Chorus shares were up 5.47 per cent to an all-time high of $9.07 in early afternoon trading, pushing its market cap above $4 billion for the first time.
That's good news for all investors, but particularly Crown Infrastructure Partners, which has built up the largest stake (58 per cent) as it buys non-voting shares as one of the mechanisms for the Government to contribute its share to the costs of the public-private Ultrafast Broadband (UFB) fibre rollout. The Crown will sell down its stake after the PPP project wraps up.
Chorus has been seen as a safe-haven stock as demand for fast internet only increases during the pandemic.
More broadly, as the public-private UFB rollout enters its final couple of years, investors are starting to look ahead to a new era of lower capex and higher cash flow - in turn fuelling a steady escalation in dividends (which came in at 24 cents per share for the year to June 30).
Dividends could double
At Chorus' recent full-year result, CFO Collins said the company was aiming to pay out the "majority of free cash flow" as dividends after 2024, with scope for increases before that during a 2022-24 transition period.
Jarden Research analysts Arie Dekker and Grant Lowe see the really fat profit payouts from FY2023, when they're picking 40 cents per share. They see 45cps then 50cps over the following two years.
Jarden has a neutral rating on Chorus, however, with a 12-month target price of $7.18.
Two factors make Dekker and Lowe wary. One is the rise of fixed-wireless broadband service from Vodafone, Spark and 2degrees, which around 200,000 people are now using as an alternative to a landline - cutting Chorus out of the loop. 5G mobile network upgrades are expected to make fixed-wireless a more potent competitive threat.
The other is uncertainty over the new regulatory regime that will be phased into place as the UFB rollout wraps up (more on which below).
Forsyth Barr analyst Matt Henry maintained Chorus at "outperform" a fortnight ago after its full-year result, but the company has since blown past his 12-month target price of $8.80.
He sees free cashflow of 70cps by 2024, stoking a dividend in the 50-60cps range.
Henry sees the network operator "edging toward regulatory clarity".
He notes that with many companies going in the opposite direction and lowering or suspending dividends, Chorus' anticipated profit payout is all the more attractive.
'Absolutely go higher'
Hamilton Hindon Greene's Mark Hampton told the Herald this afternoon that "Chorus can absolutely go higher".
In his view, investors are looking across the Tasman to the sudden reversal in Melbourne and were looking for stocks that could survive and thrive if we're forced to return to full lockdown here - or another two, or three.
And like his peers, Hampton has his eyes on the dividend prize. He says Chorus' 24cps or 3.64 per cent yield is "pretty attractive today compared to a term deposit".
He adds, "If interest rates fall to zero or negative, as most economists are picking, then we'd expect any decent stock with a dividend yield to increase in value as investors seek that income."
More trench warfare with the ComCom
An update to the Telecommunications Act comes into effect between January next year and mid-2022 and will see Chorus regulated like a utility.
On July 12 the Commerce Commission - which is refereeing how the new legislation is imposed - mooted a change to the way Chorus would be valued, which will in turn feed into the revenue cap that the regulator will impose, and other operating parameters.
Chorus shares swooned, if briefly, as chief executive JB Rousselot said he didn't like the ComCom possibly changing direction from the so-called "building blocks" model at what he saw as the last minute. And today, the newish chief executive underlined that the regulator could be leaning in the wrong direction - from Chorus' point of view - and underplays factors that determine criteria such as the weighted average cost of capital.
On a conference call with analysts on August 24, Rousselot said that, currently, there appeared to be "a significant gap between [the Commission's] retrospective economic assumptions and commercial reality."
Rousselot warned that if the Commission pressed ahead on its current path, investors would be put off future infrastructure projects modelled on the UFB public-private model - and that it could inhibit his company's free cashflow, implying that vision of fatter dividends could be under threat.
His pointed language underlined that a lot of regulatory uncertainty lies ahead, which retail telcos are looking to stoke (Vocus NZ executive Taryn Hamilton recently upped the political volume, saying a Chorus wholesale price rise from October 1, "A cynical profit grab – straight from middle New Zealand's wallets.)
But, for now, investors are ignoring the ComCom-Chorus stoush.
Postscript: The path to $4 billion
Chorus was originally the network wing of Telecom, which was privatised in 1990 by the then Labour government for $4.2b - or $7.7b in today's money.
As a precursor to the UFB, Chorus was carved off and separately listed in 2011, when it opened at $2.94 for a market cap of around $1.3b to Telecom's $4.9b.
Today; the nub of Telecom - Spark - is worth a shade under $9b - putting the combined assets of the old Telecom at around $13b.
Most of Chorus' market cap gain has come in the past two years. For a lot of the 2010s it tread water over regulatory clashes with the ComCom (then over its legacy copper lines), initially low fibre uptake, and financial strains that saw the temporary suspension of its dividend.