UBS rates out-of-favour Chorus a 'buy', Telecom cut to a 'sell'
Chorus [NZX: CNU], whose shares have halved in value from their 2012 peak, offers long-term value given the prospects for ultra-fast broadband, while Telecom [NZX: TEL] faces a challenge rebranding in a competitive services market, UBS analysts say.
Network operator Chorus is rated a 'buy' in a UBS report this week which cut Telecom, which will rebrand as "Spark" on Aug 8 and is New Zealand's biggest telecommunications provider, to 'sell' from 'neutral'. Shares of Telecom have gained some 45 percent since it split out Chorus in October 2011 as a separately listed company. Chorus's share price has plunged some 51 percent since November 2012, when the Commerce Commission first slashed its regulated prices for broadband services on the ageing copper lines network.
Chorus is now ahead of target building the UFB network, which is expected to deliver long-term profit growth along with its residual rural broadband services, UBS says. Facing regulatory uncertainty, such as regulated copper service price cuts that Chorus said left a $1 billion hole in funding for the government-sponsored national roll-out of fibre-optic cable, the network provider has focused on its cash management and reshaping its operating model, including introducing new products.
"Although Chorus's investment story remains complex, progress on non-regulatory issues is positive," UBS analysts Richard Eary, Tristan Joll and Eric Choi wrote in a July 28 report. "We retain the view that fundamental value will emerge beyond the regulatory maelstrom."
Earlier this month, Chorus cut a deal with Crown Fibre Holdings, the government body overseeing the UFB rollout, to bring forward funding of $178 million though at a high interest rate and the expense of dividends. In March, Crown Fibre gave Chorus greater flexibility in building the network provided it meets an agreed deadline. Chorus also gained more wiggle room under its banking covenants, allowing for weaker earnings relative to its borrowings.
Telecom's long-term profit growth is less clear, according to the UBS report. Income from its fixed lines fell 11 percent to $2.5 billion in the year ended June 30 2013, reflecting the migration of customers to the more competitive mobile market. According to 2013 census data, households with access to a fixed-line telephone fell to 81 percent from 88 percent in the 2006 census, while mobile access rose to 79 percent from 71 percent.
Telecom shares have advanced about 25 percent this year, outperforming the NZX 50 Index's 8.9 percent gain, "with little to support a bolder growth story longer term," UBS said. Telecom is cutting costs and rebranding in its shift away from declining fixed-line calling to focus on data, mobility, internet television and cloud services.
"Our regular tracking of market pricing reveals that competition remains intense," the UBS report said. "On one level this is driving product innovation. On another Telecom's strategic actions speak to a re-positioning of the business."
Shares of Chorus rose 1.2 percent to $1.735 in afternoon trading, below the UBS price target of $2.85. Telecom rose 1.8 percent, snapping four days of decline, to $2.825, above the UBS price target of $2.30.