SPK- Spark NZ (TELCO)

[Snoopy]

Snoops …from one of your earlier posts I’m surprised you only want a 0.5% equity risk premium (over bonds)

Doesn’t seem much

On the market today we have the Spark SPF570 bonds (last trade at 5.915%) and SPF580 bonds (last trade at 6.03%), with both showing nothing on offer on either the buy or sell side as I write this. Not very liquid, for one of our largest corporates. But we can say 6.0% in round figures is the current market bond yield.

You think I am being a bit too accepting of 'putting up' with a dividend yield of 6.5% in that context?

Well, I did say that I would be looking for a 10% discount if buying into Spark today on my yield target figure. So that means my 'buy' yield would be at a 6.5%/0.9 =7.2% yield. Still even that number is only 1.2 percentage points above the bond yield. Is that number still not enough?

It is funny how these 'percentages' work. 7.2%/6.0%= 1.2. So another way of looking at this is to say that I am seeking a 'buy in' price at at 20% premium to the last quoted bond rate. Does that sound better?

Since making my post 2076 on this topic, the Spark share price has risen from $4.74 to $4.78. So it is just teetering on my value buy in price target, yet still I have not topped up my holding. What is holding me back? I am still not quite sure that I 'believe' the uplift in profit for FY2023, given all of those one off underlying factors that flowed through the accounts over FY2023.

My sticking point is on p130 of AR2023 where current income tax of $209m is adjusted downwards. The tax bill is normalised by $31m to take account of:
a/ one off costs associated with assets disposed of in the sale of Connexa ($26m),
b/ $2m in the unwinding of deferred tax assets AND
c/ $2m in tax for the current Spark Sport provision.

If I add $30m of tax adjustments back to the FY2023 tax bill, then the underlying tax bill reduces to $178m.

$178m paid in tax implies an underlying gross profit (assuming a company tax rate of 28%) of $178m/0.28 = $611m, which translates to an underlying net profit of $611m-$178m= $433m. But then if I look at the 'Change in Equity' statement for FY2023, fully franked dividends declared over the year added up to $486m. IOW the underlying earnings do not cover the dividend. They are a not insubstantial $53m or 2.9cps short. Yet management are making noises about another modest lift in dividend payments over FY2024! Am I right to be skeptical about Spark's ability to maintain their dividends at even present day levels 'fully franked'?

SNOOPY

[Snoopy]

But to me, this is continuing evidence that the dividend payments currently being dished out by Spark to shareholders are not sustainable in the medium term.

This stuff is getting above my pay grade. But I feel as though I need to crack on just one more step. This post is looking in more detail at the topic of 'Deferred tax' that I touched on in Part 3B (post 2078).

The FY2023 tax picture is clouded by the sell down of mobile tower asset holder Connexia (formerly known as 'Towerco' when it was 100% owned by Spark 'in house'). From AR2023 p130, ('income tax expense' sub note 2):
"Due to the difference between the 'right of use assets' and 'lease liabilities' (Snoopy note: there is that IFRS16 raising its ugly head again) recognised at the date of sale of Connexia, a deferred tax asset of $126m was recognised with a corresponding adjustment (reduction) in tax expense. The balance of the deferred tax asset was $124m as at 30th June."

What the above quote is telling us is that some of what would have been called 'rental costs' (rental fees paid on towers, now a finance charge called lease liabilities) have been 'forward loaded' into the current tax year as a result of IFRS16. And that is resulting in higher expenses and -as a result- a lower tax bill today, than if those towers had not been sold down. (However, this 'shifting of costs' will be recovered eventually by the time the rental agreement has wound up: Today's higher costs will be exactly balanced out by lower costs in compensating financial periods in the future).

Before the mobile network towers were sold, they would have been on the books at 'build value'. But the towers were sold at 'commercial rental value'. The difference between those two values was $583m (AR2023, Section 1.4 sale of Connexa, p95). Why mention this? As a result of the success of the tower sale, the lease liabilities going forwards for Spark are greater than they otherwise would have been, had 'Towerco' been maintained as a fully in house subsidiary. But these larger lease payments are offset by the bumper capital payment received by Spark for the said towers being used (at least partially) to retire debt, with the consequent downstream reduction in interest payments that such a large capital repayment implies.

Separately we learn, (also in AR2023 p130 'income tax expense' sub note 2) :
"The Spark Sport provision (Snoopy note: the winding up of this business unit which saw a loss of $54m booked) had a deferred tax impact at 30th June 2023 of $12m."
For the purposes of deferred tax, and for the purposes of this discussion, I prefer to think of the 'Spark Sport shut-down' by the parent as an 'offset' against against the much larger offsetting towers transaction gain over the FY2023 period.

The whole deferred tax situation is summarised in AR2023 on p96.

"Deferred Tax
Due to the difference between the right–of–use assets and lease liabilities recognised at the date of the transaction, a deferred tax asset of
$126 million was recognised, with a corresponding adjustment (reduction) to tax expense. The balance of the deferred tax asset at 30
June 2023 was $124 million. As noted in the statement of cash flows on page 92, payments for income tax in the year ended 30 June 2023
were $190 million (30 June 2022: $160 million)."

I have to admit I do not understand that quoted paragraph. We are told that there is a $126m deferred tax asset, that reduces tax expense. But then in the very next line we are told that the cash income tax payment -for the same period- from within the cashflow statement has sharply increased from $160m to $190m over the same period. I guess I am just tax stupid. But that paragraph reads to me like a complete contradiction. Has their current year tax bill reduced or not? What on earth are Spark trying to say here?

Moving on to Section 6.1 (AR2023 p131). In the table headed "Deferred Tax Assets and Liabilities" $123m of 'deferred tax assets' under the heading 'leases', are recorded in the current period. I am assuming this is the same figure as the $124m mentioned in the second paragraph of this post, the $1m difference being a 'rounding error'.

Last stop is section 6.5 (AR2023 p135): "Reconciliation of net earnings to net cashflows from operating activities". There we have an entry for 'deferred income tax' of $159m and another entry for the net gain on the sale of Connexia for $583m. I notice that $159m/$583m = 0.273, a figure very close to the company tax rate. A co-incidence? I think not. Despite assets sales as a rule not being taxable, it looks like Spark has booked a deferred tax credit for selling an asset in a transaction where no tax is payable! This is starting to get plain weird.

I guess it has become obvious to any tax accountants reading this post that I have no idea what I am talking about in this tax matter. But for cathartic reasons, I had to put my thoughts down anyway.

SNOOPY

[Ricky-bobby]

Be interesting to know how far they are though their share buy back?.. it will be keeping it propped up.

[ziggy415]

Be interesting to know how far they are though their share buy back?.. it will be keeping it propped up.

Just a whisker over 33,000,000 so only a 1/3 of the way if my maths are correct

[Ricky-bobby]

Thanks Ziggy.

[Ricky-bobby]

Pretty impressed with the customer service of spark lately. Got a double up on a roaming charge on my phn bill. Easy to question the charge and had a reply/result and handy hint for next time within a couple of hours. So good not having to wait on the phone for hours to resolve! Now air Nz is a different story, called 3 times. Same in emails and still no response. Been going for 3 months. Useless!

[ronaldson]

In defense of Air NZ I booked Australia flights for January online yesterday and had a problem allocating my accrued airpoints as a credit towards the fares. Got straight thru to a human being on the phone and was advised to amend my airpoints account profile. Did that and all fixed in less than five minutes.

[winner69]

NBR story

Spark NZ’s chair Justine Smyth has rejected a shareholder’s assertion at the telco's AGM in Auckland today that its share price performance has been worse than the NZX50 index's over the past year.

The comment came from Neil Anderson, who identified himself as speaking on behalf of the New Zealand Shareholders’ Association when he stated the analysis and said it was disappointing given the NZX-listed company has been buying back shares.

“Do you have some comment on that? And what would the company be trying to do to improve the share price, please?” Anderson asked.

Justine basically said

“Certainly the whole NZX market is down, but we don't think on a relative basis that we have suffered more than others. In fact, during that time we have returned to shareholders as well.”


Suppose Justine couldn’t really say buybacks are just a cosmetic thing and at the end of the day rarely add any real shareholder value

[Aaron]

Suppose Justine couldn’t really say buybacks are just a cosmetic thing and at the end of the day rarely add any real shareholder value

We are told buy backs are the best way to reinvest a surplus, but I would have thought increasing your dividend would have been a better way to go.

Hey Winner many years ago were buybacks illegal prior to the Companies Act 1993??

If so why?

[thedrunkfish]

Depends the angle you are looking at it from, in my opinion Spark is undervalued so a buyback makes sense and increases shareholder value.

Another boring share that has been doing nicely lately.