Depreciation as a function of funding?
Quote:
Originally Posted by
CJ
As a regulated monopoly, CNU should be allowed to return a sufficient return on equity. Whether that return justifies the current share price is another question but there is no doubt that CNU will be profit and will pay a dividend.
Vector would be the closest comparison as the majority of its business is a regulated monopoly.
I like long life utility type assets as an investment prospect, and the Chorus network(s) tick that box. But I am still put off by the unusual funding structure of Chorus. I get that there has to be government assistance because Chorus are building the broadband fibre network ahead of the demand curve. In capital terms there is no subsidy though, as far as I can work out. That is because the 'Crown Infrastruture Partners' funding, the 'CIP debt' and 'CIP equity' (actually preference shares) ultimately have to be repaid.
$924m in accessed crown funding (AR2020 p49) is not chickenfeed, even in these days of low interest rates. If Chorus could get a commercial loan at 3% today, to replace that CIP funding, they would be up for an annual extra incremental interest bill of:
$924m x 0.03 = $28m
Net earnings last year were $52m. So underlying net profit at Chorus could eventually be nearly halved (by $28m x 0.72 = $20.2m) based on that incremental interest figure, once the government loan support starts to become 'commercial' from FY2025. This is a very different position to the electricity 'gentailers'.
Like Chorus those gentailer companies own long life utility type assets. Unlike Chorus, those renewable power assets increase in value as the wholesale power price rises. To see a similar effect at Chorus, the price of wholesale broadband will have to keep rising at a similar rate to rising power prices, while the cost to operate the now existing fibre network continually falls going into the future. That seems unlikely. This means, from a future funding perspective, Chorus is in a far worse position than the likes of Contact Energy, Mercury Energy and Meridian Energy at least.
The other point I really don't understand is the savings in depreciation of $27m (AR2020 p43) that can be obtained because Crown Funding has been used. How can the book state of the Chorus assets be affected by how those assets are funded? Surely depreciation is a function of wear and tear and maybe technical obsolescence? If, however, we do take that extra depreciation deduction at face value and we do look to the future when the Crown funding is repaid, presumably that extra depreciation deduction will no longer be available? The after tax effect would be a reduction in NPAT of 0.72x$27m= $19.4m. Add that to the underlying new incremental interest bill of $28m -before tax- and any underlying Chorus profits ( NPAT effect of 0.72x$28m= $20.2m) for an indicative FY2020 based future year Net Profit After Tax drops to a measly:
$52m - $19.4m -$20.2m = $12.4m (a near 80% reduction on the headline NPAT).
Am I missing anything here?
SNOOPY