Business Editor for the NZ Herald

Ominous note for Chorus

Chorus is due to receive $929 million of public funding to roll out a fibre-optic network by the end of 2019. Photo / APN
Chorus is due to receive $929 million of public funding to roll out a fibre-optic network by the end of 2019. Photo / APN

Proposed regulation in the telecommunications market could push Chorus' operating earnings down by 10 per cent in the 2013 financial year and cause grief for international investors, say analysts.

The Commerce Commission is reviewing benchmark data that sets what wholesaler Chorus charges phone and internet retailers for access to parts of its copper network.

These charges are regulated and are linked, in part, to movements in prices internationally.

A draft decision from the commission was due out today, however a spokesperson says it is now likely to come out next week.

Analysis from Goldman Sachs suggests the commission decisions could lead to a reduction of wholesale pricing by up to 19 per cent.

Assuming the price change comes into effect in July this year, this could push down Chorus' forecast earnings before interest, taxes, depreciation and amortisation (ebitda) by 10 per cent for the 2013 financial year, Goldman says.

The price drop could have even more of an impact on Chorus' ebitda in the 2014 financial year and see it fall by 19 per cent, the firm estimates.

Paul Harrison at BT Funds Management said the price review presented challenges to Chorus' board, particularly its dividend policy.

"This review is not going to be finalised in the near future - it's going to take a few months - so that must make it very difficult for the board to work around dividend policy going forward.

"The market is expecting it [Chorus] to have a reasonable dividend yield as well so I think that's why you're seeing people buying it," Harrison said.

While lower copper prices might be positive for some retailers, internet companies would also be less inclined to get customers to migrate to new fibre services.

"If they do pull back the pricing on the copper cables, it potentially opens up a gap between the price you will be charged for copper internet access versus the fibre and the last thing you really want to do at the moment is to make the fibre less attractive," Harrison said.

Under a deal struck between the Government and Telecom last year, its network arm Chorus became a separate publicly listed company to take part in the ultra-fast broadband scheme.

Chorus is now due to receive $929 million of public funding (which will be paid back) to roll out a fibre network in Auckland, the eastern and lower North Island and the majority of the South Island by the end of 2019. The project aims to deliver consumers, businesses, schools and the health sector internet speeds of up to 100 megabits per second.

After the split in November last year, many of the regulatory burdens Telecom and Chorus faced were lifted. However, the prospect of fresh regulatory change and its impact on Chorus was unhelpful, Harrison said.

"We've just gone through the split. We've just removed a lot of the regulatory overhang if you like around the stock and to reintroduce it is not helpful.

"Offshore investors don't like regulatory risk and particularly if you are trying to convince them to go buy some [shares] of Mighty River Power, they don't want to see regulatory risk being a feature of our market."

Mighty River Power is the first state-owned energy company planned to be partially privatised by the Government.

Chorus shares closed steady yesterday at $3.41.

- NZ Herald

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