The coming ComCom profit squeeze: Part 1
Quote:
Originally Posted by
Snoopy
Roll forward to AR2013 and Note 4 on Crown Funding has the following equivalent comment.
'The initial value of the senior portion of (CIP debt securities) is the present value (using a discount rate of 8.5%) of the sum repayable on the CIP debt securities."
There is no mention of any equivalent discount rate on equity securities, or why the CIP discount rate was upped from "6.65% to 6.90%" to 8.5%. That 8.5% figure continues to this day (AR2020 p50). Yet prevailing 180 day interest rates in 2012 were 4.25% verses 0.9% today. I have a massive problem with this as retaining that very high unexplained 8.5% discount rate IMO, significantly understates the balance sheet indebtedness of CNU.
As outlined in my previous post 2731, my new explanation for the very high 8.5% discount rate is that it is indirectly linked to the depreciation allowed for these government funded fibre assets. I am not completely sure this is correct. But it is the answer that best fits the facts as I see them. So until I get a better explanation, I will run with my current thoughts on this.
The 'squeeze" that I refer to in this post title refers to:
1/ the ballooning balance sheet representation of UFB1 debt, AND
2/ the increasing regulation of revenue that ultimately supports the profit that must service this debt.
Of particular interest is the coming regulatory period that takes us through to the end of FY2024.
|
FY2025 |
FY2030 |
FY2033 |
FY2036 |
Total |
CIP USB1 Debt Due |
$85m |
$86m |
$128m |
$163m |
$462m |
(Gross Value) |
CIP USB1 Discounted Value of Debt Due (mandated 8.5% discount rate) |
$56.5m |
$38.0m |
$44.3m |
$44.2m |
$183m |
(FY2020 Balance Sheet Representation) |
CIP USB1 Discounted Value of Debt Due (mandated 8.5% discount rate) |
$61.3m |
$41.2m |
$48.1m |
$48.0m |
$199m |
(FY2021 Balance Sheet Representation) |
CIP USB1 Discounted Value of Debt Due (mandated 8.5% discount rate) |
$66.5m |
$44.7m |
$52.1m |
$52.0m |
$215m |
(FY2022 Balance Sheet Representation) |
CIP USB1 Discounted Value of Debt Due (mandated 8.5% discount rate) |
$72.2m |
$48.5m |
$56.6m |
$56.4m |
$234m |
(FY2023 Balance Sheet Representation) |
CIP USB1 Discounted Value of Debt Due (mandated 8.5% discount rate) |
$78.3m |
$52.7m |
$61.4m |
$61.3m |
$254m |
(FY2024 Balance Sheet Representation) |
On 6th April Chorus announced that the indicative maximum allowable revenue range to $680m to $710m. I will take the mid point of that range - $695m - to illustrate my point. Revenue from 'fibre broadband' and 'fibre premium' (AR2020 p52) totalled over FY2020:
$393m + $73m = $466m
This implies a profit maximising growth rate over the ensuing four years of:
$466m(1+g)^4= $695m => g=10.5%
The implied compounding annual growth rate for fibre revenue should be up to a maximum of 10.5%. Based from a 60% take up of fibre that is rolled passed the door (the EOFY2020 figure), this means we are taking about take ups of 66.3% (EOFY2021), 73.3% (EOFY2022), 81.0% (EOFY2023) and 89.5%(EOFY2024). Granted some of that growth penetration may be a bit lower because some of the revenue increase might be for higher bit-rate services, rather than just 'more services', Nevertheless I think it would be stretch for Chorus to extract that much growth from its fibre network for the next four years in a row. The problem for Chorus is that fibre revenue growth does not equate to Chorus revenue growth. Legacy copper revenue is lost along the journey, and this particularly hurts when Chorus loses their legacy copper customers to other fibre networks not run by Chorus (such as Enable in Christchurch). To illustrate this point, look at the relationship between fibre revenue and EBITDA over the last five years.....
SNOOPY
The coming ComCom profit squeeze: Part 2
Quote:
Originally Posted by
Snoopy
The implied compounding annual growth rate for fibre revenue should be up to a maximum of 10.5%. Based from a 60% take up of fibre that is rolled passed the door (the EOFY2020 figure), this means we are taking about take ups of 66.3% (EOFY2021), 73.3% (EOFY2022), 81.0% (EOFY2023) and 89.5%(EOFY2024). Granted some of that growth penetration may be a bit lower because some of the revenue increase might be for premium services, rather than just 'more services', Nevertheless I think it would be stretch for Chorus to extract that much growth from its fibre network for the next four years in a row. The problem for Chorus is that fibre revenue growth does not equate to Chorus revenue growth. Legacy copper revenue is lost along the journey, and this particularly hurts when Chorus loses their legacy copper customers to other fibre networks not run by Chorus (such as Enable in Christchurch). To illustrate this point, look at the relationship between fibre revenue and EBITDA over the last five years.....
|
FY2016 |
FY2017 |
FY2018 |
FY2019 |
FY2020 |
FY2021F |
FY2022F |
FY2023F |
FY2024F |
FY2025F |
EBITDA |
$594m |
$652m |
$653m |
$636m |
$648m |
|
NPAT |
$99.6m |
$131.7m |
$97.2m |
$65.6m |
$67.1m |
$52.4m (2) |
$55.5m (2) |
$58.8m (2) |
$65.0m (2) |
$95.0m (2) |
|
Fibre Uptake Rate |
24% |
35% |
45% |
53% |
60% |
|
Non-Fibre Revenue {C}-{B} |
$875m |
$838m |
$714m |
$602m |
$493m |
$359m |
$137m |
$233m |
$274m |
Fibre Revenue {B} |
$133m |
$202m |
$276m |
$368m |
$466m |
$591m (3) |
$715m (3) |
$735m (3) |
$755m (3) |
Overall Revenue (C) |
$1,008m |
$1,040m |
$990m |
$970m |
$959m |
$950m (2) |
$852m (2) |
$968m (2) |
$1,029m (2) |
$1,067m (2) |
|
Notes
1/ NPAT figures are normalised, as per my post 2650.
2/ Forecast figures are taken from https://simplywall.st/stocks/nz/tele...-shares#future
3/ Forecast revenue from Chorus 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2021 value interpolated).
The above table shows that, over the last four years in particular, EBITDA has reached a plateau despite the ever increasing revenue from fibre. Overall revenue over the period has been largely flat to declining. Customers do tend to pay a bit more to access broadband than they did to access the legacy copper line services. But this revenue gain is more or less offset by the loss of customers in Northland (Northpower), the Central North Island (Ultrafast Fibre) and Christchurch (Enable). In these regions customers upgrading to fibre move from a Chorus copper account to an entirely different fibre provider. Customers that upgrade on those paths are lost forever to Chorus,
Projecting these trends it seems likely that EBITDA at Chorus will not increase materially going forward into the future, despite the encouraging growth in fibre internet all over New Zealand. In tandem with this, it seems that although most of the debt that the company needs to take on to build its share of the UFB network around the country is already on the books, the amount of debt that must be recognised is geometrically increasing (see part 1 of this post). The incremental debt recognised by EOFY24 will be:
$254m - $183m = $71m
If EBITDA remains flat, then the 'Net Debt' to 'EBITDA' ratio becomes ( 17th Nov presentation, Slide 41):
($2,680m + $71m) / $648m = 4.24 (FY2024 estimate)
This is a rise on the FY2020 equivalent figure of 4.14, but 4.24 is still below the maximum target allowable of 4.75. There remains execution risk with these projections.
The real challenge will come in FY2025 when the first tranche of 'CIP debt', $85m, will need to be repaid then refinanced. But much more significant than that, in EBITDA terms,will be the fundamental loss of earning power when the demands of the 'CIP equity' dividends become real.
SNOOPY
The perils of a 'Simply Wall Street' valuation
Quote:
Originally Posted by
Snoopy
|
FY2016 |
FY2017 |
FY2018 |
FY2019 |
FY2020 |
FY2021F |
FY2022F |
FY2023F |
FY2024F |
FY2025F |
EBITDA |
$594m |
$652m |
$653m |
$636m |
$648m |
|
NPAT |
$99.6m |
$131.7m |
$97.2m |
$65.6m |
$67.1m |
$52.4m (2) |
$55.5m (2) |
$58.8m (2) |
$65.0m (2) |
$95.0m (2) |
|
Fibre Uptake Rate |
24% |
35% |
45% |
53% |
60% |
|
Non-Fibre Revenue {C}-{B} |
$875m |
$838m |
$714m |
$602m |
$493m |
$359m |
$137m |
$233m |
$274m |
Fibre Revenue {B} |
$133m |
$202m |
$276m |
$368m |
$466m |
$591m (3) |
$715m (3) |
$735m (3) |
$755m (3) |
Overall Revenue (C) |
$1,008m |
$1,040m |
$990m |
$970m |
$959m |
$950m (2) |
$852m (2) |
$968m (2) |
$1,029m (2) |
$1,067m (2) |
|
Notes
1/ NPAT figures are normalised, as per my post 2650.
2/ Forecast figures are taken from
https://simplywall.st/stocks/nz/tele...-shares#future
3/ Forecast revenue from Chorus 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2021 value interpolated).
The article below contains some very bullish thoughts on Chorus, suggesting it should be trading at up to a fair value of $14.41.
https://simplywall.st/stocks/nz/tele...w-their-intrin
IMO more prominence should have been given to the disclaimers further down the page.
"PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NZSE every day."
This should give readers a clue that the valuation process is automated (no real surprise there).
"The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance."
In the case of Chorus the 'future capital requirements' include the repayment or refinancing of the 'CIP debt' and 'CIP preference shares' which are currently helping to finance Chorus with no cash contribution from the company. Currently these debts which will have to be dealt with from as soon as 2025 amount to 1.3 billion dollars (17th November Presentation p43) ! Compare this to the collective DCF valuation that $1.7billion that Simply Wall Street puts on the present valuation of Chorus cashflows for the next ten years and you can see the magnitude of the omitting future capital requirements' from any valuation.
When you do a DCF valuation on a company that is not rapidly growing, a disproportionate part of the valuation sits in the terminal value calculation from 2030 onwards ($8.8billion in this case). I don't believe that assuming cashflows will rise by the five year average of the current ten year bond rate (2.3%) is appropriate for a mature government regulated network. I am not saying this is impossible. There maybe some value enhanced add-ons that we cannot imagine now that will see the net cashflow from Chorus behave like this. But I don't think it is prudent to assume that this will happen for valuation purposes.
The earnings growth assumption of 14.4% per year seems to have been compiled from a low point in the business cycle and is a recovery situation. If that growth rate has been built into the DCF model for the next ten years then I think the DCF modelling is seriously flawed.
CNU is currently trading on the market at $6.70, the price set by 'Mr Market'. I am picking this is much closer to the true valuation of the company than $14.41.
SNOOPY
CNU010 Refinancing Interest Saving
Quote:
Originally Posted by
Snoopy
|
Net Debt Nov 2020 Presentation (Chorus) |
Borrowings |
$2,234m |
add PV of CIP debt securities (senior) |
$183m |
add Net Leases Payable |
$263m |
less Cash |
$0m |
equals Total Net Debt |
$2,680m |
Borrowings
Chorus Interpretation: (Refer Side 42, November 2020 Presentation):
$30m (Long term bank facilities) + $5m (Overdraft) +
$400m (NZ CNU010 Bond) + $500m (NZ Bond) + $1,299m (European Medium Term Notes) = $2,234m (Total)
In December 2020 Chorus issued two new bonds:
1/ CNU030 7 year bonds: $200m with a coupon rate of 1.98%
2/ CNU040 10 year bonds: $200m with a coupon rate of 2.51%
At the time it was made known that these two bonds would replace the $400m of CNU010 4.12% bonds, due to mature on Thursday 6th May. It is clear there will be an ongoing saving in interest charges with the replacement of $400m of CNU010 bonds with $200m of CNU030 bonds and $200m of CNU040 bonds.
Previous Annual Interest Charge: $400m x 0.0412 = $16.48m
Forward Annual Interest Charge 1: |
$200m x 0.0198 |
= $3.96m |
plus Forward Annual Interest Charge 2: |
$200m x 0.0251 |
= $5.02m |
equals Total Forward Interest Charge : |
|
$8.98m |
This should produce an annualised saving of: $16.48m - $8.98m = +$7.5m
All other things being equal this refinancing should produce an annual boost in profits from FY2022 of 0.72 x $7.5m = $5.4m
SNOOPY