Bullish forecasts for Chorus value from L1 Capital, New Street Research

Firms say Chorus is presently significantly undervalued

Chorus' largest shareholder, Australian investment fund L1 Capital, and UK based market analyst firm, New Street Research have both expressed views that Chorus is presently significantly undervalued.

In an investor presentation posted on the ASX on 26 March L2 Capital's listed entity L1 Long Short Fund (ASX: LPF) — which owns 14.8 percent of Chorus — said: "We believe the shares remain extremely undervalued and expect dividends to accelerate over the next five years."

It noted that Chorus' share price had rallied 60 percent in the past year due to new legislation that will see Chorus’ fibre assets form a regulated asset base (RAB) and said this would result in more stable earnings and enable higher gearing.

Chorus has been one fund's largest investments since its inception in September 2014 when it bought in at $A1.60 ($1.65). On 27 March they were trading at $A5.585 ($5.67).

Earlier in March New Street Research initiated coverage of Chorus, publishing a note in which it said its discounted cashflow valuation of Chorus implied a share valuation of over $9.00 per share. It said this would require a RAB valuation of over $6.0b with approximately 10 percent of value in unregulated income.

However New Street Research said: "Finalising Chorus’s RAB valuation is likely to be a contentious affair in New Zealand; notwithstanding a relatively tight legislative framework there is extensive room for regulatory opportunism.

"In the meantime we expect Chorus share price will vary both with regulatory developments as well as several operating and peak capital expenditure factors that will determine peak debt, the rate at which debt may reduce and shareholders be rewarded for risks they have faced over the past decade."

New Street Research noted that Chorus share price had increased 36 percent over 12 months as regulatory risk had reduced, saying: "We expect share price to continue to appreciate at a good rate through the next 12 months as regulatory uncertainty reduces further."

Read more: Chorus to rein in subcontractors following employment law breaches

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