely due to interest rate rises and the need to refinance a large tranche of debt due for repayment later in 2023(*). AND
Part 2/ The accelerated depreciation of the copper cables in areas where fibre is available also contributed to the reduction in net earnings."

(*) AR2022 shows Euro Medium Term Notes on the books at EOFY2022 valued at $NZ828m needing to be refinanced, making up 35.7% of Chorus long term debt as at EOFY2022. This debt was taken out over FY2017 and I quote from p31 of that Annual Report:
"On 18th October 2016, Chorus issued EUR 500m of Euro Medium Term Notes at a rate of 1.125%. They will mature in October 2023 and have been swapped back to $NZ785m using cross currency interest rate swaps."

Now, 1.125% of EUR 500m is EURO 6.25m.

The added capital cost of the loan to be repaid six years later is $828m-$785m= $43m, or $7.2m each year for six years. At that time $NZ1 = Euro 0.59. So the effective extra interest paid each year as a result of the interest rate swap was: $NZ7.2m x 0.59 = Euro 4.2m. This means the effective euro interest rate being paid on this debt is:

(6.25m+4.2m)/6.25m x 1.125% = 1.881%,

Refinancing of this bond happened at 3.625%
https://chapmantripp.com/about-us/news/chorus-taps-the-european-bond-markets-for-successful-refinance/

This means the 'interest payments due', to all of those friendly European Note Holders that are 'helping Chorus out' on what is now a 7 year bond has effectively doubled to: (3.625/1.881) x EUR10.45m/0.59 = $NZ34m per year.

Part 2 of the NPAT after tax is the success of broadband roll out undermining the success, and therefore value of the legacy copper network. The IRD have their rules own depreciation that presumably do not include slashing the value of the legacy copper network on Chorus's books at the request of management.

So in my view the explanation for the disappearance of imputation credits could be rewritten as follows:

"The real life of the copper network is dramatically shorter than we thought. But we have been continuing to pay low depreciation charges that do not reflect the reducing revenue that we still get from this network. So actually we are now making a substantial loss on copper, which combined with the significantly higher interest payments on our 'long terms loan portfolio' have wiped out the overall unadjusted Chorus profit -from the point of view of the IRD- to nothing (hence no imputation credits). IOW 'we no longer make any money at all', but -ah- we have free cashflow!"

I think that is an equally good explanation as to what has happened. It doesn't read as well as the paragraph written by Chorus that I opened this post with though!

SNOOPY