Shares in hold zone after good year

19:14, Dec 26 2012

Shares in telecommunications network company Chorus are cheap, but final government regulation on the pricing raises the level of uncertainty for the share, according to a Morningstar analysis of the local stock market.

Telecommunications stocks offered the most value, but the rest of the New Zealand market was trading around "fair value" and Morningstar had more negative than positive recommendations.

Buying opportunities in the New Zealand market were few after a strong run this year, Morningstar said.

The NZX 50 has risen steadily this year from about 3246 points to 4057, a gain of almost 25 per cent, despite New Zealand's lacklustre economic growth.

Morningstar said most stocks were now in the "hold zone" and outright buy and sell calls were hard to come by.

Morningstar rated Chorus shares "accumulate" and put a fair value of $3.60 on the share, but with a high level of uncertainty.


Other most preferred stocks included Nuplex, Sky TV, casino operator SkyCity, and Telecom. But household names such as Briscoe and Fletcher Building were well overvalued, the analyst said.

Chorus shares last traded at $2.95, rebounding from a recent low of $2.69 in mid-December.

The shares were knocked down heavily from about $3.40 at the end of November, after monopoly watchdog the Commerce Commission came out with a much lower than expected draft wholesale broadband price decision in early December.

If confirmed, that would sharply cut the revenue potential Morningstar earlier forecast.

"We expect a better outcome post industry consultation," Morningstar said.

However, just before Christmas, two large holders of Chorus shares cut their stakes, selling about 6 million shares between them.

The Bank of New York Mellon Corporation sold about 4 million shares, taking its holding from 6 per cent to just above 5 per cent of Chorus.

On the same day, AMP Capital Investors said it sold about 2 million shares in Chorus, trimming its holding from 5.3 per cent to 4.8 per cent of the company.

That move took it below the substantial shareholder mark of 5 per cent. Early in December, AMP cut its holding from almost 8 per cent to 5.3 per cent of Chorus.

Chorus is the country's biggest telecommunications infrastructure owner, though copper wire is slowly dying and is being replaced by fibre cable by Chorus and the Government in a joint venture.

As most of the company's assets are near-monopolies, wholesale pricing is regulated. With some of those pricing decisions yet to be finalised "the landscape is highly uncertain", Morningstar said.

But there should be a better outcome for Chorus in the final decision on fibre pricing, as there was on the wholesale copper price.

"This is a relatively cheap, narrow moat business offering a generous yield over 9 per cent, but uncertainty is high."

A moat business is one protected from competition by rival firms because of its nature, such as a monopoly or near-monopoly with high barriers for other players to enter the market.

Given depressed interest rates globally, quality companies with sustainable and above-average yields would remain popular, such as Telecom, SkyCity, The Warehouse and Fisher & Paykel Healthcare with yields above 5 per cent, though all were in the "hold" zone.

Retailer Briscoe was on Morningstar's least preferred stocks list, even though it was one of the top retailers.

Briscoe had performed exceptionally well despite the lacklustre trading environment. But despite reasonably strong fundamentals, its shares were 31 per cent overvalued compared with Morningstar's "intrinsic value" of $1.70 a share. The shares last traded at $2.14.

For Fletcher Building, the building market was finally showing signs of life, with new house building picking up and more steam in Christchurch's rebuilding.

The Reserve Bank recently estimated the rebuild would cost $30 billion.

As New Zealand's largest construction company, Fletcher was best placed to benefit, but that was being overestimated.

Its share price had jumped more than 40 per cent in the past year and it was now 25 per cent ahead of Morningstar's fair value estimate of $6.50, recently trading at $8.30.

Morningstar also said auction website company Trade Me was a least favoured stock, with a fair value of $3.40, compared with latest trades at $3.93.

Fairfax Media