80% Fiber Uptake Will Transform Fixed Network Connectivity

Key Takeaways

• Accelerated fiber rollout, rising data usage, and regulatory predictability boost margins, cash flow, and support stable, inflation-linked returns with sustainable dividend growth.
  
• Expansion into wholesale, data center connectivity, and market consolidation positions Chorus for new revenue streams and entrenched industry importance.
  
• Structural market decline, economic headwinds, regulatory uncertainty, and rising competition could constrain Chorus's revenue growth, margins, and returns on significant capital investments.

Catalysts

Engages in the provision of fixed line communications infrastructure services in New Zealand.

• Ongoing migration from copper to fiber, with planned completion ahead of schedule and targeted 80% fiber uptake by 2030, is likely to deliver operating leverage from lower maintenance costs and capex requirements, improving net margins and free cash flow.
  
• Data usage per fiber customer continues to set record highs, and secular growth in applications demanding high-speed, low-latency connectivity (e.g., cloud, remote work, streaming, IoT trials with councils/utilities) supports sustained ARPU growth and expanding revenue opportunities as customers eventually uptrade to higher-tier plans.
  
• Regulatory certainty on fiber revenue and capex allowances until 2028, along with potential copper deregulation, provides predictable, inflation-linked returns and margin stability, reducing risk to future earnings and supporting sustainable dividend growth.
  
• Strategic opportunities like the proposed Tasman Ring subsea cable position Chorus to capture growing wholesale revenue from data centers, international connectivity, and cloud infrastructure-areas tied to accelerating digital transformation and industry demand for capacity, potentially expanding revenue and EBITDA from FY28.
  
• Consolidation of the fixed-line infrastructure market and increased wholesale partnerships (driven by telco divestments) could further entrench Chorus's network as critical national infrastructure, opening up incremental revenue streams and driving long-term earnings growth.

Chorus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chorus's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.9% today to 10.5% in 3 years time.
• Analysts expect earnings to reach NZ$117.7 million (and earnings per share of NZ$0.22) by about July 2028, up from NZ$-19.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$136.6 million in earnings, and the most bearish expecting NZ$80.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.1x on those 2028 earnings, up from -193.2x today. This future PE is greater than the current PE for the NZ Telecom industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.84%, as per the Simply Wall St company report.

Chorus Future Earnings Per Share Growth

Risks

• Ongoing economic recession in New Zealand has led to customers downgrading from higher ARPU fiber plans to lower-cost entry-level plans, and has slowed overall fiber uptake growth, which if prolonged, could put sustained pressure on Chorus's revenue growth and margins.
  
• The fixed-line broadband market is experiencing a structural decline, as evidenced by a continuing fall in total fixed connections (down 35,000 lines year-on-year) and copper line disconnects, raising risk of a shrinking core customer base and potential long-term revenue contraction.
  
• Regulatory risks persist: while Chorus has clarity on fiber regulation until 2028, there is uncertainty regarding ongoing copper regulation and the timing of future deregulation, which could result in unfavorable pricing, delayed cost reduction, or further regulatory intervention that compresses net margins and limits pricing flexibility.
  
• Competition from fixed wireless and mobile operators is significant, with Chorus explicitly noting some impact from 5G and market churn; this secular trend towards mobile-first connectivity could cap Chorus's future growth in fixed network revenues and result in margin stagnation or erosion.
  
• Significant capital investments (e.g., on the Tasman Ring subsea cable and fiber rollout in new areas) are subject to presale demand and government funding; lack of sufficient uptake, delayed government support, or overestimated demand could lead to suboptimal capital allocation and impair future return on invested capital, negatively impacting earnings and free cash flow.

Valuation

• The analysts have a consensus price target of NZ$8.6 for Chorus based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$9.83, and the most bearish reporting a price target of just NZ$7.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$1.1 billion, earnings will come to NZ$117.7 million, and it would be trading on a PE ratio of 31.1x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of NZ$8.46, the analyst price target of NZ$8.6 is 1.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.