Chorus profit falls 18pc, narrows UFB build cost

Chorus reported an 18 per cent drop in first-half profit, meeting estimates, as the telecommunications network operator contends with regulated price cuts to sell access to its copper line network, while narrowing the forecast cost to build its nationwide fibre network.

Net profit fell to $64 million, or 14 cents per share, in the six months ended December 31, from $78 million, or 17 cents, a year earlier, the Wellington-based company said in a statement. That was in line with Forsyth Barr's estimate for a profit of $64 million and ahead of First NZ Capital's forecast for $58 million.

Revenue slipped 1.5 per cent to $527 million, while earnings before interest, tax, depreciation and amortisation declined 2.4 per cent to $321 million. Chorus affirmed its annual Ebitda guidance of between $590 million and $605 million.

"This represents another period of solid operating performance by Chorus, underpinned by stable fixed line connection numbers, continuing broadband growth and the ongoing focus on initiatives to address the regulatory price cuts from 1 December 2014," said chief executive Mark Ratcliffe. "A large number of revenue, operating cost and capital expenditure initiatives have now been implemented and Chorus will continue to limit discretionary spending."

Chorus won a small reprieve in the Commerce Commission's draft determination in its final pricing principle to set the charge on the company's regulated copper network, with a smaller reduction flagged than in the regulator's earlier decision. That's still being disputed by Chorus's customers, and the commission has yet to decide whether or not to backdate pricing to the December 1 date when cheaper pricing was legislated to come into effect.

The regulatory uncertainty forced Chorus to reassess its cost structure, with Crown funding helping pay for the fibre network build, and the company has clamped down on a series of other costs to ensure it stays within its banking covenants. It renegotiated the release of government funding with Crown Fibre Holdings, the entity tasked with overseeing the spend, including the suspension of dividend payments until June 30 of this year, or when the regulator's final decision is made.

Chorus's operating cash flow sank to $261 million in the period from $340 million a year earlier, and the company had cash and equivalents of $103 million as at December 31. Its bank debt of $1.58 billion was down from $1.71 billion a year earlier.

The company narrowed its forecast cost for the UFB to between $1.75 billion and $1.8 billion form a previous range of between $1.7 billion and $1.9 billion after negotiating new deployment contracts with Visionstream and Downer, covering about 90 per cent of its rollout areas.

Chorus's average cost to connect per premise was $1,350 in the period, in line with guidance of between $1,150 and $1.350, and it expects that to decline in the second half of the financial year due to its new commercial arrangements.

Total fixed lines rose 5,000 to 1.78 million in the half, with declines in its baseband copper line connections offset by gains in naked basic/enhanced unbundled bitstream access (UBA)/ naked very fast digital subscriber line (VDSL) and fibre connections. Total broadband connections rose 23,000 to 1.19 billion, led by gains in the higher value lines, with VDSL connections up 43 per cent to 70,000, naked VDSL gaining 53 per cent to 23,000 and fibre connections climbing 71 per cent to 53,000.

The increased fibre uptake prompted Chorus to raise its forecast capital expenditure in the 2015 financial year to between $625 million and $650 million from a previous range of $590 million to $640 million.

The shares last traded at $2.83, and have gained 6.4 per cent this year. The stock is rated an average 'hold' based on eight analyst recommendations compiled by Reuters, with a median price target of $2.80.

See Chorus' latest investor presentation here: