Tamsyn Parker 's Opinion

Money Editor for NZ Herald

Stock Takes: Chorus of woes

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The Nga Awa Purua Geothermal Power Station owned by Mighty River Power, whose falling share price is likely to weigh on Genesis Energy. Photo / APN
The Nga Awa Purua Geothermal Power Station owned by Mighty River Power, whose falling share price is likely to weigh on Genesis Energy. Photo / APN

Morningstar has slashed its valuation for Chorus amid the company's copper pricing woes. Analyst Peter Rae this week cut his fair value from $3.60 to $1.60 although he maintained a hold recommendation on the stock.

Rae said in a note his valuation was based on applying the Commerce Commission's final wholesale equipment for a broadband price of $10.92 compared to a previous assumption of $16.

"This represents a 50 per cent decline to existing equipment pricing of $21.46. Our fiscal 2015 and fiscal 2016 earnings forecasts decline 9 per cent and 34 per cent, respectively.

"The larger impact in fiscal 2016 reflects the first full year of lower prices, which will be applied on December 1, 2014."

Rae said his estimate also factored in the potential for a $400 million capital raising by Chorus at $1. He also did not expect the company to pay a dividend in the near future.

Yesterday accountancy firm Ernst & Young gave its preliminary view that copper price changes will have a significant impact on Chorus' financial position and put it at risk of not meeting its ultra-fast broadband contract.

The Government has said it won't put up any extra money to help Chorus at this stage and has left the telco network provider to talk to its agency Crown Fibre Holdings about what can be done.

Chorus' share price has plummeted in the past few months, falling from over $3 in August to less than $1.40. Yesterday it closed down 5.5c at $1.38.

Retail fears

Chorus is said to be widely held by New Zealand retail investors, many of whom bought it up after it split from Telecom as a perceived steady infrastructure stock with a good dividend.

James Smalley, client adviser at broker Hamilton Hindin Greene, said he had received a number of calls from investors asking, "What the hell is going on with Chorus?"

Smalley believes the current price is not reflective of Chorus' copper network and hopes that once a proper valuation had been completed the company's share would recover.

He said the benchmark used by the Commerce Commission to value the copper network was flawed. But a full valuation could be more than a year away.

Smalley said Chorus may also have a challenge raising capital in the market as investors may not be prepared to cough up money where their return may be less than what they put in.

Investors who don't take part in a capital raising would also face having their shareholding diluted.

Regulatory influenza

Smalley said the regulatory uncertainty surrounding Chorus was also feeding into the fears held around the power companies and was likely scaring off international investors.

A strong Kiwi dollar against the aussie may also be encouraging Aussie investors to cash up their New Zealand stocks and reinvest in their own market.

A plethora of new initial public offerings in Australia means there are potentially plenty of choices for investors. Mighty River Power sank below $2 this week - 50c off its May issue price and Meridian Energy shares yesterday fell below 90c - 10c off its $1 issue price.

Mighty River closed yesterday on $1.98 while Meridian closed on 89.5c.

Falling prices for the already listed energy companies are also likely to weigh on Genesis Energy. The Government released figures this week indicating it expects to get at least $700 million for a 49 per cent chunk of Genesis.

Analysts will use price to equity ratios for its peers to help set how much they will be prepared to pay for the company should the Government go ahead with its float plans.

Diligent disappointment

Diligent Board Member Services investors seem to be deserting the company in droves after it announced another delay in the release of its accounts on Wednesday.

The company's shares fell 13 per cent to $3.35 after Diligent said it would not meet its already delayed deadline of December 12 and instead hopes to release them by the end of February.

Shares in the boardroom software company have more than halved since May when they hit a high of $8.20. Yesterday they fell again, closing down 20c at $3.15.

First NZ Capital analyst James Schofield said the delay was another blow to the company's credibility.

"The continued stream of embarrassing headlines since December 2012 goes to credibility, and we believe will be exploited by their competitors. We note two weaker quarters of sales data to this effect," Schofield said in a note. He retained a neutral recommendation on the stock but downgraded his target price from $5.40 to $4.05.

Meanwhile, Deutsche Bank analyst Stephen Ridgewell has maintained his buy recommendation on the stock with a $6.60 target price.

Ridgewell said in a note that a lack of information from Diligent and repeated delays to the restatement of its accounts had contributed to the current negative market sentiment.

"However, we see significant re-rate potential once the restatement is complete."

Ridgewell said Diligent had confirmed that no material accounting issues had been found other than those already flagged and the company said it was in full compliance with its continuous disclosure obligation.

Growing up

Stock exchange operator NZX told Bloomberg this week it plans to beef up its Auckland office next year by adding a further five staff.

That will bring its Auckland operation to 20 by the end of 2014 - a year ago it had just one employee in Auckland.

NZX's total head count is 183 across the whole company which is Wellington, Feilding, Auckland, Melbourne.

Trading on the NZX hit a record of $927 million on November 26 and the NZX 50 index hit a record high on November 8.

Mint shake-up

Boutique fund manager Mint is to lose one of its founding members. Shane Solly will leave the firm at Christmas, selling his 7 per cent stake in the business.

Chief executive Rebecca Thomas said Solly was leaving because he wanted a change of scene and the shares would be offered to others in the firm to buy first as part of a shareholder agreement.

Thomas said the company had been aware of the change for some time and had taken the opportunity to broaden and deepen its team.

Former BT Funds Management chief investment officer Paul Richardson is to become CIO at Mint. The company has also hired Greg Fraser as an analyst and Anthony Halls joined the firm in September from the New Zealand Superannuation Fund.

Thomas said the firm would look to expand its funds on offer and would likely pursue something that used the team's international investment experience.

Mint was founded in 2006 after Thomas returned from working in the UK. She said the firm had not grown as fast as she would have liked and had been hampered by launching into the "teeth of the global financial crisis".

But she hoped that boosting its team and improving retail investor confidence would help the company increase its funds under management.

- NZ Herald

Tamsyn Parker

Money Editor for NZ Herald

Tamsyn Parker is the NZ Herald's Money Editor. A business journalist for ten years, she has worked in the UK and NZ for the New Zealand Herald, the National Business Review and a specialist publication on investment products for financial advisors. She is passionate about helping readers learn more about to make their money work for them.

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