Should you buy, hold or sell Chorus shares?

Chorus (ASX: CNU) is a unique opportunity to own an infrastructure utility business leveraged to the tailwinds of surging data demand and growing dividend, as it transitions from building to operating the New Zealand Ultra-Fast-Broadband (UFB) network.

What does Chorus do?

Chorus is the largest telecommunications infrastructure company in New Zealand. It is the owner of most of the telephone poles, wires and physical exchange assets in New Zealand and has been responsible for building the new fibre optic UFB network, the equivalent of the Australian National Broadband Network (NBN).

The company listed in 2011 out of the demerger of Telecom New Zealand into an operating company (Spark Telecom) and infrastructure company (Chorus), which were separately listed on the New Zealand Stock Exchange and dual listed on the ASX.

Over the past decade, Chorus has built out the New Zealand UFB network in partnership with the government. At the end of 2022, Chorus completed the roll-out of the first stage of the UFB which covers approximately 87% of the population across more than a million premises.

The second stage of the network build is to extend the roll-out to approximately 170 regional towns which is due to be completed by 2024 at a cost of NZ$370m, making fibre available to a further 200,000 homes and businesses.

Holding a privileged monopoly-type position, and as a wholesaler to retail telco service providers such as Spark and Vodafone, Chorus must meet certain service obligations in helping connect home and business customers to the network.

As part of this, it has also transitioned over the last few years to become a regulated utility as it has increasingly moved from building to operating the network.

Strategy and outlook

The appeal of telecommunications fibre assets is they are increasingly seen as the backbone of the modern digital age as demand for cloud-based services, video streaming, teleworking and 5G networks have grown.

Fibre optic lines, consisting of cables of glass fibre, offer the benefit of greater bandwidth, speed and reliability over copper and coaxial technologies, but also - importantly - the potential for future upgrades to hyper fibre (with speeds up to 25 faster than standard fibre broadband).

With growth in the number of connected devices in the home and services such as ultra-high-definition broadcasting, we expect the demand for data will continue to increase and with it, demand for Chorus' services.

Based on data from the World Broadband Association the average number devices per household is expected to increase from 13 in 2020 to 44 by 2030 with the increase in the number of connected appliances and internet-based devices. This should continue to drive upgrades to higher data plans and, with it, average revenue per user (ARPU).

At its recent results presentation, Chorus highlighted connections to the completed UFB network continue to grow and uptake now stands at 73%. Further, average data usage per connection is now back at Covid levels of 585GB per month, and more residential consumers are opting for higher data one-gigabyte plans.

Chorus will face competition from 5G broadband, but we believe the New Zealand Government's commitment to the UFB and nationwide roll-out, topography challenges and superior performance of fibre provide Chorus with a strong and defendable position.

Trends in countries with fibre roll-out levels similar to New Zealand including Japan, Korea, Singapore, Spain, Sweden, Chile, France, Norway and Portugal, where wireless broadband is increasingly seen as an interim technology, are also supportive for Chorus and suggest fibre will remain a compelling proposition for all but a minority of users over the coming decade.

With stage one of the UFB now complete and Chorus pivoting from building the network to operating it, and realigning its business accordingly, we see greater certainty in the free cashflow and dividend trajectory over the next three to four years as capex declines significantly.

Our analysis suggests the current share price implies an expected dividend yield of between 6-7%, with potential for the dividend to grow over coming years.

By way of comparison Transurban, and Sydney Airports when it was listed, have historically traded on dividend yields of around 4-5%, and Telstra is currently trading on 4.6%.

We also see Chorus as being a beneficiary of the recent higher inflationary environment. This should help underpin the key metrics and underlying assumptions in the up-and-coming review for the second regulatory period covering 2025-28 calendar years.

Specifically, it should result in a higher WACC and increase in the maximum allowable revenue which Chorus can earn.

This provides a highly attractive opportunity to own a social infrastructure stock with annuity style earnings trading at an attractive margin of safety.

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