Chorus Limited

Company Overview: Chorus Limited (NZX: CNU) is a leading New Zealand-based telecommunications infrastructure company that builds a fibre network. A wide range of service providers uses this network to provide fixed-line phone, broadband and data services.  The company’s product portfolio includes a broad range of wholesale broadband, data, and voice services across a mix of regulated and commercial products. The company’s strategy is focused on developing long-term future of its business, growing new revenues, optimising non-fibre business, and wining core fibre business.

CNU Details

Provider of Fixed Line Communication Infrastructure, Chorus Limited (NZX: CNU) is a New Zealand-based  leading telecommunications infrastructure company.

The company’s FY21 topline and bottom line stood at $947.0 million and $47.0 million, moderately lower  than the FY20 performance at $959.0 million and $52.0 million, respectively.

Exhibit 1: Historical Operating Performance

Source: Company Reports, Analysis by Kalkine Group

Results Performance (FY21 ended 30 June 2021)

• The company’s revenue from continuing operations for the full year period stood at $947 million, a decline of 1% on the previous year. The revenue decline can be attributed to softer market conditions due to the ongoing effects of COVID-19 on demand, together with competition from other fibre and wireless networks.
• Operating expenses for the year reduced by $13 million to $298 million, reflecting the company’s continued tight management of costs and the absence of significant one-off COVID-19 costs experienced in FY20.
• Earnings before interest, income tax, depreciation and amortisation (EBITDA) for the full year period stood at $649 million, an increase of $1 million from FY20. The prior year included a net $12 million COVID-19 impact on EBITDA with a similar impact on EBITDA in FY21.
• Capital expenditure for the period stood at $672 million, as compared to $663 million in FY20, mainly due to the commencement of the West Coast fibre rollout and strong demand for fibre to new property developments, partly offset by $10 million decrease in copper spend.
• Net profit from continuing operations for the full year period stood at $47 million, a decline of 10% on the previous year. Net tangible assets per share for the full year period stood at $1.45, as compared to $1.39 in the previous year.
• The Board of Directors declared a final dividend of 14.5 cents per share, fully imputed, with payment date on 12 October 2021, bringing total dividends for FY21 to 25 cents per share.

Exhibit 2: Key Metrics

Key Data (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the pie chart , which together forms around 41.26% of the total shareholding. L1 Capital Pty Ltd. and Unisuper Limited are holding a maximum stake in the company at 9.96% and 6.44%, respectively.  

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

A Quick Look at Key Metrics: As is obvious from line charts shown below, the company's EBITDA margin improved from 62.7% in FY 2017 to 68.9% in FY 2021 and gross margin improved from 64.3% in FY 2017 to 69.8% in FY 2021, reflecting decent fundamentals. As regard the liquidity profile of the company, the current ratio has improved to 0.44x in FY 2021 from 0.22x in FY 2020.

Exhibit 4: Key Metrics

Source: Analysis by Kalkine Group

Outlook:

The company is on track to its target of one million connections by FY22 underpinned by strong demand for reliable and high-capacity broadband. There has been an unprecedented rise in demand for internet data that supports fibre broadband. Further, the Commerce Commission is in the process to finalise the new fibre regulatory model which aims at a smooth transition into the new regime, stronger consumer protections and better information about broadband technologies. This will help CNU to add more connections at higher speeds.

FY22 Guidance:

The company has provided guidance for FY22 whereby it expects EBITDA   to be in the range of $640 million to $660 million,  gross capex  to be in the range of $550 to $590 million and  the initial dividend  to be around 26 cents per share.

Key Risks:

The company is exposed to a variety of  market risks which include the volatility in electricity prices.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation:

Currently, CNU’s stock is trading below the average of 52-week high-low price range band of $9.39-$6.03. The company’s UFB2 rollout continues to track ahead of schedule. Its Fibre passed another 69,000 premises during FY21.

The stock has been valued using an EV/Sales multiple- based illustrative relative valuation method and  a target price with the potential of low double-digit (in percentage terms) upside, has been arrived. The company might trade at a slight premium to EV/Sales Multiple (NTM) (Peer Average) considering its diversified product portfolio as well as decent outlook.

Thus, we give a “Buy” rating on the stock at the price of NZ$6.510 per share, down by 2.11% on 20^th September 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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