SPK- Spark NZ (TELCO)

[Snoopy]

A summary of 'the facts we know'.

"Spark had an imputation credit balance of nil as at 30-06-2020" (AR2020 p94, confirmed in AR2021 p100)

A 'nil imputation credit balance' means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the three year period following EOFY2020, what fully imputed dividends were paid out?

Dividends Paid FY2021 & FY2022	Gross Dividend	Net Dividend	Imputation Credits
Second HY dividend FY2020	$319.4m	$230m	$89.4m
First HY dividend FY2021	$320.8m	$231m	$89.8m
Second HY dividend FY2021	$323.6m	$233m	$90.6m
First HY dividend FY2022	$325.0m	$234m	$91.0m
Second HY dividend FY2022	$325.0m	$234m	$91.0m
First HY dividend FY2023	$325.0m	$234m	$91.0m
Total			$542.8m

Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend



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Now, how does that $542.8m imputation credit total paid out line up with the amount of tax paid up by the company over that same period? From the respective cashflow statements:

Income Tax paid over FY2021	$188m
Income Tax paid over FY2022	$160m
Income Tax paid over FY2023	$190m
Imputation Credit Balance Owing EOFY2023	$32m	(See AR2023, p131)
Total	$570m

This means enough tax has been paid to cover those fully imputed dividends. Or perhaps more correctly, enough tax would have been paid, if Spark had got around to paying that outstanding tax debt of $32m of imputation credits owing! But the imputation credit balance isn't really owing (yet), because of the mismatch of the ending of the Spark reporting financial year (30th June) , and the Spark tax financial year that ends 9 months later (31st of March of the following year). That means the unpaid imputation credit balance of $32m is actually an accounting construct, caused by Spark choosing to put a line under their year at the end of 30th June, while the same $32m is a bill 'not yet due' from an IRD perspective.

There is a reported deficit on income tax credits, - which is odd in itself as I was under the impression that income tax credits could not be issued to shareholders until the underlying tax bill was paid (does this mean that the negative imputation credit balance as at 30th June was brought up to zero 'and then some' ($32m+$91m= $123m) before the payment of the final dividend in October, despite the negative imputation credit balance payment not being required to be paid by the IRD until 31st March the following year? - I guess it does!) So does all of this line up with the income tax payments expected to the IRD as reported to the half year ended 31st December 2022 (EOHY2023)? 'Kind of' - the half year cashflow statement shows income tax payments to the IRD of $120m over that period. That means the income tax payment by the final dividend payment date looks to have been $3m shy.

A summary of 'the facts we know'.

"Spark had an imputation credit balance of nil as at their balance date of 30-06-2020" (AR2020 p94, confirmed in AR2021 p101)

A 'nil imputation credit balance' @30-06-2020 means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the period following EOFY2020, what fully imputed dividends were paid out? We can find this information under financial note 4.5 in the respective annual report(s) titled "Equity and Dividends."

Dividends Paid FY2021 & FY2022 & FY2023	Gross Dividend	Net Dividend	Imputation Credits	Declared HY Net Earnings
Second HY dividend FY2020 (12.5cps)	$319.4m	$230m	$89.4m	$147m
First HY dividend FY2021 (12.5cps)	$320.8m	$231m	$89.8m	$234m
Second HY dividend FY2021 (12.5cps)	$323.6m	$233m	$90.6m	$179m
First HY dividend FY2022 (12.5cps)	$325.0m	$234m	$91.0m	$231m
Second HY dividend FY2022 (12.5cps)	$325.0m	$234m	$91.0m	$165m (2)
First HY dividend FY2023 (13.5cps)	$350.0m	$252m	$98.0m	$298m (3)
Sub Total		$1,414m	$549.8m	$1,254m
Second HY dividend FY2023 (13.5cps)	$345.8m	$249m	$96.8m	$157m
Sub Total		$1,663m	$646.6m	$1,411m
First HY dividend FY2024 (13.5cps)	$340.3m	$245m	$95.3m	$?m
Total		$1,908m	$741.9m	$?m

Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend
Note that the first dividend shown in the above table, paid on 20th October 2020 was fully imputed, as have been all dividends since.

2/ Normalised profit calculation for FY2023 HYR2023 Note 5: $837m-$584m+$52m-$140m=$165m

3/ For FY2023, I have removed from the declared profit, one off transactions to create an estimate of the ongoing 'operating profit'. Specifically my adjustments were:
3i/ The $583m one off net gain on the sale of Spark's majority interest in Connexa, the mobile phone tower holding company, was subtracted (AR2023 p95).
3ii/ The subsequent revaluation upwards of the Spark stake in Connexa following the 'Connexa 2 degrees' transaction (a $5m gain in an invested entity valuation) was subtracted (AR2023 p94).
3iii/ One off costs associated with the selling down of Spark's share of Connexa, totalling $30m, were added back.
"$26m for the costs associated with the assets disposed of in the sale of Connexa, $2m for the unwinding of a deferred tax asset associated with the Connexa transaction and $2m of current tax adjustment for the Spark Sport provision. (AR2023 p130 under sub note 1 (under 'income tax expense' header).
3iv/ The $54m loss on the closing of Spark Sport was added back (AR2023 p94).
3v/ Tax effect of Connexa sale, Spark Sport write down and the subsequent dilution effect from the 2 degrees towers being folded into Connexa, diluting the Connexa holding of Spark but also modestly increasing the value of that stake: Total $168m. (AR2023 p103).

Total FY2023 Profit Adjustment = (-$583m+$54m-$5m+$30m) -$168m = -$672m
Total Normalised FY2023 Profit = $1,135m - $672m = $463m





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Now, how does that $646.6m imputation credit total paid out line up with the amount of tax paid up by the company over the SOFY2021 to EOHY2024 reference period? From the respective cashflow statements:

Income Tax paid over FY2021	$188m
Income Tax paid over FY2022	$160m
Income Tax paid over FY2023	$190m
Income Tax paid over HY2024	$101m
Imputation Credit Balance Owing EOHY2024	$?m	(Balance owing was 'nil' at 31/03/2024, but not declared at 31/12/2023)
Confirmed Total	$639m

At this point I should record that 'cash payments' of tax in any particular year can include wash up payments for a previous year and forecast provisional payments for an ensuing year. So if you compare the tax payments from the cashflow statement for any particular year, and try to compare that to the NPBT for the year multiplied by 28% (the company tax rate), then those two numbers may not be equal, But if you do a sum comparison over many years those single year tax differences will tend to average out.

This means almost enough tax has been paid to cover those fully imputed dividends to EOHY2024. The figures imply that at EOHY2024, there was a negative imputation credit balance (tax debt owing) on the books of: $646.6m-$639m=$7.6m to 'close the gap'. Spark are only legally required to 'close that gap' (not have a negative imputation credit balance) for 'tax not paid' by 31st March of the following calendar year (31-01-2024). That explains why they haven't done it - a prudent conservation of cash measure no doubt - at the HY2024 reporting date (31-12-2023).

The problem that remains is that when we add up operational earnings, in this case for a 3.5 year period, the sum total is significantly less than the net dividends paid out over that same period. Sure if you add back the one off profit from the Connexa sale, then the dividends paid since our reference date are perfectly affordable. But pumping up dividends (and the supporting tax payments to IRD to allow full dividend imputation?) from either borrowings or the proceeds from asset sales, did not seem sustainable to me a year ago. And it still doesn't now.

SNOOPY