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Chorus cost clamp-down gives analyst cheer, stock upgraded to ‘buy’

Measures by telecommunications network operator Chorus [NZX: CNU] to achieve $400 million in savings over the next six years to mitigate the impact of looming regulated price cuts has been welcomed by one analyst, who has upgraded the stock to a 'buy'.

Chorus this week announced plans to scale back re-investment in the copper lines, introduce new unregulated revenue streams, and operational cost cutting which will likely include job losses as a means to limit the impact of Commerce Commission-enforced price cuts. The company also suspended payment of an interim dividend.

Craigs Investment Partners research analyst Arie Dekker welcomed the news in a research note, saying the approach being taken seemed measured and sought to achieve realistic savings. He has upgraded the stock to a 'buy' rating from a 'hold', lifting the 12-month price target to $1.80 from $1.58. The shares were recently down 0.7 percent to $1.48.

"With the company addressing factors within its control and catalysts coming up with regards the outcome of discussions with CFH (Crown Fibre Holdings) we do view the risk return trade off as more balanced, which is an important consideration in our upgrade," Dekker said.

"The company did not talk to liquidity but sent a clear signal of its priorities and its desire to avoid raising equity and noted a focus on initiatives and management of key leverage metrics," he said.

Dekker said he doesn't view the company as having the characteristics of a utility, and that it was "important to stress that its long-term value remains heavily influenced by a number of key factors which will take some time to resolve."

Last year the Commerce Commission proposed cutting the network operator's pricing on its copper line services, which Chorus says has left a $1 billion hole in funding the roll out of the government-sponsored ultrafast broadband network.

Chorus is in negotiations with Crown Fibre Holdings over building the network, but Communications Minister Amy Adams has indicated the government expects the company to fill most of the $1 billion funding hole it says has opened because of the impact of price cuts on its cash flow.

The company has discussed a number of potential initiatives with Crown Fibre Holdings, and hopes to announce the end to the first tranche of measures shortly, chief executive Mark Ratcliffe said this week.

Chorus is still mulling other capital management decisions, which it expects to make once there is more certainty around the outcome of the various initiatives and regulatory discussions.

(BusinessDesk)

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