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NZ telco Chorus is in dire straits, but is it too cheap to refuse?

It’s been a great year for most companies on the S&P/ASX 200 (ASX: XJO) (^AXJO) this year, but it’s not beer and skittles for everyone.

Shares in New Zealand telecommunication company Chorus (ASX: CNU) have hit an all-time low as the threat of government regulation on the price the company can charge customers looms overhead.

The company has said that under the fixed pricing proposed by the government, the lower cash flows will make it harder to borrow the money it needs to continue to build the country’s fibre-optic network for ultra-fast broadband, a project being co-ordinated in conjunction with government.

Shares in Chorus have plunged almost 18% since Monday. One big risk being contemplated by investors is whether the company can continue to pay a dividend if its cash flow is reduced, or if the company’s credit rating is downgraded.

Yesterday, two investment rating agencies, Moody’s and Standard & Poors, placed Chorus on credit rating watch for possible downgrades, which has the potential to increase the company’s borrowing costs. These borrowing costs are substantial given it is the initial phase of the company’s programme to construct a fibre-optic network across the country.

And Chorus is not getting any sympathy from the government’s opposition. Labour’s economic development spokesman Shane Jones has blasted the company. “Chorus did the deal; it’s called capitalism. They have continued to pay dividends. They have got a contract. They are not the first company to go through a peak in capital investment”, Mr. Jones is quoted as saying by Fairfax media.

So is this an ideal opportunity to buy while there is blood in the streets? At a price-to-earnings ratio of just 5, and strong potential growth it certainly looks attractive. However it is entirely possible that the dividend will be curbed or cut going forward, and the continued regulatory issues make evaluating future potential extremely difficult.

Foolish Takeaway

New Zealand is always going to need the fibre-optic network built, and Chorus is still the company charged with the job. However the breakdown in the partnership between the government and the company looks like it could take a serious toll on the company’s short-term prospects, with an unclear impact on the long term.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned. 

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