A Broker's View: Chorus

GRANT DAVIES
Last updated 05:00 05/04/2014

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Company: Chorus Limited

Sector: Telecommunications Infrastructure

Overview: Chorus and the Commerce Commission are finally singing in harmony. After surprising investors last year with an Unbundled Bitstream Access (UBA) pricing decision based on the price of broadband delivery in Sweden, the Commerce Commission essentially retracted that benchmarking decision on Friday without much fanfare.

What it announced was a fast tracking of the Final Pricing Principle (FPP) for both the UBA and UCLL (hardware that connects a home or business to the main distribution frame in the local exchange).

The UBA benchmark pricing was due to come into force in December of this year, but now that the FPP decision has been brought forward to November 30, the original benchmarking decision could no longer be relevant.

Pros: Chorus is supposed to be a no frills, regulated monopoly provider of an essential service. The no frills side of that equation has been sorely lacking of late as the regulated side took over.

The effective nullification of the benchmarking decision has sent the stock up 10 per cent in the last week.

The share price still has some ground to make up before it reaches the levels it was trading at pre-benchmarking.

Chorus investors could also see upside from a High Court case it has taken against the Commerce Commission regarding its interpretation of parts of the Telecommunications Act.

The company will eventually own most of the country's Copper and Ultra Fast Broadband Networks.

Cons: With the share price still languishing, one must wonder why investors have not flooded back in given the fast tracking of the FPP.

The key reason probably has a lot to do with the huge uncertainty that remains around the stock. Although the FPP is likely to mean Chorus receive a fair price for its copper network, investors seem to be approaching the situation with a 'once bitten, twice shy' attitude.

Downsides exist if there are delays in the FPP, as this means Chorus may have to weather the lower prices.

Of course a low FPP price would also hurt Chorus, and could see it have to raise capital to save itself from breaching debt covenants. Dividends are unlikely to be paid in the short term due to uncertainty, but we could see dividends return next year depending on the FPP result.

Price performance: Chorus' share price dropped over 50 per cent in 2013, but has recovered in 2014 to $1.76, up over 20 per cent for the year,

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Investment outlook: Some of the uncertainty has been removed, but Chorus is still not quite the no frills, regulated monopoly it should be. Investors prepared to take the risk could see significant upside.

*A Broker's View is written by Grant Davies, Authorised Financial Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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