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