Every Australian investor knows Telstra (ASX: TLS), and is familiar with the National Broadband Network. What is perhaps less well known is that a similar effort is underway across the Tasman – and one value-priced company with irreplaceable assets stands to benefit.
The Kiwi NBN
In New Zealand, dual-listed Chorus (ASX: CNU) has been awarded the rights to build out much of the Ultra-Fast Broadband Initiative (UFB), the Kiwis' equivalent to the NBN.
In completing its portion of this project, Chorus will build "fibre-to-the-premises" in 24 of that nation's largest 33 population centres. As part of the public-private partnership, the New Zealand government is subsidising this work to the tune of nearly NZ $1 billion.
The project is already underway, with the company receiving the subsidy on an incremental basis as it completes the work. While able to use much of its existing network to complete its portion of the UFB, the company still incurs costs in excess of the subsidy (more on this later). Chorus' work on the UFB is due for completion by the end of 2019.
Today, Chorus has nearly two million "fixed line" connections — think home phones, representing some 93% of all New Zealand's fixed lines — and about 1 million total broadband connections. When the UFB work is completed, the company will also possess much of the country's largest and fastest fibre broadband network.
Valuable assets and the key point for investors
With these valuable assets, and following its demerger about two years ago from Telecom New Zealand (ASX: TEL), Chorus is New Zealand's foremost telco "wholesaler."
In short, the company sells access to its considerable telco assets and makes money when, for instance, Telecom New Zealand or another retail company purchases access (for the purpose of selling voice and Internet packages to consumers).
The key point for investors is the irreplaceable nature of Chorus' assets. Such assets should produce plenty of cash, and the company appears committed to paying out much of this cash to shareholders in the form of dividends.
The company has guided to a full-year 2013 dividend payment of NZ 25.5¢ per share, while Chorus shares have lately been trading just north of $2, or less than six times earnings and three times sales. But the sailing isn't guaranteed to be smooth, and there are a few risks current and future investors need to keep in mind.
Costs rising, plus regulatory concerns
It should come as no surprise: Large-scale projects like the UFB are almost always more expensive in implementation than they looked to be in the earlier, planning stages. While Chorus initially estimated the cost of its UFB build to be between NZ$1.4 and $1.6 billion, newer estimates run to between NZ$1.7 and $1.9 billion. The company also has a considerable, but to all appearances manageable, debt load.
Additionally – and this looks to be in part behind the low share price – the regulatory environment is somewhat unclear for Chorus just now. The New Zealand government is able to regulate some of the prices Chorus charges for its various services. In December, a draft ruling from New Zealand regulators warned of a cut to wholesale broadband prices that could significantly affect Chorus' earnings. The company has responded, but the outcome isn't yet clear.
Foolish takeaway
As a value-priced dividend play, Chorus shares could be attractive (but remember, the dividends aren't franked). Investors will want to keep close tabs on the outcome of regulatory decisions before jumping in – so stick this one on your watch list and wait for news before making beautiful music with Chorus.
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Motley Fool writer/analyst Catherine Baab-Muguria does not own share in any company mentioned.
