SPK- Spark NZ (TELCO)

[bull....]

UK lawmakers accuse Huawei of ‘collusion’ with Beijing, say telco’s gear may be axed from British networks by 2025

https://www.cnbc.com/2020/10/08/huawei-accused-of-collusion-with-china-communist-party-uk-lawmakers.html

[bull....]

Spark NZ Enters A Trans-Tasman IoT Network Sharing Agreement With Australian Network Operator
https://www.scoop.co.nz/stories/BU2010/S00155/spark-nz-enters-a-trans-tasman-iot-network-sharing-agreement-with-australian-network-operator.htm

[tango]

Spark share price is languishing
I know one broker was recommending it for the div yield but the price has been heading south for a while ;)

[Cyclical]

spark been in the doldrums bit since div was paid but seems to be finding some love today , maybe as a high div player it is started to be noticed again after the others have all run hard lately


Spark share price is languishing
I know one broker was recommending it for the div yield but the price has been heading south for a while ;)

2 months on from Bull's comment and it's same same. Is it just a bit unloved because it's a boring blue chip and there're plenty of other more exciting options out there? Or is there a fundamental problem somewhere? Doesn’t get a lot of coverage on ST, which probably reiterates the fact it's a bit boring. 5+% div yield ain't bad in today's environment but. I might add a few more to the kid's portfolio.

[dln]

Yep, just topped up a few.

[bull....]

2 months on from Bull's comment and it's same same. Is it just a bit unloved because it's a boring blue chip and there're plenty of other more exciting options out there? Or is there a fundamental problem somewhere? Doesn’t get a lot of coverage on ST, which probably reiterates the fact it's a bit boring. 5+% div yield ain't bad in today's environment but. I might add a few more to the kid's portfolio.

probably never going to be a fph but adds a bit of yield to the portfolio

[peat]

prospects of significant growth a bit limited I would think.... and the risk of technology change remains forever present. those are the reasons its not in my portfolio.

[airedale]

prospects of significant growth a bit limited I would think.... and the risk of technology change remains forever present. those are the reasons its not in my portfolio.
Hi Peat, you could say the same thing about most of the utilities, but I suggest that they are useful "ballast" in a portfolio. They never shoot the lights out and they seldom go broke.

[Cyclical]

prospects of significant growth a bit limited I would think.... and the risk of technology change remains forever present. those are the reasons its not in my portfolio.

Yep, fair comments. Although the technology change risk has always been there and Spark has proven over the years to be pretty good at embracing it, moving with the times, fending it off, reducing cost, or whatever is required to keep trucking along. The only reason I sometimes look at it currently is the rest of the market is starting to look a bit heady, IMO.

[mondograss]

Also in a bit of a downtrend at present, through most of the last 5 years it's traded in a channel of approx $3.12 - $4.32 and it's only really since Sept 2019 that it's broken out of that range and cycled around the $4.50 mark. I'm inclined to watch it a while longer and see if it breaks down or can sustain at current levels as people cycle away from defensive utilities and back towards growth.

[dibble]

Also in a bit of a downtrend at present, through most of the last 5 years it's traded in a channel of approx $3.12 - $4.32 and it's only really since Sept 2019 that it's broken out of that range and cycled around the $4.50 mark. I'm inclined to watch it a while longer and see if it breaks down or can sustain at current levels as people cycle away from defensive utilities and back towards growth.

Not an unreasonable approach but the yield is consistent and compelling, especially so in a long term low int rate setting. Plus said low/minimal growth ought at least keep pace with inflation. There will continue to be a lot of money (ever growing kiwisaver?) seeking cash-cow-yield so decent chance it has a new floor above $4. Its also in Milford's top NZ holdings.

[peat]

good points guys and I certainly dont disagree. portfolios are quite personal and can be constructed in many different ways to achieve successful outcomes.





Hi Peat, you could say the same thing about most of the utilities, but I suggest that they are useful "ballast" in a portfolio. They never shoot the lights out and they seldom go broke.


Yep, fair comments. Although the technology change risk has always been there and Spark has proven over the years to be pretty good at embracing it, moving with the times, fending it off, reducing cost, or whatever is required to keep trucking along. The only reason I sometimes look at it currently is the rest of the market is starting to look a bit heady, IMO.

[tomm]

4 out of 7 brokers picked Spark for 2021, pretty solid! .It shall go with an up trend to follow Infratil as they mentioned.

[Sideshow Bob]

Ouch - Net Profit down 11.4%!

Spark New Zealand Limited H1 FY21 Results - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/368068)

[ratkin]

Ouch - Net Profit down 11.4%!

Spark New Zealand Limited H1 FY21 Results - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/368068)

Pretty ugly result that. Vodafone might not do to well either by the sound of that report.
The trouble with all these companies is the rapid pace of change that we have now. Hard for them to keep up.

[Getty]

Ouch - Net Profit down 11.4%!

Spark New Zealand Limited H1 FY21 Results - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/368068)

Might be just a sideshow Bob.

To many, the Main Event with this stock is the divvie, and they have kept that intact.

[850man]

Pretty ugly result that. Vodafone might not do to well either by the sound of that report.
The trouble with all these companies is the rapid pace of change that we have now. Hard for them to keep up.

Spark hit by covid and no international roaming revenues as well as businesses overall just tightening their belts or shutting up shop. Voda will be the same I would imagine. Good they are sustaining the divvie but can this continue if the profit remains down?

[Mr Slothbear]

Pretty ugly result that. Vodafone might not do to well either by the sound of that report.
The trouble with all these companies is the rapid pace of change that we have now. Hard for them to keep up.


yes exactly high tech change and 2 degrees is eating their lunch

[Ohdoyle]

Pretty ugly result that. Vodafone might not do to well either by the sound of that report.
The trouble with all these companies is the rapid pace of change that we have now. Hard for them to keep up.

Now I've actually read the results I actually realise not particularly ugly. Revenue within guidance.

Dividend confirmed for upper end of guidance and fully imputed.

Net profit down but a big chunk of that due to depreciation.

I'm inclined to think this is actually a good result. Nothing amazing but slightly better than expected.

The dividend yield continues to look attractive.

[Joshuatree]

How does this work?! Is it using 5G? How do they not use the Fibre.Im a recent convert to Fibre.I can see the advantage for Spark , they keep all the fees and cut Chorus right out.And up to 10 times faster.! Im the first to admit ,this techno phobe cant keep up

NZ Herald
Spark CEO Jolie Hodson wants 30-40 per cent of fixed-line broadband customers on wireless



"A quiet revolution is happening in New Zealand broadband.
Spark and Vodafone are in the process of shifting hundreds of thousands of customers on to fast internet technology that's completely outside the Ultrafast Broadband (UFB) fibre rollout that has cost Chorus and the Crown some $3.5 billion."

[Mr Slothbear]

How does this work?! Is it using 5G? How do they not use the Fibre.Im a recent convert to Fibre.I can see the advantage for Spark , they keep all the fees and cut Chorus right out.And up to 10 times faster.! Im the first to admit ,this techno phobe cant keep up

NZ Herald
Spark CEO Jolie Hodson wants 30-40 per cent of fixed-line broadband customers on wireless



"A quiet revolution is happening in New Zealand broadband.
Spark and Vodafone are in the process of shifting hundreds of thousands of customers on to fast internet technology that's completely outside the Ultrafast Broadband (UFB) fibre rollout that has cost Chorus and the Crown some $3.5 billion."






they’re doing their customers a disservice in the name of profit.

Providing fibre internet as the retailer is low margin whereas they can extract much bigger margins from fixed wireless while the customer gets poorer speed, more latency and more variability in service quality in the majority of situations.


there are rural situations where customers will either never get fibre or its still years away where fixed aireless does make good sense but certainly not for the majority.

[Joshuatree]

But what is fixed wireless Mr slothbear, are they not using the fibre that Chorus put in?

[Mr Slothbear]

But what is fixed wireless Mr slothbear, are they not using the fibre that Chorus put in?


no fixed wireless uses cellular infrastructure e.g 4g and 5g mobile towers. The vast majority will be using 4g

[LaserEyeKiwi]

they’re doing their customers a disservice in the name of profit.

Providing fibre internet as the retailer is low margin whereas they can extract much bigger margins from fixed wireless while the customer gets poorer speed, more latency and more variability in service quality in the majority of situations.


there are rural situations where customers will either never get fibre or its still years away where fixed aireless does make good sense but certainly not for the majority.

Where I live (Central Wellington) - my 4G/5G cellular speed is much faster than my fibre connection.

Rural users will quickly flock to Starlink now that they are starting to roll it out here (Starlink is designed with rural users in mind - $99USD a month for 100-300mb download speed - after you shell out $799 for a receiver) - Spark will be fine catering to cities & towns and foregoing the rural user (probably will be quite happy to abandon them for broadband (given the expense in needing to provide that), as they will still need cellular voice services at least.

[mondograss]

Yes you just have a 4g modem with a SIM card in it. Basically just a glorified hotspot. But you’re not supposed to take it anywhere else like your bach. Hence the “fixed”. Mum uses it via Skinny, much cheaper than Spark fibre and quite adequate for email and Netflix.

[Mr Slothbear]

Where I live (Central Wellington) - my 4G/5G cellular speed is much faster than my fibre connection.

Rural users will quickly flock to Starlink now that they are starting to roll it out here (Starlink is designed with rural users in mind - $99USD a month for 100-300mb download speed - after you shell out $799 for a receiver) - Spark will be fine catering to cities & towns and foregoing the rural user (probably will be quite happy to abandon them for broadband (given the expense in needing to provide that), as they will still need cellular voice services at least.


this could be due to a variety of factors including which fibre product you’re getting, internal wiring, your computer specs, ethernet cable, modem model etc... etc...

I can assure you the 2000-4000 (tel:2000-4000) mbps hyperfibre will decimate 5g.even gigabit fibre will beat it in latency and consistency which are two of the most important factors once things get above a certain speed. As mondogoose rightly points out fixed wireless is fine for checking emails but so is hotspotting off ones phone, if you want anything actually demanding like running a server or gaming you’ll absolutely want fibre


you’re also right about starlink it will also give very good comptetition and more options for rural

[mcdongle]

Dont most pc's only have a 1 gig LAN? Or can you get faster download speeds on it somehow?:confused:

[oldtech]

Dont most pc's only have a 1 gig LAN? Or can you get faster download speeds on it somehow?:confused:

Yes ... but how many households have only one PC using their link? You can easily have three, four, five or more devices all contending for bandwidth in one household.

[mcdongle]

Yes ... but how many households have only one PC using their link? You can easily have three, four, five or more devices all contending for bandwidth in one household.

What i am trying to get at is, To get speeds faster than a gig on a pc people will have to upgrade it....??

[nztx]

With Telstra announcing delisting from NZX from June back to solely ASX - maybe NZ Telco's & Infrastructure companies
will see slightly more attention..

[mikelee]

happy with the annual dividend but really disappointed with the SP...finally hit $5 earlier but didn't last long at all
can't believe how resilient AIA is by comparison

[bull....]

happy with the annual dividend but really disappointed with the SP...finally hit $5 earlier but didn't last long at all
can't believe how resilient AIA is by comparison

spk has a habit of declining after div , the last time it took a while to get back to pre - div levels. but this time things have changed a bit due to rising bond yields so it may be harder this time as spk is a bond proxy stock

[mikelee]

do you think it might have to do with Sky TV's recent product announcement too? I doubt anyone can compete with Spark's share of the corporate business, even Air NZ switched from Vodafone to Spark a few years ago.

[Snoopy]

Planning to buy more SPK than any other share, just waiting for the right time.


Some choose when to buy their Spark shares. Others, like directors for example, have less choice. Their buying and selling is restricted to a limited window, after both the full year and half year result release dates. But how many shareholders know the Spark directors are 'forced' shareholders, no matter what they may think about the prospects of the company? This was first mentioned in AR2017 p90:

"All non-executive directors are encouraged to hold Spark shares. Subject to personal circumstances (that should be discussed with the Chair, or in the case of personal circumstances of the Chair, with the Chair of the Audit & Risk Management Committee, as appropriate) there is an expectation that each non-executive director will hold an amount of shares equivalent to the non-executive director base member fee to be purchased over a three year period from the date of their appointment or in the case of directors appointed before 1st July 2017 over a three year period from that date."

Using this information I thought it would be interesting to draw up a list of the non-executive directors and see how they sit on the ENU shareholder scale, where E stands for 'Enthusiastic', N stands for 'Neutral' and 'U' stands for 'Underdone'. AR2020 p103 shows Chair fees of $368,700 and non-executve director fees of $145,200. The Spark share price closed today at $4.75.

That means for a 'neutral' position, a non-executive director must hold: $145,200 / $4.75 = 30,568 shares

And to be neutral, the Chair must hold: $368,700/$4.75 = 77,621 shares

Lined up against these standards, how is the board doing? Because the share price goes up and down, for the purposes of this exercise I will describe any holder of shares within 10% of the 'neutral number' as 'neutral'.

Number of Spark Shares held by Directors (AR2020)



DirectorEnthusiasticNeutralUnderdone


Alison Barass37,716


Paul Berriman20,000


Warwick Bray0


Pip Greenwood33,325


Ido Leffler32,000


Charlie Sitch32,729


Justine Smythe (Chair)375,201



Good marks for Justine Smythe and Alison Barass, showing their enthusiasm for the company via their shareholdings.

Pip Greenwood, Ido Leffler (joined the board 2014) and Charlie Sitch (joined the board 2011) are playing the game by the book, with their minimum holdings. Pip Greenwood did not join the board until April 2018. By the rules she had until April 2021 to accumulate a satisfactory holding. So I do give Pip some bonus points for 'getting in early'.

Paul Berriman has been on the board for ten years. So it isn't a good look for him to be snubbing the minimum shareholding requirement. Warwick Bray has the excuse of only joining the board in September 2019. By the director share accumulation rules, he would not be expected to finally accumulate his required holdings until September 2022. But he seems in no hurry to accumulate his Spark shares, which is not a good look.

So there you have it. Under ordinary circumstances it would be good to see so many of the board with 'skin in the game', overseeing the business with their 'owner's eye'. However, having read and understood the minimum share ownership requirements for non-executive directors at Spark, the 'Enthusiasts' are cancelled out by those 'Underdone'. Overall director engagement with Spark, as expressed via shareholdings of the non-executive directors, looks a bit ho hum. But I will be polite and call it 'neutral'.

SNOOPY

[850man]

Snoopy - a bloody good question at the shareholders meeting, why the directors have so little personal comittment in the company they are running.

[Snoopy]

Snoopy - a bloody good question at the shareholders meeting, why the directors have so little personal comittment in the company they are running.


It is a tricky one. The Chair, Justine Smythe, has nearly $1.5m of her own cash in Spark shares. That sets a good example to the rest of the board, and I would imagine an investment of that size would 'focus the attention'. Mind you with an annual cash consideration of $375,000 from Spark, Justine probably has a bit more spare cash to invest than most, including those regular director paupers who have to make do with just $145k per year.

If I didn't know about the policy of demanding directors to hold shares, I would have been quite pleased with the level of director shareholding. $150,000 worth of shares is not a trivial amount of skin to have in the game for a 'run of the mill' director. But somehow, seeing a shareholding level is forced, diminishes the public commitment of a director in my eyes.

Personally I think it is more important for the 'executive team' to have skin in the game rather than the 'governance team'. There is an argument for non-executive directors to be well remunerated, and Spark directors certainly are that, but not have any shares. That allows the governors of the company have one level of separation from management. Having skin in the game can also give you blinkers.

SNOOPY

[winner69]

It is a tricky one. The Chair, Justine Smythe, has nearly $1.5m of her own cash in Spark shares. That sets a good example to the rest of the board, and I would imagine an investment of that size would 'focus the attention'. Mind you with an annual cash consideration of $375,000 from Spark, Justine probably has a bit more spare cash to invest than most, including those regular director paupers who have to make do with just $145k per year.

If I didn't know about the policy of demanding directors to hold shares, I would have been quite pleased with the level of director shareholding. $150,000 worth of shares is not a trivial amount of skin to have in the game for a 'run of the mill' director. But somehow, seeing a shareholding level is forced, diminishes the public commitment of a director in my eyes.

Personally I think it is more important for the 'executive team' to have skin in the game rather than the 'governance team'. There is an argument for non-executive directors to be well remunerated, and Spark directors certainly are that, but not have any shares. That allows the governors of the company have one level of separation from management. Having skin in the game can also give you blinkers.

SNOOPY

Snoopy - the red bit is so true

Having 'skin in the game' can diminish ones 'independence' (if they are an independent / non-executive director)

Like 'what's in it for me' instead of 'what's best for stakeholders' (see I didn't say just shareholders)

[percy]

Snoopy - the red bit is so true

Having 'skin in the game' can diminish ones 'independence' (if they are an independent / non-executive director)

Like 'what's in it for me' instead of 'what's best for stakeholders' (see I didn't say just shareholders)

Think of shareholders with skin in the game,or on the line.and you will find their companies are the most successful.
.
Mainfreight.
Freightways,
Ebos
Push pay holdings.
Delegats.
Hallensteins Glasson.
Heartland Group Holdings.
Ryman.
Turners.
Briscoes.
Berkshire Hathaway.
Apple
Tesla
About the first thing I look for when investing.Directors with skin on the line.
I try to avoid companies where directors have small or no holdings.

[Snoopy]

Snoopy - the red bit is so true

Having 'skin in the game' can diminish ones 'independence' (if they are an independent / non-executive director)

Like 'what's in it for me' instead of 'what's best for stakeholders' (see I didn't say just shareholders)


I am thinking back now to the Telecom days before it split into Chorus and what is now Spark. Wasn't there a 'kiwishare' held by the government that could have been used to look after non-shareholder stakeholders? I don't recall the government doing much with it 'in the day'. But I guess it was always there 'as a threat' should the board choose to take advantage of their monopoly position. Was the kiwishare tied up with local free calling and inflation linked maximum lines charges? Funny, I can't remember what happened to that Telecom kiwishare. Can anyone recall?

I want to 'have my cake' and 'eat it' with director shareholdings. I am quite happy to see directors buy shares on market, as a sign of genuine confidence in the company. But I want them to consider the wider industry picture too and not have their decision making skewed simply because they are shareholders.

SNOOPY

[BlackPeter]

I am thinking back now to the Telecom days before it split into Chorus and what is now Spark. Wasn't there a 'kiwishare' held by the government that could have been used to look after non-shareholder stakeholders? I don't recall the government doing much with it 'in the day'. But I guess it was always there 'as a threat' should the board choose to take advantage of their monopoly position. Was the kiwishare tied up with local free calling and inflation linked maximum lines charges? Funny, I can't remember what happened to that Telecom kiwishare. Can anyone recall?

I want to 'have my cake' and 'eat it' with director shareholdings. I am quite happy to see directors buy shares on market, as a sign of genuine confidence in the company. But I want them to consider the wider industry picture too and not have their decision making skewed simply because they are shareholders.

SNOOPY

The "new"Kiwi share agreement (now 20 years old):
https://www.beehive.govt.nz/release/government-announces-updated-kiwi-share-obligation

and what happened with it:
https://teara.govt.nz/en/cartoon/25627/telecom-kiwi-share

12824

Actually - I think it is legally still in place in areas where customers don't have the option yet to connect to fibre ...

[dobby41]

Was the kiwishare tied up with local free calling and inflation linked maximum lines charges? Funny, I can't remember what happened to that Telecom kiwishare. Can anyone recall?


The kiwishare had nothing to do with shareholders and all to do with ensuring standards were met - standards around the PSTN (Public Switch Telephone Network) and dial Internet (at the time).

[Snoopy]

The kiwishare had nothing to do with shareholders and all to do with ensuring standards were met - standards around the PSTN (Public Switch Telephone Network) and dial Internet (at the time).


Yes I realise that the kiwishare was a stakeholder not a shareholder benefit. I wouldn't say it had nothing to do with shareholders though, as they had to pay for it! (see my quote from Blackpeter's reference below):

--------

The updated Kiwi Share:

·Clarifies that free local calls include standard calls to the Internet and fax calls;
·Brings basic Internet access to virtually all New Zealanders by upgrading Telecom’s network to provide 9.6kbps data capability to 99% and 14.4 kbps to 95% of existing lines over the next two years (Telecom to bear the capital cost of this upgrade)

--------------------


The "new"Kiwi share agreement (now 20 years old):
https://www.beehive.govt.nz/release/government-announces-updated-kiwi-share-obligation

and what happened with it:
https://teara.govt.nz/en/cartoon/25627/telecom-kiwi-share

12824

Actually - I think it is legally still in place in areas where customers don't have the option yet to connect to fibre ...


I guess the fact that the 'new' kiwishare arrangement is now 20 years old gives me some excuse for not being able to remember all the details! I got weaned away from PSTN by Spark onto the wireless broadband network in 2018. I got the sweetheart $53.50 a month deal (including GST), where I can have free unlimited toll calls to the landline network around NZ. That is handy when you ring up Inland Revenue and they keep you waiting on the line for two hours. I even get 5GB of wireless broadband data thrown in a month too, which is enough for my text based internet use. I am not sure if this plan is available any more. Unfortunately I read something in AR2020 about Jolie Hodson threatening to streamline the customer plans available. So my luck to be on this plan may be about to run out!

I wonder if my current wireless broadband access meets the old kiwishare standard of 9.6kbps? I should do a speed test. Not sure what will happen if it fails. Maybe I should fax Spark?

SNOOPY

[BlackPeter]

...

I wonder if my current wireless broadband access meets the old kiwishare standard of 9.6kbps? I should do a speed test. Not sure what will happen if it fails. Maybe I should fax Spark?

SNOOPY

I am sure your connection speed will be superior to 9.6 kbs - if you are connected at all. I don't see any modern internet service operating over a 9.6 kbs connection :); Obviously - with wireless broadband being a packet based service ... (perceived) speed for the individual subscriber goes down if number of connections go up.

However - if you just re-check this kiwi share agreement ... it does offer some basic service guarantees for landlines. A telephone connection via wireless broadband is NOT a landline.

I am afraid, you are with that on your own and without protection of the kiwishare agreement.

[oldtech]

From memory, I started online with a 14.4 k modem back in the nineties ...

[winner69]

From memory, I started online with a 14.4 k modem back in the nineties ...


From memory I just stuck the cord directly from computer into the phone plug

[dobby41]

From memory I just stuck the cord directly from computer into the phone plug

14.4k - fancy stuff.
Started with 2k4
Plug the cord into the PC - again fancy having a built-in modem or modem card. Standalone for me. I still have a couple, historic value only.

[winner69]

14.4k - fancy stuff.
Started with 2k4
Plug the cord into the PC - again fancy having a built-in modem or modem card. Standalone for me. I still have a couple, historic value only.

My Eason ‘laptop’ in the early 80’s was the envy of my workmates because it had a built in printer

Couldn’t connect to Internet though

[Snoopy]

Spark are running an experimental program across forty homes in the Waikato in conjunction with the professor of gerontology associated with the Waikato District Health Board.

https://sparkiot.buzzsprout.com/389848/1548460-ep-4-health-wellness

An obvious IoT (Internet of Things) application is the 'asset tracking' of loaned hospital equipment (walkers and wheelchairs for example). But more 'cutting edge' is the application of this technology to directly help people.

Care in the community, via detecting frailty in homes in a pro-active way, and preventing re-admission of a recently discharged patient to hospital is a goal. This can be achieved by using sensor information: Checking movement, whether people are in bed or walking about; checking if lights are being turned; and even monitoring the temperature and dampness of surroundings. Movement declines may be a leading indicator of propensity to fall over. Ryman healthcare and Metlifecare are mentioned as companies interested in this technology. The price point per home for this solution is $30 per month, on top of a mobile phone or broadband plan. An app can be used to monitor this information off site. Such an app would not only be useful to health workers, but be a 'peace of mind' device to children of elderly frail parents.

Using 'sets of data' like this to feed 'artificial intelligence' machine learning might be a future benefit of such a study. Nevertheless data on its own is not an asset: some will be useful information and other irrelevant noise. You have to ask the right question for data to be useful. Data hides insights which have to be drawn out.

Global head of healthcare from Apple (who knew that had one?) visited NZ in 2019, talking about users holding their own health information on their i-phones and being able to transport it around with them so that healthcare professionals in other countries can access it if needed. In NZ healthcare there are 6500-7000 agencies on the provider side. So it is a very fragmented provider set. The thinking is consumers will be more able to adapt to the practical uses of such technology, better than the institutions. Personal vital sign monitoring technology already exists. It is personal and psychological barriers that have to be removed to make sure having such knowledge results in positive outcomes. As an example, It could be a great solution for diabetes management.

Pharmaceutical (for research purposes) and Insurance companies (for risk assessment purposes) are interested, so privacy issues arise. In the US and Canada there are already schemes where patients share data and in 'payment' receive insurance discounts. But this is voluntary.

Someone suffering a chronic asthma attack? A doctor can prescribe an asthma inhaler and the pharmacy can report to the health system if the patient picks it up. But there is no way to know if the inhaler was used in accordance with instructions - until now. Smart Asthma inhalers, that report when they were activated, could be correlated with IoT monitored environmental air quality information supplied by Councils. On a different note, 'broadcasting thermometers' are being tried in Auckland, in fridges of restaurants. A 'too warm' signal could avoid ineffectively stored food causing salmonella poisoning.

'Edison Health', a start up company in Auckland, has produced the 'Oura Ring', a device that can monitor vital signals with greater precision than the more popular wrist band and watch technology.

https://www.edisonclinic.com/post/while-you-sleep-edison-and-the-oura-ring

This is an example of using data to enable the provision of personal precision health care.

St Johns Ambulance, in 2018 started on a 3 year 'digital transformation' of the St John organization. Ambulances have become their own mobile electronic terminal. Paramedics have their own linked tablets and information can be sent to the hospital before the patient arrives, and passed on directly back to the patients own personal doctor. St John Ambulance monitors emergency assistance alarms of 45,000 people. Traditionally these have been medical alarms with a base unit plugged into he fixed line at each user's home. But if you are down the back of the garden or at a friends place they do not work. St John have now implemented a mobile network based IoT solution using a pendant around a person's neck, with a battery life of two years.

This is all interesting and cutting edge stuff. It helps fill in some of the gaps in my knowledge as to where the growth in 'health applications' will come from. But how much of this 'added value' will be captured by Spark, and how much will be captured by other third party providers? That is the question I really want the answer to!

SNOOPY

[Waltzing]

Put an smart band on the wrist with some other sensors and away you go...

There is a company in the US with over 11,000 developers using Bosch accelerometers running on multiple OS's . They have multiple tracking software solutions across a range of industries including human daily otion.

we are just waiting for a multi junction box with wake up mode for field trails in europe to run with the new IOT scripting engine platform..

of course there is Apple and its emerging platform for health but more specific health platforms have been under development in the US and europe for few years now.

[peat]

Global head of healthcare from Apple (who knew that had one?) ...
Apple Health apps are amazing.
Apple Watch is doing heaps of this recording and monitoring physical stuff


Telstra has a Health Division too.

[Snoopy]

Put an smart band on the wrist with some other sensors and away you go...

There is a company in the US with over 11,000 developers using Bosch accelerometers running on multiple OS's. They have multiple tracking software solutions across a range of industries including human daily option.

we are just waiting for a multi junction box with wake up mode for field trails in Europe to run with the new IOT scripting engine platform..

of course there is Apple and its emerging platform for health but more specific health platforms have been under development in the US and Europe for few years now.


Wow, it sounds like you are right at the cutting edge of 'Internet Ossisted Training' Waltzingman. It does sound though that, to be useful, much of the IoT is going to have to be wireless. How would it work if you were doing an ironman race? Do you have a sensor on you that pings a central database (at a cost of 20c per ping) so it can produce a Geo-trace of your race? What do you do for a sensor on the swimming leg? I imagine some bulky rubber encrusted device stuffed down your swimsuit. That might get in the way on your bike and run legs. Accelerometers measure acceleration don't they? Are you really changing gears that aggressively that such numbers make a difference?

What I am trying to get a handle on Waltzingironman, is that I can imagine you sweating away doing all this superhuman ironman stuff. Meanwhile as a Spark shareholder I am quietly ensconced in an armchair my lounge watching you on 'Spark Sport'. So I am paying myself via my Spark Sport subscription. But how am I making money from you with all your fancy telemonitoring gear in live action?

SNOOPY

[Snoopy]

An obvious IoT (Internet of Things) application is the 'asset tracking' of loaned hospital equipment (walkers and wheelchairs for example). But more 'cutting edge' is the application of this technology to directly help people.


Many organizations have assets and things of value that need to be tracked. 'Mainfreight's' New Zealand operations need to know where each of their 400 'Hazardous Chemical Segregation Bins' are, so that the empty bins can be returned to Hamilton and Auckland (there is an imbalance of demand north to south).

'Mainfreight' were facing the extra cost of buying 50-100 more $3000 bins per year. Now, a computer dashboard, with bin locations, is 'display accessible' all over the country. Those missing bins are no longer missing! The fact that customers know the bins are being tracked, means they tend to be faster to return them too.

https://sparkiot.buzzsprout.com/389848/1611979-ep-5-asset-tracking

The bins tracking solution requires three component parts:

1/ A Network,
2/ A Physical device (a hard cased functional rugged hard plastic box), AND
3/ A Platform (way to visualize information feed back)

The challenge is to be able to do all this with the right cost structure and the least maintenance:

1/ Find the technology needed, CHECK
2/ Cost it out, CHECK
3/ and CHECK the physical device battery life (three to five years is what is needed).

The Spark 'LoRa' network is that solution. Spark’s national 'LoRaWAN' network was built by specialist network provider, and IoT rollout experts, Kordia. It suits low-power, low-data (like single ping) uses. This complements Spark's second high-power LTE ('Long Term Evolution' signifying a fast download rate utilising the 4G network) particular tracking network "LTE Cat-M1", called ‘M1’ for short. M1 can transmit text messages.

So in terms of hardware, what is 'LoRa'? Physically LoRa sites consist of a box and antenna (known as a ‘gateway’) installed, for the most part, on Spark 4G cell sites. Where appropriate, Spark can install LoRa boxes on third party sites. Alternative cellular tracking technology based on 3G and 4G technology takes more battery to power up. With LoRa, everything being tracked 'phones home' once a day (although you can set it to phone home as many times as you want). As far as utilising extra information from the data collected goes, knowing turnaround times means 'Mainfreight' know how to optimize the number of boxes they actually need in the future .

'Blackhawk', an Auckland based company with global ambitions, are the Spark partners in this project, handling the 'device' and 'dashboard' end of the installation.

https://www.blackhawk.io/blackhawk-iot-saas-home

Spark are good at

1/ Building the networks AND
2/ Managing data across networks AND
3/ Helping customers understand the technology and how it can be used in their business.

Spark are not product designers, which is why Blackhawk became involved. A particular need of Mainfreight was to be able to continue to track bins in an inside environment (note concrete walls impede wireless tracking signals). Spark's solution was to install 'repeater devices', like a broadband modem, into each of the depots that extend coverage into the building environment. Technologies that can be used inside are Ultra Wideband, RFID (Radio Frequency IDentification), and WiFi. Spark can use all three technologies.

Why use Ultra Wideband? Ultra-wideband refers to the significantly larger spectrum (up to several GHz) employed over a short range. It measures distance by signal time of arrival. Other short-range technologies determine distances by signal strength, which is less accurate. How does RFID work? When triggered by an electromagnetic interrogation pulse from a nearby RFID reader device, the tag transmits digital data, usually an identifying inventory number, back to the reader.

Future Applications for IoT asset tracking technology:

1/ Agriculture: tracking fruit bins or wine vats,
2/ Healthcare: tracking beds and blood supplies,
3/ Manufacturing: tracking just in time components in an assembly process.

SNOOPY

[Snoopy]

Spark are good at

1/ Building the networks AND
2/ Managing data across networks AND
3/ Helping customers understand the technology and how it can be used in their business.

Spark are not product designers,


Trying to put a cash value on Spark's growth streams is not an easy exercise. For example, I couldn't find where the 'Internet of Things' revenue was reported in the Annual Report. It turns out it is part of 'Other' revenue, along with 'Digital Health' and 'Sport' (and 'Qrious', the data analytics business unit). I only found this out by looking at the 16th September 2020 'Investor Strategy Update' investor report.

https://investors.sparknz.co.nz/FormBuilder/_Resource/_module/gXbeer80tkeL4nEaF-kwFA/Spark%202023%203-Year%20Strategy%20FINAL.pdf

Total revenue for 'Other' of FY2020 was $130m (AR2020 p61).

Slide 59 of the aforementioned strategy update document suggests a substantial business revenue case for the three new growth areas from Spark: 'Digital Health', 'The Internet of Things' and 'Sport'.

'Digital Health' is already a billion dollar revenue earner in NZ, with a projected growth rate of 5% per year. Yet total St John's Ambulance (one of the Health divisions significant customers - apparently) 'Property & Infrastructure Expense' (which includes 'significantly' information and telecommunications infrastructure) spend was just $14.4m in total over FY2020. Even if $7m of that cost went to Spark, I am really struggling to see total Spark Health division revenue topping $30m over FY2020. The rest of the 'Spark Health & Wellness' podcast sounded like hoped for future earnings.

The 'Internet of Things', already a billion dollar market in NZ, is forecast to reach $3.5billion by FY2024. That is a compounding growth rate over three years of:

1b(1+g)^3=$3.5b => g=50%

That is impressive. But you would have to think, at least initially, that a lot of that spend would go to capital equipment, setting up new systems. Spark's game is monitoring those systems once they are in place. So it could be that much of this surge in IoT revenue is not reflective of down the track earning power of that revenue for Spark. For example, tracking 4,000 specialist Mainfreight bins at $20 each per month (price made up) would be just shy of $1m per year. 30 such customers would bring in $30m per year. Did Spark have 30 such customers over FY2020? I would guess not. Spin off 'data analytics' work by Qurious on this tracking information might be worth $30m over a year (Qrious staff are sure to be highly paid and have a charge out rate to reflect that.)

Sport in general is seen as a $500m revenue market in total, which leaves plenty of room for growth from whatever relative meagre revenue that Spark Sport currently has. Yet Sky TV total satellite subscription revenue was $582m (which includes more than just sport). It is hard to know how many Sky subscribers are 'sport subscribers'. If it was 75% that would give SkyTV 0.75 x $582m = $437m (Total programming fees paid by Sky for content were $342m, and I would pick the lions share of that was for sports rights). If the rest of the 'Sport' market was split between 'Spark' and 'Others', we would be looking at normalised 'Spark Sport' revenue of just over $30m. For the FY2020 operating period, we include the dates 20th September 2019 to 2nd November 2019 - the dates of the 2019 Rugby World Cup. The RWC certainly boosted Spark Sport. But given the dearth of subsequent rugby content, how many of those 'rugby sport' customers were maintained? When live sport 'turned off' early in the pandemic, Spark gave away 'Spark Sport' for free. So maybe only a sustainable $20m revenue from 'Spark Sport' was earned over FY2020?

Summing up, I get the revenue contribution from the areas of new growth to be: Digital Health $30m + Internet of Things $30m + Qurious $30m + Sport $30m = $120m. That leaves $10m unallocated for 'other' "Other Revenue".

SNOOPY

[Snoopy]

Continuing my summising of the Spark IoT podcasts

https://sparkiot.buzzsprout.com/389848/1479166-ep-3-without-wires

A brief History of mobile phone generational evolution.

1G/ Voice,
2G/ SMS texting,
3G/ Blackberry with e-mail access,
4G/ Much wider bandwidth to support Social Media, Video + alternative to fixed access (80% of traffic now video)
5G/ Supercharged bandwidth, MB to GB on Wireless Broadband, Super Low Latency (fast reaction), Ability to bring millions of devices on line.

Diagnostic and location reporting are liable to be the most popular early applications for IoT. Anything with a power source on it could be considered a candidate for putting on 5G. Release 16 of 5G (dare I call it 5.5G?) upcoming will bring in IoT specific elements. Spark intends to run 3 IoT networks that are optimized for different applications.

1/ The Spark 'LoRa' network stands for 'Long range' (low power and long battery life) and very spectrum efficient (best for responding to a simple ping signal).
2/ The Spark 'Cat M1' (a machine based standard for the 4G network) will transmit up to 1MB per second (suitable for sending text based updates).
3/ NBIoT (Narrowband Internet of Things) is the 5G Internet of Things standard (can send much more information, albeit with a higher power cost).

Which companies have shown early interest in 5G? Paymark (the EFTPOS provider) are experimenting with facial recognition for micropayments. Such a solution doesn't need physical wire infrastructure overcoming the problem of bandwidth and latency and correcting lots of different devices (camera, AI machine for optical analysis, bank account computer).

Spark are also working with Ohmio, the Auckland based driverless car company start up. Trials are going on at Christchurch International Airport. Low latency is really critical in such applications.. Smart streets (lighting and traffic management), linking with security and integrating 'cars talking to traffic lights' is all part of the wider convergence of such technology within the transport ecosystem.

Spark used Team New Zealand and the America's Cup as a 5G usefulness test case. Our Americas Cup team had 200 sensors on their boat. This information was downloaded to a hard drive drive, and the data was studied overnight. With 5G, the information can be immediately relayed to shore, in partnership with video footage. The designers can then do real time adjustments and understand the cause and effect of those adjustments while the boat is still 'out on the water'. For the sailing spectator, 5G can deliver video streaming to a whole crowd of people in one place.

South Korea is in pole position with 5G. Samsung is determined to be the leader in 5G technology.

The arrival of 5G will not see the end of 'LoRa' and '4g based IoT' technology. These older technologies will be complimentary and not superseded by 5G IoT applications.

SNOOPY

[Snoopy]

Trying to put a cash value on Spark's growth streams is not an easy exercise.

Summing up, I get the revenue contribution from the areas of new growth to be: Digital Health $30m + Internet of Things $30m + Qurious $30m + Sport $30m = $120m. That leaves $10m unallocated for 'other' "Other Revenue".


Returning to my favourite Spark 'growth' reference:

https://investors.sparknz.co.nz/FormBuilder/_Resource/_module/gXbeer80tkeL4nEaF-kwFA/Spark%202023%203-Year%20Strategy%20FINAL.pdf

Slide 69 suggests that revenue from 'Other Revenue' (that is the revenue category that includes the three hot growth prospects) will grow by $80-$90m (from $130m) by EOFY2023. That represents a compounding annual growth rate 'g' of:

$130m(1+g)^3=($210m to $220m) => g= 17% to 19%

"Growth in IoT driven by explosion of connected devices to grow to~1m." That sounds like a big lift in monitoring fees piggy backing on cellphone towers that are largely already equipped with the gear they need. Such growth sounds quite profitable.

"Growth in Digital Heath driven by new revenue opportunities supported by the introduction of the Digital Health Platform." This part of the growth agenda, I find the most opaque. Spark runs the nationwide 111 service, for example. Would this move to the new 'Digital Health Platform'? If it does that isn't really growth because the same service was already operating under another business unit envelope.

Health Board ICT infrastructure is highly fragmented, and includes many unsupported legacy systems.

https://www.reseller.co.nz/article/683500/dhb-owned-nz-health-partnerships-hires-former-telecom-executive-lead-procurement/

That means there is definitely room for some serious IT spend, even though most of that seems directed towards customized software systems as designed by the likes of Oracle. But Spark may be stuck with the 'operational crumbs' in this space, unless this is where Qrious fits into the Spark business plan.

"Growth in Sport driven by increasing subscriber base." That sounds like a recipe for cashflow going straight to the bottom line - good stuff. Although it may be that Spark Sport is not yet profitable, this early in the business development cycle.

P61 of AR2020 is where the true calculation of profitability starts



Operating Revenuesless Product Costsless Labour Costs
less Other Operating Expensesequals EBITDA


'Other Operating Revenues'$130m$82m$19m
$15m$14m



Notes

1/ 'Labour Costs' and 'Other Operating Expenses' are estimated in fractional proportion (f) to the percentage of revenue turned over by the 'Other Operating Revenues' business unit.

f= 130/3588 = 3.623%; Labour Cost = 0.03623 x $511m = $19m, 'Other Operating Expenses' = 0.03623 x $402m = $15m

-------------------

EBITDA is a good proxy for cashflow. But barring some trunk transmission assets, most of the equipment at Spark is not long lived. Indeed there is significant investment now replacing the old PSTN telephone system and continuing the 5G mobile roll out. In my assessment, this means EBIT is the more important measure.

Depreciation & Amortisation ('Other Revenue') = 0.03623 x $479m = $17m

EBIT= EBITDA - DA = $14m - $17m = -$3m

The interest charge against 'Other Revenue' = 0.03623 x [ $36m - $94m ] = -$2m. With a loss there is no tax due. So underlying Net Profit After Tax is:

NPAT = EBIT - I = -$3m-$2m= -$5m

These growth initiatives at Spark sound good and no doubt have future promise. But at this stage in the business cycle, the future growth initiatives are loss making.

SNOOPY

[Snoopy]

Spark has transformed itself into an "end to end digital services company". The aim is to be the number 1 retailer in mobility, data, effortless service and cost. To do this, Spark needs to maintain the lowest cost per Gigabit future proof data network in the country. Spark seek out to understand their customers: feelings, frustrations, aspirations and what drives them to succeed. It is by being a customer-centric business that Spark will know what customers, including small business owners, truly value.

From their telecommunications company ancestry, Spark are good at:

1/ Building the networks AND
2/ Managing data across networks AND
3/ Helping customers understand the technology and how it can be used in business.

Spark are not product designers. So using their networks in partnership with 'internet connectable third party hardware' and/or content is the way Spark see their own business developing. Spark have realigned their 'business units' into 'product classes'.

1/ Mobile: Currently first in 'pay monthly mobile', with 'Spark' and 'Skinny' brands. Data demand is driving growth. Main competitors 'Vodafone' and 'Two Degrees'.
2/ Voice: The legacy voice business. (Market position No.1)
3/ Broadband: Currently largest provider in both fixed fibre and mobile broadband. 80+ competitors in the market, with low barrier to entry.
4/ Cloud Security & Service Management: In the cloud data storage and complimentary security business. Market leader for onshore services.
5/ Procurement & Partners: Buying in third party equipment (e.g. mobile handsets) for resale and third party software services for resale.
6/ Managed data, networks & services: Trading under Spark as well as sub brands:
6a/ 'Leaven' (accelerates cloud and digital adoption, e.g. supporting the technology behind the Covid-19 Tracer App and helping the implementation and operation of the vaccine rollout),
6b/ 'Computer Concepts Limited (CCL)' (e.g. multi-cloud and ICT (Information and Communications Technology) solutions, provided to the NZ Election 2020) and
6c/ 'Digital Island' (e.g. remote contact centre solutions).
7/ Other operating revenues: This includes the future growth categories of
7a/ IoT (Internet of Things),
7b/Digital Health and
7c/ Spark Sport.
These are largely innovative growth areas where it is difficult to measure the current size of the market. I expect 'Spark Sport' is number 2 in that market, behind 'Sky'.

From a revenue perspective Mobile and Broadband, the two largest product categories, make up 55% of all the company's revenue. But Spark are 'at the top' or 'near the top' in in all the markets in which they choose to operate.

Conclusion: Pass Test

[Snoopy]

eps = (Normalised Earnings) / (Total Shares on Issue, EOFY)

FY2017: ($396m - 0.72($20m) )/ 1833m = 20.8cps
FY2018: ($365m - 0.72($10m) )/ 1835m = 19.5cps
FY2019: ($409m - 0.72($15m) )/ 1836m = 21.7cps
FY2020: ($427m - 0.72($35m-$2m) - $10m -$7m)/ 1837m = 21.0cps
FY2021: ($384m - 0.72($28m - $16m) ) / 1867m = 20.1cps

Notes

1/ Figures for FY2017 and FY2018 are derived from the re-reported profit figures as as presented in the December 4th 2018 Analysts Briefing, titled 'Updates to External Reporting'. These updates alter the financial reporting for the FY2017 and FY2018 year as though the subsequently applied new accounting standards NZ IFRS15 (on apportioning revenues and costs) and NZ IFRS16 (on the balance sheet representation of leases) were already in force over FY2017 and FY2018. Doing this means that all calculated results are compared under the same set of accounting standards.

2/ For FY2017, I have removed the $20m of profit that resulted from the one off sale of surplus land on Mayoral Drive.

3/ For FY2018, I have removed the $10m of profit resulting from a 50% sale of formerly 100% owned subsidiary 'Connect 8 Limited' (an infrastructure civil construction business).

4/ For FY2019 I have removed from profit $2m from the sale of a long term investment/business, $11m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations, making a grand total of $15m to be adjusted for.

5/ For FY2020 I have removed $35m of 'other gains' (that includes $5m from the sale of a long term investment or former subsidiary, $28m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations). I have offset this with $2m of rent concessions that would not have been granted outside of a Covid-19 environment. Furthermore I have removed a one off $10m downward adjustment to the tax bill that was a result of a law change reinstating the depreciation allowance on commercial buildings. Finally I have brought in a retrospective adjustment of $7m from FY2021. This adjustment relates to "reflect a reduction in net earnings of $7 million for the amortisation of reacquired rights that were previously regarded as indefinite life and therefore not amortised."

6/ For FY2021 I have removed $28m of 'other gains' (that includes $1m from the sale of a minority shareholding in long term investment 'Now New Zealand' (a boutique broadband retailer), $9m from the sale of Property Plant and Equipment (primarily mobile plant and equipment) and $18m from a gain on lease modifications and terminations). I have offset this against a one off refund of $16m of historic wire and maintenance charges that was charged to some fibre broadband customers.

Original Concluding Remarks: Some of the changes in profit from year to year could almost be seen as rounding errors. I don't want to make a judgement just on that. I need to sleep on this result before I decide what to do.

Conclusion: Average normalised earnings over the past five years was 20.6cps. The high of 21.7cps was 5% higher than average and the low of 19.5cps was 5% less than the average. This is just about as flat as corporate earnings get in the real world. My BT4 test (post 1810 below) has discussed the reduced likelihood of cost cutting in the future being able to maintain profits. My growth initiative research (post 1812) does not give any hint of a significant boost in top line revenue going forwards. Looking at the trend in the last five years of earnings, as used in the 'Buffett Model', is meant to be the indicator of whether a company is able to continue positive 'eps' growth into the future. The spreadsheet part of the Buffett valuation model does not work unless this is the case. There is no clear historical pattern of increasing earnings per share here. Furthermore it looks like increasing 'eps' into the future is going to get harder. For these reasons, I cannot see any reason to overturn the actual 'eps' numbers calculated because of unusual market conditions (e.g. the Covid-19 environment). The numbers do tell the story. The result of this test for Spark is a 'fail'.

SNOOPY

[Biscuit]

.........

Conclusion: Some of the changes in profit from year to year could almost be seen as rounding errors. I don't want to make a judgement just on that. I need to sleep on this result before I decide what to do.

SNOOPY


It looks pretty clear to me Snoopy. They work hard just to stay where they are, they will never go bust but there is no growth there. I hold for diversification and they have been a better investment than Telstra which I also hold.

[Snoopy]

ROE= (Normalised earnings) / (Shareholder Equity EOFY)

FY2017: $382m / $1,601m = 23.9%
FY2018: $358m / $1,483m = 24.1%
FY2019: $398m / $1,465m = 27.2%
FY2020: $386m / $1,493m = 25.9%
FY2021: $375m / $1,503m = 25.0%

Conclusion: Pass Test

[Snoopy]

Net Profit Margin = (Normalised Profit) / (Operating Revenue)



FY2017: $382m / ($3,505m - $20m)= 11.0%


FY2018: $358m / ($3,533m - $10m) = 10.2%


FY2019: $398m / $3,518m = 11.3%


FY2020: $386m / $3,588m = 10.8%


FY2021: $375m / $3,565m = 10.5%



Notes

1/ Turnover across FY2017 and FY2018 has had revenue from asset sales removed from the revenue total.
2/ Turnover from asset sales is not included in the revenue that I have quoted for FY2019, FY2020 and FY2021.

I want to drill down a bit more into that big profit margin lift [ (11.3%-10.2%)/10.2% = 10.8% in one year, which is >2% inflation] between FY2018 and FY2019. If I look at the segmented result (AR2019 p52),



Product Category
Operating Revenue (FY2019)Product Margin (FY2019)Product Margin %ge (FY2019)
Operating Revenue (FY2018)Product Margin (FY2018)Product Margin %ge (FY2018)


Mobile
$1,271m$775m61.0%
$1,237m$732m59.2%


Voice
$486m$310m63.9%
$573m$369m64.4%


Broadband
$685m$344m50.2%
$665m$350m52.6%


Cloud, Security & Service Management
$400m$327m81.8%
$370m$315m85.1%

/
Procurement and partners
$365m$43m12.3%
$357m$40m11.2%


Managed Data, Networks & Services
$197m$104m52.8%
$207m$111m53.6%


Other Operating Revenues
$114m$51m44.7%
$114m$49m43.0%



I can see the product categories with the highest 'Product Margin' are:

1/ 'Cloud, Security & Service Management' ' and
2/ 'Voice'.

But 'Voice' was on the decline (-$87m in lost revenue on a year vs year comparison). When a high margin business unit declines like this, it puts pressure on the up and coming 'product unit revenues' to fill the gap. Cloud, Security & Service management is too small to do that on their own (+$30m - equivalent to +$30m x 81.8/63.9= +$38m in revenue indicative of profit substitution terms). But combine that with the growth in mobile revenue, also very profitable, at: +$34m x 61.0/63.9=$32m and for broadband +$20m (equivalent to a profit equivalent revenue offset of $20m x 50.2/63.9 = +$16m) and we are covering those lost 'voice unit' profits: $38m + $32m + $16m = $86m. This means profit indicated revenue offset from the remaining business units is minimal (actually slightly negative). Yet none of this explains the increasing profit margin 'year on year'.

It looks like the biggest contributor to the profit margin increasing was a very significant labour cost saving (a $475m-$513m=$38m drop in the wage bill over the year- see table below). There is a lot of automation behind the scenes that will be contributing to this. But can it continue? Here is what has happened to the wage bill in the five years under review.



Financial Year
Labour ExpenseFinance Expense


2017$550m$75m


2018$513m$77m


2019$475m$85m


2020$511m$94m


2021$491m$81m



This table suggests to me that the big savings in labour have already been made. Alongside of this, I have recorded the annual finance expense (the second column of the table).

A fall in the 'under 3 month' NZD Commercial debt ($228m-$155m=$73m), both in capital being borrowed and interest paid on that capital, looks like the explanation for interest payments saved over FY2021 (see AR2021 p89). There are $100m in domestic notes maturing in each of FY2022 and FY2023 too. Refinancing those at lower interest rates should take the pressure off the interest bill in the next two or three years. Yet the picture that is emerging here is that taking cost out of the business looks to be an exercise that will get more and more difficult going forwards. That means it will be increasing revenue on the 'top line' from the up and coming revenue sources going forwards that will be required to 'fuel growth' going forwards.

In summary, I think there is room for 'surprise on the upside' if some of the new business units start to get traction in their specialty markets. I think 5G could yet prove to be a profit margin game changer too. Yet doing this cold hard numbers exercise has reinforced to me that Spark is not a sure bet. The fact that there has been some quite good execution of the business plan over the last five years, while the net profit margin has shrunk - albeit not significantly so - seals the fate of Spark for me when lined up against this criterion.

Conclusion: Fail test

SNOOPY

[Snoopy]

https://investors.sparknz.co.nz/FormBuilder/_Resource/_module/gXbeer80tkeL4nEaF-kwFA/Spark%202023%203-Year%20Strategy%20FINAL.pdf

Slide 71 suggests that revenue from 'Other Revenue' (that is the revenue category that includes the three hot growth prospects) will grow by $80-$90m (from $130m) by EOFY2023. That represents a compounding annual growth rate 'g' of:

$130m(1+g)^3=($210m to $220m) => g= 17% to 19%

<snip>

P61 of AR2020 is where the true calculation of profitability starts



Operating Revenuesless Product Costsless Labour Costs
less Other Operating Expensesequals EBITDA


'Other Operating Revenues'$130m$82m$19m
$15m$14m



Notes

1/ 'Labour Costs' and 'Other Operating Expenses' are estimated in fractional proportion (f) to the percentage of revenue turned over by the 'Other Operating Revenues' business unit.

f= 130/3588 = 3.623%; Labour Cost = 0.03623 x $511m = $19m, 'Other Operating Expenses' = 0.03623 x $402m = $15m

-------------------

EBITDA is a good proxy for cashflow. But barring some trunk transmission assets, most of the equipment at Spark is not long lived. Indeed there is significant investment now replacing the old PSTN telephone system and continuing the 5G mobile roll out. In my assessment, this means EBIT is the more important measure.

Depreciation & Amortisation ('Other Revenue') = 0.03623 x $479m = $17m

EBIT= EBITDA - DA = $14m - $17m = -$3m

The interest charge against 'Other Revenue' = 0.03623 x [ $36m - $94m ] = -$2m. With a loss there is no tax due. So underlying Net Profit After Tax is:

NPAT = EBIT - I = -$3m-$2m= -$5m

These growth initiatives at Spark sound good and no doubt have future promise. But at this stage in the business cycle, the future growth initiatives are loss making.


FY2021 results are out. So time to try and find how the exciting new growth divisions are shaping up.

P68 of AR2021 is where the true calculation of profitability starts:



Operating Revenuesless Product Costsless Labour Costs
less Other Operating Expensesequals EBITDA


'Other Operating Revenues'$137m$67m$19m
$15m$36m



Notes

1/ 'Labour Costs' and 'Other Operating Expenses' are estimated in fractional proportion (f) to the percentage of revenue turned over by the 'Other Operating Revenues' business unit.

f= 137/3565 = 3.843%; Labour Cost = 0.03843 x $491m = $19m, 'Other Operating Expenses' = 0.03843 x $385m = $15m

-------------------


EBITDA is a good proxy for cashflow. But barring some trunk transmission assets, most of the equipment at Spark is not long lived. Indeed there is significant investment now replacing the old PSTN telephone system and continuing the 5G mobile roll out. In my assessment, this means EBIT is the more important measure.

Depreciation & Amortisation ('Other Revenue') = 0.03843 x $523m = $20m

EBIT= EBITDA - DA = $36m - $20m = $16m

The interest charge against 'Other Revenue' = 0.03843 x [$34m - $81m] = -$2m. With a loss there is no tax due. So underlying Net Profit After Tax is:

NPAT = 0.72(EBIT - I) = $16m-$2m= $10m

On page 68 of AR2021 we learn "Other operating revenues include revenue from Qrious, Internet of Things, Spark Sport, and exchange building sharing arrangements." I had previously assumed this category included 'Spark Health' as well. But it could be the Spark Health referred to as a promising potential future revenue business unit has yet to start from a zero base.

Whatever, the NPAT estimate for all those promising future growth initiatives looks to have turned the corner from loss making, and is now a small positive number. Albeit in overall terms, that profit is not significant.

SNOOPY

[Snoopy]

It looks pretty clear to me Snoopy. They work hard just to stay where they are, they will never go bust but there is no growth there. I hold for diversification and they have been a better investment than Telstra which I also hold.


The bare earnings numbers and history as a default necessary service provider lead to the impression of a 'steady as she goes' giant - I agree. But look at what has happened to the revenue break down over the five reporting years under review.




Product Category
Operating Revenue (FY2021)
Operating Revenue (FY2017)
Change
Change Percentage


Mobile
$1,311m
$1,197m
+$114m
+9.5%


Voice
$308m
$655m
-$347m
-47%


Broadband
$670m
$689m
-$19m
-2.8%


Cloud, Security & Service Management
$443m
$324m
+$119m
+36.7%


Procurement and partners
$414m
$345m
+$69m
+20.0%


Managed Data, Networks & Services
$282m
$207m
+$75m
+36.2%


Other Operating Revenues
$137m
$116m
+$21m
+18.1%


Total External Revenues
$3,565m
$3,533m


Total Absolute Value of Changes


$764m



Something that struck me about this table was the broadband revenue decreasing! This is partly explained by the reclassification of some earnings. From p9 of "Updates to External Reporting" document issued in December 2018.

"To provide a clearer view of broadband and managed data performance, revenues associated with managed internet services have been moved from broadband revenue to managed data revenue."

For the FY2018, year this policy change reduced broadband revenue from $685m to $665m. Concomitant with that, Managed Data, Networks & Services revenue increased from $190m to $207m. Yet even with that adjustment broadband revenue was flat. An example of customers expecting more and more for the same price?

$764m/$3,565m = 21%

That is a measure of how much the business has changed in five years. Although overall revenue has barely changed, more than one in five dollars taken in has shifted to a different product category. I would suggest that is rather a large operational change. In fact I would struggle to think of any other NZ business that has transformed this much over the last five years (bar some start ups). Sometimes what you think you see, a boring steady dividend payer, is not a boring as you think it is.

SNOOPY

[Ferg]

Thanks for the analysis Snoopy. Interesting reading.

[Biscuit]

The bare earnings numbers and history as a default necessary service provider lead to the impression of a 'steady as she goes' giant - I agree. But look at what has happened to the revenue break down over the five reporting years under review.




Product Category
Operating Revenue (FY2021)
Operating Revenue (FY2017)


Mobile
$1,271m
$1,237m


Voice
$486m
$573m


Broadband
$685m
$665m


Cloud, Security & Service Management
$400m
$370m


Procurement and partners
$365m
$357m


Managed Data, Networks & Services
$197m
$207m


Other Operating Revenues
$114m
$114m




I really appreciate the fact you share your figures Snoopy. But what's really changed over those 5 years? There's been a significant drop back in "voice" and a pick up in a few other things. They are not a provider of a commodity service like power, they are a technology service and have to keep changing as the technology changes. There should be opportunities for growth in there but are there?

[Snoopy]

I really appreciate the fact you share your figures Snoopy. But what's really changed over those 5 years? There's been a significant drop back in "voice" and a pick up in a few other things. They are not a provider of a commodity service like power, they are a technology service and have to keep changing as the technology changes. There should be opportunities for growth in there but are there?


There are opportunities for growth for sure. The cloud data centres look promising. But looking a bit further into the future, where is the next bout of growth to come from? It seems not from the pool of new business ideas that I covered in my post 1812. No doubt if management were doing the same analysis, then they would report things slightly differently.

"It seems future profit growth is not yet coming from the pool of new business ideas covered in Snoopy's post 1812."

SNOOPY

[FatTed]

Thanks for your work Snoopy, is this at current SP in your opinion a buy hold or sell? Spark make up 10% of my holdings

[Snoopy]

Thanks for your work Snoopy, is this at current SP in your opinion a buy hold or sell? Spark make up 10% of my holdings


Stay tuned FatTed. I am not sitting on a valuation thesis for SPK that I am feeding to Sharetrader page by page. It's all going out live.

SNOOPY

[Snoopy]

Continuing my reviews of these Spark podcasts

https://sparkiot.buzzsprout.com/389848/1612099-ep-6-security

This one is about risks associated with the IoT. The general risk is similar to a person connected to the internet, trading data for convenience. In the case of the person, an example of this would be you handing over your credit card details for the convenience of buying an item. Just like a laptop computer, access to your IoT devices must be controlled and the software involved in running them must be patched.

Mass market makers of IoT devices are concentrating on getting as many products out to the market as they can without thinking about security or whether a device can even be patched. Government regulations seem almost inevitable to get some level of security around these IoT devices. The EU has since banned hard coded default passwords. In the USA, the California Act demands that IoT devices have some kind of security features, without specifying what those security features are.

IoT security divides up into:

1/ Data privacy
2/ The Security of Devices

As an IoT device owner there are two ways to lose:

1/ You can lose your data that your device is transmitting OR
2/ Your device can be used to attack others.

Spark are going to use a technique called 'network slicing'. A 'sliced network' connects and exceeds the emerging requirements from a wide range of enterprises. Thus there is network space that allows a user to isolate untrusted IoT from trusted IoT. Slices are defined as end-to-end self-contained logical networks, which can be controlled and managed in an independent way by the slices’ owner. The 'ultimate owners' are Over-The-Top (OTT) service providers and Mobile Virtual Network Operators (MVNOs), like Spark.

Another issue is 'telematics' (GPS location) , and the control of privacy devices in cars. Could an internet connected vehicle be taken over? You have to carefully control how firmware is updated. With vehicles, the consequences of the risk involved is higher.

Currently there are no specific security standards for IoT beyond specific legislation. Should you as an operator take responsibility for voluntary user initiated updates? Or rely on over the air updates? Or forced updates? Some updates can force a reboot. You don't want that to happen with a critical device, like when a car is speeding down a twisting back road. The best way to check if a company is taking IoT seriously is to web-search the words 'company name' and 'security' and see what comes up. People are very vocal on social media about security.

For any IoT capable device, always ask yourself if you need to connect it to the internet. Don't feel obligated to trade off your personal information for internet enacted convenience you don't need. Always factor in 'use' verses 'risk'. Despite the flood of insecure cheap devices from manufacturers, there is public and government pressure to make security on the IoT better.

SNOOPY

[Snoopy]

Happy with the annual dividend but really disappointed with the SP...finally hit $5 earlier but didn't last long at all


Spark certainly is one for the 'dividend hounds'. I haven't yet written the summary conclusion to my Buffett tests. But it is clear the background conditions to run the so called "Buffett Spreadsheet' to value Spark will not be fulfilled. This means we need to apply alternative valuation techniques. My standard 'go to' alternative method is 'capitalised dividend valuation'. This is capitalising the average dividend paid over the last five years.

To reprise, -because I haven't done this for a while- 'capitalising the dividend' is actually a fairly crude method of valuation. Implicit is the assumption that the company is 'no growth', and that the performance of the last five years will be reflective of company performance in the current year. Of special mention in this case is that Spark dividends have been consistently greater than underlying earnings. One way to think of this is that directors, who have more up to date and comprehensive knowledge of Spark than we shareholders do, are optimistic that underlying business will improve. IOW we shareholders are benefitting from director 'insider knowledge'. Another benefit of capitalised dividend valuation is that it does not require anyone to forecast any dividend payouts from the company. So there is no forecasting error. All the figures I use in the valuation are based on dividends actually paid

Gross Dividend Calculations

FY2017 P2:
11.0c (Ordinary, 100% imputed) + 1.5c (Special, 80.6% imputed):
= 11.0c (FI) + 1.209c (FI) + 0.291c (NI) = 11.0c/0.72 + 1.209c/0.72 +0.291c = 17.25c (gross dividend)

FY2018 P1:
11.0c (Ordinary, 100% imputed) + 1.5c (Special, 75% imputed):
= 11.0c (FI) + 1.125c (FI) + 0.375c (NI) = 11.0c/0.72 + 1.125c/0.72 + 0.375c = 17.22c (gross dividend)

FY2018 P2, FY2019 P1, FY2019 P2, and FY2020 P1 (All 75% imputed): 11.0c (ordinary) + 1.5c (ordinary) = 12.5c (total)
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2020 P2:
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2021 P1, FY2021 P2, FY2022 P1:
12.5c (Ordinary, 100% imputed) = 12.5c (FI) = 12.5c/0.72 = 17.36c = 17.36c (gross dividend)




Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY201712.5c+12.5cN/Ac + 17.25c17.25c


FY201812.5c+12.5c17.22c + 16.15c33.37c


FY201912.5c +12.5c16.15c +16.15c32.30c


FY202012.5c + 12.5c16.15c + 16.15c32.30c


FY202112.5c + 12.5c17.36c + 17.36c34.72c


FY202212.5c + ?c17.36c + ?c17.36c


Total167.3c



Now we come to selecting the capitalisation rate in this ultra low interest rate environment. I have selected a figure of 5% for Chorus. But Chorus is a regulated monopoly. I think Spark shareholders need a greater implied return than that, to compensate for the risks of competition and technological change. I think a 6% gross interest return on your shares bought would be fair. The five year historical average gross dividend received by shareholders from Spark was:

167.3 / 5 = 33.46c

The capitalised dividend value of Spark (fair value) is therefore: 33.46c/0.06 = $5.58

Of course no self respecting value investor would target 'fair value' as a price purchase target. Value investors want a discount! For a utility type investment like Spark I think a discount of 10% is reasonable target. So I am setting my target purchase price at $5.58 x 0.9 = $5.02.

I have been buying SPK cum that 12.5c fully imputed dividend today!

SNOOPY

[Snoopy]

A fall in the 'under 3 month' NZD Commercial debt ($228m-$155m=$73m), both in capital being borrowed and interest paid on that capital, looks like the explanation for interest payments saved over FY2021 (see AR2021 p89). There are $100m in domestic notes maturing in each of FY2022 and FY2023 too. Refinancing those at lower interest rates should take the pressure off the interest bill in the next two or three years.


This is a little exercise I like to run on all my companies just to check they are not overloaded with debt. MDRT is the answer to the question:

"How many years would it take to repay your borrowing debt if you decided to repay that debt by pouring all this years net profit into debt repayment, and continued to do the same in subsequent years?"

In other calculations I have been concerned with 'normalised profit', as I am concerned with sustainable earnings trends. However in this case I need the recognised profit from all sources, as determined by current accounting standards. For FY2021 that was $384m.

The total long and short term debt at Spark at EOFY2021 balance date was $1,403m (p89 AR2021). From that figure I like to take off the balance sheet cash balance of $72m. So at EOFY2021, for Spark:

MDRT = ($1,403m-$72m) / $384m = 3.47

My 'rule of thumb' is that any MDRT between 2 and 5 represents a 'medium level' of debt. 3.47 is right in the middle of that range. Whether that is a good result depends on the kind of company being assessed. Generally if you have a stable cashflows that are not affected too much by business cycles, it becomes more 'capital efficient' for shareholders if you crank the debt up a bit This is exactly the situation that I see Spark in. That means I am quite happy with Sparks debt position.

Conclusion: Pass Debt Test

SNOOPY

[Snoopy]

Spark certainly is one for the 'dividend hounds'.

Gross Dividend Calculations

FY2020 P2:
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2021 P1, FY2021 P2, FY2022 P1:
12.5c (Ordinary, 100% imputed) = 12.5c (FI) = 12.5c/0.72 = 17.36c = 17.36c (gross dividend)


In AR2020 on p94 we learn:
"Spark has a nil imputation credit account as at 30 June 2020"

This is not a surprise. The dividend paid in 'Part 2' of FY2020 (referenced above) was not fully imputed. That is consistent with the imputation credit account running out. However the fact that the imputation credit account was empty at SOFY2021 means we can run a little 'imputation credit check'.

The total dividend paid out during the FY2021 year was 25cps 'fully imputed'. 'Fully imputed' means 'after tax is paid at the company rate of 28%'. So how much tax was paid by Spark to allow the dividend to be fully imputed?

Answer: 25cps / (1-0.28) = 34.72cps (gross dividend) => Tax paid = 34.72cps - 25cps = 9.72cps

At EOFY2021 there were 1,867m Spark shares on issue. If we assume that there were 1,867m on issue at the time of both 12.5cps dividend payments to shareholders (actually there likely weren't because there were 30m employee performance share options cashed in over the year) then the amount of dividend paid out in dollars over the FY2021 year was:

1,867m x $0.0972 = $181m (the possible maximum error in this calculation, should none of the 30m performance rights have been exercised before any of the dividend was paid is -$2m)

The cashflow statement for FY2021 shows payment of income tax at $188m. Anyway you look at things, that is more than enough tax to pay a fully imputed dividend (only a $181m payment is required). However, if I look at the income tax expense information for FY2021 (AR2021 p100) then the current year tax expense was $172m. So it looks to me as though Spark has paid $188m-$172m= $16m more tax than was due. $181m - $172m = $9m of that went towards making the dividend fully imputed, even though technically the dividend was not fully imputed. It only was allowed to became fully imputed when Spark handed more money to the tax man than was actually due. If the odd one off tax adjustments were taken out of the FY2021 Spark result, then the underlying tax bill for the year was even less, only $155m. $155m is $181m - $155m = $26m short of the actual underlying tax bill paid by Spark. So:

1/ IF $181m was the actual tax paid to give 100% imputed dividend AND
2/ $155m was the normalised requirement for tax to pay THEN

the underlying dividend imputation rate at Spark over FY2021 was only $155m/$181m = 85.64%. This is more in line with earlier imputed tax rates of 80.6% and 75% paid over FY2019 and earlier. This means I would not be surprised if for FY2022 - if the dividend rate is kept at 25cps - then the Spark dividend for FY2022 will no longer be fully imputed. The only reason the dividends paid in the year FY2021 were fully imputed was that Spark paid the IRD in advance more tax than they had to.

There follows a very strange statement on p101 of AR2021 regarding the EOFY imputation credit position.

"Spark has a negative $18 million imputation credit account balance as at 30 June 2021, due to the timing of dividend and tax payments (30 June 2020: nil)."

A negative imputation credit balance means that the company has somehow paid out more imputation credits than it had earned. But this is impossible, because if a company hasn't paid the required amount of tax, then it cannot pay a dividend with full imputation credits. Yet in direct contradiction to this, the dividend paid over the second half of FY2021 was fully imputed! How is this possible?

A rather confused SNOOPY

[Ferg]

Hi Snoopy

I did a bit of a dive into the Spark tax numbers. Keep in mind that IC's are deducted from the ICA when they are paid, not declared so the recent final dividend will not appear in the ICA until the interim report next year (being FY22H1).

ICA Account:
Opening= $0 (per AR)
+ Taxes Paid $188m (per AR)
- IC's attached to Dividends -$179m (* see below)
- Other -$27m (balancing figure)
= Closing Balance -$18m (per AR)

*$179m being FY20H2 Div $230m (per AR) + FY21H1 Div $231m (per AR) = $461m * .389 = $179m
NB: .389 is the number you apply to the declared dividend to get the IC's where they are fully imputed (.389 = .28/.72). I believe the FY20H2 and FY21H1 declared dividends were both fully imputed, being dated September 2020 and March 2021 respectively.

I did a full reconciliation on current and deferred tax - it all stacks up, except for the -$27m above.

The fact they are showing tax payable of $23m suggests they have not paid more tax than they should have. A reconciliation of the current tax account shows:

Current Tax Payable
Opening Balance = $43m (per AR)
+ Current Year Tax Expense $172m *see below
- Current Year Adjustment -$4m *see below
- Taxes Paid -$188m (per AR)
= Closing Balance $23m (per AR)

Instead of having paid more tax than they should have, they owed (and paid) tax for the previous year, being $39m. So the $188m paid was $39m for the prior year and $149m for the current year. Note the opening balance was $43m less I'm assuming the $4m current year tax adjustment to give a payment for the prior year of $39m.

Tax Expense:
Tax Calc & P&L both show $169m (per AR)

Booked as: (per AR)
Current Year Tax Expense $172m *see above (per AR)
Current Year Tax Adjust -$4m *see above (per AR)
Deferred Tax Expense -$4m (per AR)
Deferred Tax Adjust +$5m (per AR)
= Tax Expense Classified $169m (per AR)

Rather than being funny business with tax, I view the amount payable as being real (ie Spark owes $23m) and that for whatever reason they went OD on the ICA account. It could be that included in the $188m of tax payments were overseas tax payments that do not count towards the ICA. Notice in the tax calc workings per the AR there are two adjustments for $6m, one being taxes paid overseas and the other being for a different tax rate (Oz?). Either someone miscalculated the available IC's or there was an unknown tax receipt/refund** that put a spanner in the works. Notice the prior year AR had $1m tax receivable but the latest AR has $0 tax receivable and does not show any tax receipts - I suspect any such receipts have been netted off against the payments made so we do not have 100% visibility. I am curious as to what penalties they will cop for the negative ICA balance.

**Maybe the ICA was good when the dividend was declared but there was a tax receipt/refund between the payment date and year end. Or a combination of all 3.....receipt + stuff up + non-NZ payments.

FERG

P.S. Don't use the $155m - that is a notional tax figure and, other than in the AR note/reconciliation, does not appear in any journals made by Spark or in any amounts payable or paid or tax returns etc.

[Snoopy]

In AR2021 on p101 we learn:

"Spark has a negative $18 million imputation credit account balance as at 30 June 2021, due to the timing of dividend and tax payments (30 June 2020: nil)."

A negative imputation credit balance means that the company has somehow paid out more imputation credits than it had earned. But this is impossible, because if a company hasn't paid the required amount of tax, then it cannot pay a dividend with full imputation credits. Yet in direct contradiction to this, the dividend paid over the second half of FY2021 was fully imputed! How is this possible?




Rather than being funny business with tax, I view the amount payable as being real (ie Spark owes $23m) and that for whatever reason they went OD on the ICA account. It could be that included in the $188m of tax payments were overseas tax payments that do not count towards the ICA. Notice in the tax calc workings per the AR there are two adjustments for $6m, one being taxes paid overseas and the other being for a different tax rate (Oz?). Either someone miscalculated the available IC's or there was an unknown tax receipt/refund** that put a spanner in the works. Notice the prior year AR had $1m tax receivable but the latest AR has $0 tax receivable and does not show any tax receipts - I suspect any such receipts have been netted off against the payments made so we do not have 100% visibility. I am curious as to what penalties they will cop for the negative ICA balance.

**Maybe the ICA was good when the dividend was declared but there was a tax receipt/refund between the payment date and year end. Or a combination of all 3.....receipt + stuff up + non-NZ payments.


Thanks for that bit of forensic work Ferg, much appreciated. I hadn't thought about the possibility of a tax refund shifting the imputation credit account into the negative. Since the refund would have been authorized by the IRD themselves, it would seem a little unfair that such a refund could cause a tax penalty!

I tend to think of Spark as a 100% New Zealand company. But of course Spark is a shareholder, with Vodafone NZ and Telstra, in 'Tasman Global Access' (the Australian International Cable), and a shareholder, with Singtel, Verizon and Telstra in 'The Southern Cross Cable Network (SCCL)' (the US west coast connection). I see SCCL is registered in Bermuda. So maybe there are some FIF tax obligations as a result?

Another possibility is R&D tax credits (that effectively are a reduction in current year tax obligations) on tax paid for one or more of Sparks developing new business sub units.

SNOOPY

[JeffW]

Thanks for that bit of forensic work Ferg, much appreciated. I hadn't thought about the possibility of a tax refund shifting the imputation credit account into the negative. Since the refund would have been authorized by the IRD themselves, it would seem a little unfair that such a refund could cause a tax penalty!


SNOOPY

Imputation Credits can run a negative balance at any time APART FROM 31 March of any year, so I doubt that penalty would apply in this instance - more likely, Imputation Credits attached to dividends prior to the payment of a known liability. It's fairly common practice.

[nztx]

Imputation Credits can run a negative balance at any time APART FROM 31 March of any year, so I doubt that penalty would apply in this instance - more likely, Imputation Credits attached to dividends prior to the payment of a known liability. It's fairly common practice.


Yes, that's correct - something to consider where company balance date is other than 31 March

Where there is a difference or negative - Tax credit purchases via authorised intermediaries is another thing to take into
account and can be done up to last instalment date for the year in question..

[Snoopy]

Imputation Credits can run a negative balance at any time APART FROM 31 March of any year, so I doubt that penalty would apply in this instance - more likely, Imputation Credits attached to dividends prior to the payment of a known liability. It's fairly common practice.


Interesting, I didn't know that. 31st March is the 'standard' end of the tax year though. The end of the tax year for Spark is 30th June. Does Spark still need to have a zero to positive imputation credit balance on 31st March?

SNOOPY

[nztx]

Interesting, I didn't know that. 31st March is the 'standard' end of the tax year though. The end of the tax year for Spark is 30th June. Does Spark still need to have a zero to positive imputation credit balance on 31st March?

SNOOPY

Spark's accounting year ends 30 June

IRD EOY for Imputation credits is 31 March

Spark will report for their year to 30 June - reported to IRD - but considered 31 March year for tax purposes

Spark may for example decide in time for their 3rd Prov tax payment due (usually I believe 28 days / a month or so
after 30 June balance) to up their Prov tax & pay - say 28 July.

In any event the 3rd Prov Instalment would seem to appear to be due at latest for payment
after their 30 June accounting year has finished

So this may result in a negative ICA account at balance date, if credits are attached to dividends paid
as they were in the Interim 9 April 2021 Div pay-outs

Spark's interim dividend was paid also on 9 Apr 2021 - in the current 31 March 2022 Imputation year
but they will have all of 2021/22 year to make up those credits attached to the dividend, in tax payments

Similarly with the fully imputed SPK dividend to be paid out on 1 Oct 2021.

Presumably if Spark are on an Tax Agency account, or similar - 2020 terminal tax wont have been due to be paid
until 7 April 2021 (at latest)

I would expect Spark would have arrangements in place to buy backdated Tax Pool credits if needed which can
be applied backwards into earlier Prov Tax instalments as well (up until final Prov instalment for a year is due)

Sorry to throw a spanner in the works - Snoops :)

[JeffW]

Yes, that's correct - something to consider where company balance date is other than 31 March

Where there is a difference or negative - Tax credit purchases via authorised intermediaries is another thing to take into
account and can be done up to last instalment date for the year in question..

Oddly, although tax purchases through an intermediary backdate the tax for UOMI and penalty purposes, the Imputation Credit effect is not back-dated

[nztx]

Oddly, although tax purchases through an intermediary backdate the tax for UOMI and penalty purposes, the Imputation Credit effect is not back-dated


Okay - that's interesting - so Tax Pool purchases must follow the payments timing as well :)

[Snoopy]

OK I am first to admit that this is not an 'apples with apples' comparison. Both companies are operating in the telecommunications space in New Zealand, but that is where the similarities end. Spark is primarily a 'retailer' that also happens to own their own 'mobile network' and is on the drive to become a wider player in the digital space. Chorus OTOH is strictly a fibre broadband network company that operates entirely in the wholesale space.

Nevertheless both are competitors in the sense that they compete for my investment dollar. So how do the investment fundamentals stack up when the key metrics are tabulated side by side?



FY2021SparkChorus


No. Shares1,867m447.025m


Share Price (10-10-2021)$4.83$6.85


Declared eps20.6c10.5c


Normalised eps20.1c11.5c


Normalised PE24.059.6


Normalised NPAT Margin10.5%5.4%


Normalised ROE25.0%5.4%


Net Bank Debt$1,403m - $72m$2,373m - $53m (1)


Declared NPAT$384m$47m


Min. Debt Repayment Time3.5 years49 years


Snoopy's Fair Share Price Valuation (2)$5.58$8.36


Market Discount to Fair Value-13%-18%



Notes

1/ Bank debt for Chorus excludes crown funding
2/ For this comparison my 'Fair Share Price Valuation' is based on my 'capitalised dividend valuation' model (Post 2658 on Chorus Thread, Post 1820 on Spark Thread). Being a monopoly wholesale provider, I have judged a fair yield in today's ultra low interest rate market for Chorus shares to be 5%. For Spark being in a different competitive market place (albeit starting from a strong incumbent position) I have judged a fair yield for Spark shares to be 6%.
3/ For normalised earnings calculations see post 1808 (Spark thread) and 2792 (Chorus thread)

Lined up so starkly like that, when I was looking recently for a space for my 'telecommunicatioons dollar ' to go, I think you can see why I pushed it the way of Spark. It came down to a better earnings ability (higher ROE) and much more conservative debt position (the MDRT figure for Chorus of 49 is eye watering). I actually hold both shares. But my 'commitment' to each, in dollar terms, is now 4:1 in favour of Spark.

My fair value calculations, both yield based, both have a whisker of unease attached to them. Actual dividends paid out from Spark have been above core earnings in recent years. So being able to keep paying those dividends in the future will require some of those Spark 'business development plans' to come to fruition. LIkewise Chorus is transitioning to a new 'cashflow based' dividend policy. I was already projecting sharply lower imputation credit percentages going forwards, a reality which has since been confirmed by Chorus. But it does seem the Chorus capital spend is tracking higher than expected, and they are facing more competition from 'disruptive technology' in the form of 'fixed mobile broadband' from Spark, Vodafone and 2 degrees. So I may have to rethink that 'acceptable monopoly yield' that I have attributed to Chorus

SNOOPY

[Biscuit]

OK I am first to admit that this is not an 'apples with apples' comparison. Both companies are operating in the telecommunications space in New Zealand, but that is where the similarities end. Spark is primarily a 'retailer' that also happens to own their own 'mobile network' and is on the drive to become a wider player in the digital space. Chorus OTOH is strictly a fibre broadband network company that operates entirely in the wholesale space.

Nevertheless both are competitors in the sense that they compete for my investment dollar. So how do the investment fundamentals stack up when the key metrics are tabulated side by side?



FY2021
Spark
Chorus


No. Shares
1,867m
447.025m


Share Price (10-10-2021)
$4.83
$6.85


Normalised (eps)
20.1c
11.5c


Normalised PE
24.0
59.6


Normalised NPAT Margin
10.5%
5.4%


Normalised ROE
25.0%
5.4%


Net Bank Debt
$1,403m - $72m
$2,373m - $53m (1)


Declared NPAT
$384m
$47m


Min. Debt Repayment Time
3.5 years
49 years


Snoopy's Fair Share Price Valuation (2)
$5.58
$8.36


Market Discount to Fair Value
-13%
-18%



Notes

1/ Bank debt for Chorus excludes crown funding
2/ For this comparison my 'Fair Share Price Valuation' is based on my 'capitalised dividend valuation' model (Post 2658 on Chorus Thread, Post 1820 on Spark Thread). Being a monopoly wholesale provider, I have judged a fair yield in today's ultra low interest rate market for Chorus shares to be 5%. For Spark being in a different competitive market place (albeit starting from a strong incumbent position) I have judged a fair yield for Spark shares to be 6%.

Lined up so starkly like that, when I was looking recently for a space for my 'telecommunicatioons dollar ' to go, I think you can see why I pushed it the way of Spark. It came down to a better earnings ability (higher ROE) and much more conservative debt position (the MDRT figure for Chorus of 49 is eye watering). I actually hold both shares. But my 'commitment' to each, in dollar terms, is now 4:1 in favour of Spark.

My fair value calculations, both yield based, both have a whisker of unease attached to them. Actual dividends paid out from Spark have been above core earnings in recent years. So being able to keep paying those dividends in the future will require some of those Spark 'business development plans' to come to fruition. LIkewise Chorus is transitioning to a new 'cashflow based' dividend policy. I was already projecting sharply lower imputation credits going forwards, a reality which has since been confirmed by Chorus. But it does seem the Chorus capital spend is tracking higher than expected and they are facing more competition from 'disruptive technology' in the form of 'fixed mobile broadband' from Spark, Vodaphone and 2 degrees. So I may have to rethink that 'acceptable monopoly yield' that I have attributed to Chorus

SNOOPY

Given the first nine lines of your comparison table (favour SPK), its hard to see how you arrived at the comparative figures in the last two lines, Snoopy.

[Snoopy]

Given the first nine lines of your comparison table (favour SPK), its hard to see how you arrived at the comparative figures in the last two lines, Snoopy.


If you look under 'Note 2' you will see a reference to each of the posts in the respective threads in which I derived 'fair value'. I may have to rework that Chorus figure as I did that just before the FY2021 Chorus results came out (but I was using Chorus projections). Of course as a value investor I do not seek to buy a share at fair value. I am after shares that I can buy below fair value, so I have a bit of a safety buffer just in case some of my assumptions turn out to be optimistic.

SNOOPY

[percy]

Given the first nine lines of your comparison table (favour SPK), its hard to see how you arrived at the comparative figures in the last two lines, Snoopy.

I will use Direct Broking figures.
.......................................eps........ ..........pe..................yield............... ..divie..............share price.
SPK...............................20.74........... ....23.31................5.17%................25 cps.............$4.83
CNU...............................10.46........... ....65.49................3.58%...............24.5 cps............$6.85

So investing $100.000 which do I choose.?
$100,000 will buy 20,703 SPK shares providing $5175.75 in divies.
$100,000 will buy 14,598 CNU shares providing $3,576.51 in divies
There fore I would receive 44.71% more in divies by investing in SPK.or $1,599.24 more.

[Biscuit]

I will use Direct Broking figures.
.......................................eps........ ..........pe..................yield............... ..divie..............share price.
SPK...............................20.74........... ....23.31................5.17%................25 cps.............$4.83
CNU...............................10.46........... ....65.49................3.58%...............24.5 cps............$6.85

So investing $100.000 which do I choose.?
$100,000 will buy 20,703 SPK shares providing $5175.75 in divies.
$100,000 will buy 14,598 CNU shares providing $3,576.51 in divies
There fore I would receive 44.71% more in divies by investing in SPK.or $1,599.24 more.

Yes, on first glance it is hard to see the value proposition in CNU, but then I haven't looked in detail as they don't really interest me. What's interesting about them? They are building a domestic fibre network. Sounds fairly limited and just the sort of thing the commerce commission would regulate so no exponential profit growth and high risk tech-wise.

[BlackPeter]

Yes, on first glance it is hard to see the value proposition in CNU, but then I haven't looked in detail as they don't really interest me. What's interesting about them? They are building a domestic fibre network. Sounds fairly limited and just the sort of thing the commerce commission would regulate so no exponential profit growth and high risk tech-wise.

I recon CNU is as exciting as AIA, POT or any of the Gentailers.

They do provide an essential service and operate as monopolist (or as the Gentailer's, in an oligopoly).

Predictable income, but big SP changes are still possible, however more likely based on a change of the regulatory framework (these things do happen ...) or the markets perception of what a fair PE for a given earnings would be.

Not sure I would buy CNU today, but for sure there have been amazing opportunities in the past (and might come again). In 2013 it was possible to buy a CNU share for less than $1.50 ... quite healthy capital appreciation over these 8 years for a boring infrastructure company, wasn't it?

One thing which I didn't see in the recent discussion is the fact that Chorus will start to reap over the next couple of years the fruits of its huge fibre rollout investment, i.e. capex will drop (when everybody connected) and income will rocket. Obviously - politics easily might curtail these future earnings, but I think markets at the moment assume they won't. That's why CNU is trading currently at a premium compared to SPK which is just another replaceable Telecom company.

Discl: hold neither CNU nor SPK

[percy]

I think a lot comes down to whether you see "fibre" or "wireless" as the future.
I have a "wireless" connection,and am in the "wireless" camp.
I own SPK shares, while the trust I am a trustee of holds CNU and SPK.,

[BlackPeter]

I think a lot comes down to whether you see "fibre" or "wireless" as the future.
I have a "wireless" connection,and am in the "wireless" camp.
I own SPK shares, while the trust I am a trustee of holds CNU and SPK.,

That's the problem with predicting things which are in the future :):

We should however not forget that Sparks WiFi transceivers need (and use and presumably pay for) as well CNU's glass fibre network to stay in operation - the WiFi over the air part are only the last handful of hundred meters - the reminder is CNU's glass fibre ...

[850man]

I think a lot comes down to whether you see "fibre" or "wireless" as the future.
I have a "wireless" connection,and am in the "wireless" camp.
I own SPK shares, while the trust I am a trustee of holds CNU and SPK.,

From a technology perspective, fibre is the only service where you can be guaranteed uncontended bandwidth, you buy 100Mb you get 100Mb (soon to be 300Mb at no extra cost). Wireless, even 5G, is a shared spectrum so the endpoint shares available bandwidth with all others using the cell site. Even now it's evident that the shared nature of fixed wireless impacts streaming services. This is less evident in areas where fewer people are on a cellsite but in city areas, where the bandwidth may be shared by tens to hundreds of users especially if more subscribe to fixed wireless, it's going to become an issue.

You can of course take you fixed wireless box to your bach or on holiday with you, not that Spark allows that.

[Snoopy]

I think a lot comes down to whether you see "fibre" or "wireless" as the future.
I have a "wireless" connection,and am in the "wireless" camp.
I own SPK shares, while the trust I am a trustee of holds CNU and SPK.,


I am in the 'wireless camp' too Percy. In the three years or so I have been on it everything has gone faultlessly. Mind you I have never been a 'gamer', nor am I a large consumer of high res video. I thought, perhaps I am in a 'shrinking dinosaur group'. But then my cousin, who has two teenage boys (actually one is in his 20s but teenagers seem to go up to 25 these days) moved into an 'interim house' that had a wireless connection (Spark). Those two young guys gave that wireless network a real gaming workout (both on separate gaming channels at the same time). There was a family imposed 8pm gaming curfew, when internet use switched to streaming video for the family. Eventually they got the message from Spark that their usage had gone over a somewhat nebulous 'fair data cap' and they switched to fibre. But neither of the boys had any problem -technically- with the wireless set up. The wireless set up was via a 4G connection. Once 5G gets established, the wireless network performance should get even better. Spark's goal is to get a minimum of 30% of their customer base on 'fixed wireless broadband'. If they succeed in that goal, then there isn't much growth left for Chorus in supplying more fibre to the Spark customer base.

There is other 'fixed wireless broadband' from Vodafone and 2 degrees. But anecdotally I have heard stories of very poor service from Vodafone, and 2 degrees are really only just getting started. So I think I am in the right camp with Spark, both from a customer and shareholder perspective.

SNOOPY

[Snoopy]

We should however not forget that Sparks WiFi transceivers need (and use and presumably pay for) as well CNU's glass fibre network to stay in operation - the WiFi over the air part are only the last handful of hundred meters - the reminder is CNU's glass fibre ...


I used to think that. But I am not sure if it is true Blackpeter. Look at p8 of AR2021. There you will see a nice pattern of purple lines representing 1200km of backhaul 'Fibre Transport Network' owned and operated by Spark. Sure there are a few areas of the country that don't connect, but it does look remarkably complete between major population centres. I am thinking the actual backhaul work performed by Chorus for Spark, on a nationwide basis, may not be so large?

SNOOPY

[dobby41]

We should however not forget that Sparks WiFi transceivers need (and use and presumably pay for) as well CNU's glass fibre network to stay in operation - the WiFi over the air part are only the last handful of hundred meters - the reminder is CNU's glass fibre ...

While they do consume some CNU services they are getting of them wherever possible.
And possible is most places.

[BlackPeter]

I used to think that. But I am not sure if it is true Blackpeter. Look at p8 of AR2021. There you will see a nice pattern of purple lines representing 1200km of backhaul 'Fibre Transport Network' owned and operated by Spark. Sure there are a few areas of the country that don't connect, but it does look remarkably complete between major population centres. I am thinking the actual backhaul work performed by Chorus for Spark, on a nationwide basis, may not be so large?

SNOOPY

Interesting ... yes, I thought that Chorus owns all the backbone fibre network. Looks like I thought wrong. Always learning :):

On the other hand - googling after Sparks backbone fibre network I came across this link:

https://www.sparknz.co.nz/news/joint_fibre_build/

So - I take it that Chorus, Spark (and some of the other Telecom providers) do own (at least some of) the fibre trunks jointly.

While I have no clue how the relevant commercial agreements look like, you are right, while Chorus is still involved it is under these conditions unlikely to be a huge money spinner for them.

Just wondering how this is all in the spirit of the laws which used to split Telecom and Chorus apart, if they are now growing back together :confused: ?

[percy]

Not sure of my facts.
Did hear that CNU are looking to stopping supporting copper.
That will mean people will have to either go to fibre or wireless.
CNU are hopeful people will go to fibre.
I have my doubts.

[dobby41]

Interesting ... yes, I thought that Chorus owns all the backbone fibre network. Looks like I thought wrong. Always learning :):

On the other hand - googling after Sparks backbone fibre network I came across this link:

https://www.sparknz.co.nz/news/joint_fibre_build/

So - I take it that Chorus, Spark (and some of the other Telecom providers) do own (at least some of) the fibre trunks jointly.

While I have no clue how the relevant commercial agreements look like, you are right, while Chorus is still involved it is under these conditions unlikely to be a huge money spinner for them.

Just wondering how this is all in the spirit of the laws which used to split Telecom and Chorus apart, if they are now growing back together :confused: ?

They own some jointly and some in their own right.
When Telecom and Chorus split Telecom kept a trunk capability.
Since then they have laid heaps more.
Spark has a huge network in its own right.

Remember that at the split no one said that Telecom was only to be a service provider and wasn't allowed a network - it was about Chorus being able to wholesale access (which Spark doesn't do) to other retailers.

[Bjauck]

I think a lot comes down to whether you see "fibre" or "wireless" as the future.
I have a "wireless" connection,and am in the "wireless" camp.
I own SPK shares, while the trust I am a trustee of holds CNU and SPK., My house is semi-rural in the Auckland fringe, about 120m from the road. Currently I am on a copper vdsl. Luckily I am close to a box so speeds are adequate for streaming hd video. I am in the wireless coverage area, so I will probably be going the wireless route this year as it would be less trouble than hitching up to fibre.

[Bjauck]

Not sure of my facts.
Did hear that CNU are looking to stopping supporting copper.
That will mean people will have to either go to fibre or wireless.
CNU are hopeful people will go to fibre.
I have my doubts. I am not sure but I think it is the PSTN "analog voice over copper" part that is being stopped.

[Marilyn Munroe]

Not sure of my facts.
Did hear that CNU are looking to stopping supporting copper.
That will mean people will have to either go to fibre or wireless.
CNU are hopeful people will go to fibre.
I have my doubts.

It is possible Chorus in order to shut down the copper would shift hold-out voice line customers over to voice over IP through the fiber network.

They would be given a something which looks like a phone, sounds like a phone and acts like a phone but is a fiber connecting device.

Boop boop de do
Marilyn

[dobby41]

Not sure of my facts.
Did hear that CNU are looking to stopping supporting copper.
That will mean people will have to either go to fibre or wireless.
CNU are hopeful people will go to fibre.
I have my doubts.

The PSTN is slowly being shut down and Chorus is reducing (and removing) the maintenance of the copper network (it is expensive to maintain and riddled with faults).
At some point, you will probably have to go to fibre or Wireless.
I prefer fibre because it suffers less from capacity contention - it is far easier (and cheaper) to remove contention in a fibre network than a wireless network.

[dobby41]

It is possible Chorus in order to shut down the copper would shift hold-out voice line customers over to voice over IP through the fiber network.

They would be given a something which looks like a phone, sounds like a phone and acts like a phone but is a fiber connecting device.

That is what is happening.
Spark and Voda also supply wireless devices that are the same (also VoIP or VoLTE) - a small wireless modem and connect the phone.

[Zaphod]

From a technology perspective, fibre is the only service where you can be guaranteed uncontended bandwidth, you buy 100Mbps you get 100Mb .

Within the context of the UFB network, a plan with a Peek Information Rate (PIR) of 100Mbps (for example) is readily available, but that's not the guaranteed throughput. A Committed Information Rate (CIR) that provides a guaranteed sustained 100Mbps pushes the price up quite a lot further.

High CIR's can also be provisioned on the copper network in an uncontended fashion. Indeed, we had at one time a Chorus provisioned private point-to-point copper link between two offices, as well as a high CIR ADSL service for general internet access.

[dobby41]

High CIR's can also be provisioned on the copper network in an uncontended fashion. Indeed, we had at one time a Chorus provisioned private point-to-point copper link between two offices, as well as a high CIR ADSL service for general internet access.

Expensive though!

[Mickey]

The PSTN is slowly being shut down and Chorus is reducing (and removing) the maintenance of the copper network (it is expensive to maintain and riddled with faults).
At some point, you will probably have to go to fibre or Wireless.
I prefer fibre because it suffers less from capacity contention - it is far easier (and cheaper) to remove contention in a fibre network than a wireless network.

That's right. There are two large initiatives underway. The PSTN is a 30+ year old NEAX based switching technology that is owned by Spark that is gradually being shut down. The PSTN allows Spark to provide services over the copper network that is owned by Chorus. Spark is migrating its customers who are in fibre and wireless coverage areas off the PSTN to its Converged Communication Network (CCN), which is a more modern IP network. Chorus are undertaking a copper withdrawal programme whereby they are gradually removing copper cabinets in areas that are served by their fibre network.

[mikelee]

I lost my copper landline years ago..it's good that Spark gave me all the hardware for wireless for free but am still not comfortable with no connect in an outage. The battery for backup they supplied turns out to be faulty and it was never replaced.:mad ;:

[dobby41]

I lost my copper landline years ago..it's good that Spark gave me all the hardware for wireless for free but am still not comfortable with no connect in an outage. The battery for backup they supplied turns out to be faulty and it was never replaced.:mad ;:

Most people have cordless phones and they stop during a power outage also.

[Zaphod]

Expensive though!

Yes, I think the PON link was around $2k a month for a fraction of the speed mentioned above "back in the day" which wasn't all that long ago. It predates the UFB rollout though.

[kiwitrev]

Not sure if anyone can answer my question regarding divvies and imputation credits. Any insight as to how long the status quo can be maintained for both. Sorry if this is a naive query.

[BlackPeter]

Not sure if anyone can answer my question regarding divvies and imputation credits. Any insight as to how long the status quo can be maintained for both. Sorry if this is a naive query.

Good question.

I assume you are referring to the fact that their dividend (this year 25 cents) is higher than their earnings (avg. 20 cts), and I think it often is. Their NTA (34cts) is not a lot either.

Just pulling this from open databases .... somebody scrutinizing the balance sheet (Snoopy?) might be able to shed more light into this issue.

From memory - Telecom / Spark always operated with a "lean" balance sheet, and so far it worked thanks to their quite strong and reliable cash flow. On the other hand - I don't see as much secretly hidden value in Spark as e.g. the Gentailers would have (they tend to pay as well dividends above earnings thanks to their ability to reduce earnings by writing off assets they don't lose :) ). I'd say a reduction of dividends at some stage might well be on the menu ...

However - take this with a grain of salt, it is a long time since I did some sort of analysis on Spark. Would be interesting to get Snoopy's view on your question.

[Snoopy]

Not sure if anyone can answer my question regarding divvies and imputation credits. Any insight as to how long the status quo can be maintained for both. Sorry if this is a naive query.


No nothing naive, about your question. It is probably the thing that all Spark shareholders most want to know!

My take on things, FWIW, some 'growth' will be required to maintain dividends and imputation credits at 12.5c (interim) + 12.5 (final) with 'full imputation'. IMO, from easiest to hardest, is that the keys to growth going forwards into FY2022 are:

1/ Restoration of Mobile Roaming Revenue: This has largely dried up during the pandemic and yet from p2 AR2021

"Mobile revenue grew $23M despite the loss of roaming revenues. Pay monthly mobile connections grew by 56,000."

That shows to me that Spark are doing 'something right' in the mobile space. I know regular tripping over the Australia looks a world away again now. But I feel it will be back sooner than some think. 5G could also inspire some growth in the mobile space.

2/ Spark seem very determined to leverage their mobile network further into the fixed wireless broadband space. Yes technically it will never be as good as fibre. But 'never as good' might well translate to 'more than good enough' for a lot of people. And if Spark can hit the right price point with a broadband package that is cheaper to supply than via Chorus, this may be a way that Spark can extricate more profit from that broadband market.

3/ 'Data storage in the cloud' plus any associated security enhancements looks like a solid way to meet demand and lift profits in the near term.

4/ This is a little further out but I feel a more widespread use of 'the Internet of Things' (IoT) which covers everything from public rubbish bins pinging their owners as to when they should be emptied, to weather monitoring tools feeding back to the farmer any moisture deficits in their paddocks.

I was tempted to add in 'Spark Health' too, which has been billed as an IoT prospect. But so far I am a little shy on exactly how Spark plans to pursue this in terms of a 'plan of implementation'.

SNOOPY

[percy]

From Craigs' research.
...................................2021 actual....2022 forecast........2023.............2024
Dividend per share.........25 cents...........25cents.............25.5 cents........26cenys.

[Biscuit]

......the keys to growth going forwards into FY20222 are....

SNOOPY


Wow, I admire your long term foresight!!

[Snoopy]

From Craigs' research.
...................................2021 actual....2022 forecast........2023.............2024
Dividend per share.........25 cents...........25cents.............25.5 cents........26cenys.


It is easy to roll out a favourable projected dividend stream Percy. But what did Craigs say about underlying earnings that will underpin these increasing dividend projections?

SNOOPY

[mikelee]

I wonder if the SP is going to stagnant again, like last time, after the dividend pay out.

[Snoopy]

Continuing my Spark IoT (Internet of Things) podcast reviews. This one is a bit more 'futurist' than the other podcasts that I have reviewed so far:

https://www.buzzsprout.com/389848/1675012-ep-7-smart-cities

This podcast is on how the Internet of Things could reshape the public sector. The Hamilton City Council sees a role for themselves to showcase what is possible and partner with others on how they can benefit from IoT applications.

Gathering data, and figuring out the best way to utilise it in the running of a city is the goal. This could be via 'Public Libraries' of information accessible in the cloud. Sharing data and people adding their own individual knowledge is encouraged. To bring the public along, all information held in such 'Data Cloud Libraries' should be transparent, while still allowing individuals to block sensitive information. People must understand any application benefits and associated consequential issues.

Working examples already in place include:

1/ Smart control of street lighting, with sensors put throughout the network. The light poles could collect localised rain data to predict imminent street flooding, as an future 'expanding what we do now' example.
2/ 'Smart Car Parking Spaces': Replacing a 'two hour free' car park system, with a 'two hour free at a combination of parks' system. This requires sensors in all metered parking bays linked to a mobile phone app, 'Pay My Park'. This allows users to check parking availability, get reminders when their parking is due to expire, and pay for parking via their mobile device.
3/ Working with local electricity network company "WEL Networks" to allow checking the availability of the local electric vehicle charging network.
4/ 'Smart Mobility' can be enabled by looking at the data from usage pattern of electric scooters.
5/ Monitoring flows in underground pipes on a continuous pre-emptive basis as a tool for locating leaks.
6/ Creating a networking space for 'Community Innovation', in partnership with local idea champions and businesses.

Further up the North Island, Auckland has built a 'smart street' in the Wynyard quarter. The Auckland City Council is on the outlook for technology, information or data that can be gathered for people in the 'Streetscape' to use as they pass through. Sitting on a solar powered 'smart seat', you can recharge your electric bicycle or your smartphone. There is smart sensing on traffic lights, so that pedestrians do not need to push the 'cross' button. This includes technology for the visually impaired that can tell them when it is safe to cross by interacting with their mobile phones.

Predictive analytics on public transport can be used to ensure that bus and ferry connections do connect, despite unforeseen service route delays. There is the possibility of knitting together traditional public transport journeys with those made by the Electric Scooter and Uber too.

The Auckland City Council sees opportunities with 5G and transportation. But issues of liability from traffic incidents look like pushing the adoption of private autonomous vehicles out many years into the future. The sole exception to this is vehicles in a very controlled environment, like an Airport passenger shuttle, or very low speed applications.

No-one has satisfactorily defined what a 'Smart city' is. There are 'smarts in a city', and 'different cities have different smarts'. Different cities will plough their own future smart path.

SNOOPY

[peat]

The problem with clouds is there is a lot of vapour.
I would prefer local governments stick to the knitting of their role. Its not like they don't have enough to do.
I wasnt clear on what you wrote how street lighting should be smart. It doesnt turn off when no one is around I wouldnt think? There is no need to collect rain water on poles - cloud connected community weather stations are doing this already.

I know that there will be uses for IoT for sure but sometimes it all sounds a bit contrived. Or am I just raining on the parade.

[dobby41]

I know that there will be uses for IoT for sure but sometimes it all sounds a bit contrived. Or am I just raining on the parade.

Electricity meter reading.
You are raining on the parade.

[Snoopy]

The problem with clouds is there is a lot of vapour.
I would prefer local governments stick to the knitting of their role. Its not like they don't have enough to do.
I wasn't clear on what you wrote how street lighting should be smart. It doesn't turn off when no one is around I wouldn't think? There is no need to collect rain water on poles - cloud connected community weather stations are doing this already.

I know that there will be uses for IoT for sure but sometimes it all sounds a bit contrived. Or am I just raining on the parade.


Fair comment Peat. I would say that lighting and parking were core council functions though?

I too was unsure about what the smart management of lighting meant. So I clicked through the links. There was something about residents being able to contact the council after their new lights had been installed, as the luminescence could be adjusted. So maybe they could increase the lighting power on really dark nights? All the before and after shots showed more light with the new LED lighting, and all for less operating and maintenance cost. In the video, the guy from the Hamilton Observatory seemed pleased as all the new light was facing downwards with no leakage out the sides.

I take your point on the private weather stations too. Why replicate what your 'citizen scientists' are already doing? Still I guess whether the city does it, or citizen scientists do it, Spark benefits either way?

SNOOPY

[Snoopy]

Here is my summary review on the last IoT podcast from this set (it is number 2 on the list of 7 but I reviewed them out of order).

https://sparkiot.buzzsprout.com/389848/1425736-ep-2-talking-to-business

The format for this podcast was a panel discussion with Tessa Tierney (Product Director for Spark NZ), Stephen Brown (Director of Directed Electronics NZ), and Kriv Naicker (Managing Director of Synaptec, and Chair of the NZ IoT Alliance).

The IoT is not new. In 1874 the French had sensors on Mount Blanc that sent back information on snow depth to Paris. Today machine-to-machine type communications, telemetry (collection of measurements or other data at remote points and their automatic transmission), telematics (GPS tracking) type solutions have been around for decades. But what were hard wired into specific businesses can now be spread across industries and sectors (this effect is termed 'horizontal leverage'). The same technology solution for 'Agritech', as an example, must be able to be applied to different contexts, be it dairy, horticulture, viticulture, or arable farming. In other words today's IoT solutions must be sharable and reusable.

Heavy vehicle telemetry is now just as much of interest to the owners of a heavy truck, as to the customers -like food producers dispatching the goods- and to end line customers -like supermarkets receiving the goods. As well as timing, for spoilage reasons, they want to know the temperature of the product on its journey. To allow data use across different user applications, a standardised format for recording data is highly desirable.

Spark see their role as a packager of the IoT service: helping to choose what commercial partners, devices and best practices to knit together. Spark being the 'connectivity partner', can be agnostic towards different devices and services, which can help reduce any perceived vulnerability in choosing the wrong technological solution. Spark see themselves as an aggregator, an integrator, and protector against outside internet attacks. 5G is expected to greatly improve the usefulness of the Internet of Things.

Rather than think in terms of industries, Spark see the requirements of customers can usually be encompassed by solving four key questions:

1/ How do I digitise my processes?
2/ I am solving a costly problem often related to waste, loss, compliance or health and safety. Where are my workers? Are they safe? Can they contact me if they're in trouble?
3/ Are there data and insights I'm leaving on the table today that would help me make better business decisions?
4/ If I'm looking at my business, where will customer experience be improved by the use of this data?

Once you can technically solve those questions, the cost of IoT implementation must be less than the cost of the asset you are trying to make more efficient to see a 'value return' on the exercise.

Adoption of Vehicle telematics is very high, with the likes of NZ innovators but now global companies in this space Coretex, and E-Road, digitising road charges and health and safety compliance. New business models enhanced by the IoT include 'car sharing' and even 'truck sharing' (OEM dealers utilising vehicles for sale 'on the lot' to earn income in the interim).

Asset tracking was 'the first cab off the rank', but don't think of an asset as just a car or a vehicle. The next waves of IoT adoption is likely to be a further evolution of this, tracking pets, kids, workers, chairs ....and tracking the condition of things, not just their location.

For most potential customers, the IoT will not change the type of data they already use in their business. It will provide more granular, pertinent and accessible data while ensuring cyber security and data privacy concerns are met. The challenge is how to make best use of that data, augmenting the information the customers already have that helps them with better planning and decision making. The IoT is seen as the bridge between the physical and digital world, both of which must remain working together with each other.

SNOOPY

[Ferg]

The challenge is how to make best use of that data, augmenting the information the customers already have that helps them with better planning and decision making.

Hi Snoopy

Thanks for sharing. I think the quote above misses an important point for businesses wanting to use this sort of technology. The challenge IMO is getting costs and technology to a point where it makes financial and/or practical sense.

I was working with a client on a project where we needed to track very large "wet" bins. In one example client A ran 24/7 where offal was the byproduct, and that was delivered to client B who would then use that to make another product. Client A would fine the logistics company heavily if there were not enough wet bins at the right location on site to take the offal. That was a very good incentive to get it right and look at IoT. We looked at tagged bins using Spark where the tag would "ping" a local cell site to say "I am here", but there were some fundamental issues which stopped the project dead. In order of significance:


the monthly cost was something like $30-$35+ for each unique tag/identifier (like a cellphone # and a cellular connection charge), but when multiplied by hundreds of bins it was not an insignificant cost. Spark was negotiable on the monthly costs but only to the point where the frequency of pings was unworkable. Also, redundancy was needed (ie extra bins) to cope with fluctuations in demand, but unused bins still incurred the same charge.
client sites are relatively large such that significant capex was required for booster receivers to get a more granular location within that site (we needed to know if the bins were at a specific location within that site)
there are black spots in various parts of the country, e.g. parts of SH5 between Taupo and Napier where IoT doesn't work
we couldn't guarantee the tags would not be damaged while being used and/or moved
from memory battery life was also limited which required preemptive action (and $)


In this instance IoT could not beat the current process. The responsibility was with the drivers & manager via a tight process and had worked for years. To replace this with centralised control would have resulted in more costs to the company over and above those from Spark. In short, we could not get the financials to work in this example. The counter argument is it works until it doesn't.

That said I suspect this is one example of many where it "could" work but while Spark want to charge a flat fee similar to that of a prepay cellphone, it is hard to get the economics to work for very large asset fleets. Although it works very well with vending machines where smart products require a smart solution (such as vending where the machine orders what needs to be replaced rather than drivers & route planners guessing) whereas simple products (e.g. bins) require a simple solution.

[Snoopy]

Many organizations have assets and things of value that need to be tracked. 'Mainfreight's' New Zealand operations need to know where each of their 400 'Hazardous Chemical Segregation Bins' are, so that the empty bins can be returned to Hamilton and Auckland (there is an imbalance of demand north to south).

'Mainfreight' were facing the extra cost of buying 50-100 more $3000 bins per year. Now, a computer dashboard, with bin locations, is 'display accessible' all over the country. Those missing bins are no longer missing! The fact that customers know the bins are being tracked, means they tend to be faster to return them too.

https://sparkiot.buzzsprout.com/389848/1611979-ep-5-asset-tracking

The Spark 'LoRa' network is the solution. Spark’s national 'LoRaWAN' network was built by specialist network provider, and IoT rollout experts, Kordia. It suits low-power, low-data (like single ping) uses. So what is 'LoRa'? Physically LoRa sites consist of a box and antenna (known as a ‘gateway’) installed, for the most part, on Spark 4G cell sites. Where appropriate, Spark can install LoRa boxes on third party sites. Alternative cellular tracking technology based on 3G and 4G technology takes more battery to power up. With LoRa, everything being tracked 'phones home' once a day (although you can set it to phone home as many times as you want). As far as utilising extra information from the data collected goes, knowing turnaround times means 'Mainfreight' know how to optimize the number of boxes they actually need in the future.

A particular need of Mainfreight was to be able to continue to track bins in an inside environment (concrete walls will impede wireless tracking signals). Spark's solution was to install repeater devices, like a broadband modem, into each of the depots that extend coverage into the building environment. Technologies that can be used inside are Ultra Wideband, RFID (Radio Frequency IDentification), and WiFi. Spark can use all three technologies.

Why use Ultra Wideband? Ultra-wideband refers to the significantly larger spectrum (up to several GHz) employed over a short range. It measures distance by signal time of arrival. Other short-range technologies determine distances by signal strength, which is less accurate. How does RFID work? When triggered by an electromagnetic interrogation pulse from a nearby RFID reader device, the tag transmits digital data, usually an identifying inventory number, back to the reader.




Hi Snoopy

Thanks for sharing.

I was working with a client on a project where we needed to track very large "wet" bins. In one example client A ran 24/7 where offal was the byproduct, and that was delivered to client B who would then use that to make another product. Client A would fine the logistics company heavily if there were not enough wet bins at the right location on site to take the offal. That was a very good incentive to get it right and look at IoT. We looked at tagged bins using Spark where the tag would "ping" a local cell site to say "I am here", but there were some fundamental issues which stopped the project dead. In order of significance:


the monthly cost was something like $30-$35+ for each unique tag/identifier (like a cellphone # and a cellular connection charge), but when multiplied by hundreds of bins it was not an insignificant cost. Spark was negotiable on the monthly costs but only to the point where the frequency of pings was unworkable. Also, redundancy was needed (ie extra bins) to cope with fluctuations in demand, but unused bins still incurred the same charge.
client sites are relatively large such that significant capex was required for booster receivers to get a more granular location within that site (we needed to know if the bins were at a specific location within that site)
there are black spots in various parts of the country, e.g. parts of SH5 between Taupo and Napier where IoT doesn't work
we couldn't guarantee the tags would not be damaged while being used and/or moved
from memory battery life was also limited which required preemptive action (and $)


In this instance IoT could not beat the current process. The responsibility was with the drivers & manager via a tight process and had worked for years. To replace this with centralised control would have resulted in more costs to the company over and above those from Spark. In short, we could not get the financials to work in this example. The counter argument is it works until it doesn't.

That said I suspect this is one example of many where it "could" work but while Spark want to charge a flat fee similar to that of a prepay cellphone, it is hard to get the economics to work for very large asset fleets.


As a Spark shareholder, I am disappointed to hear of your experience in this potential client bin tracking exercise Ferg. For comparison, I re-quote -above your own quoted experience-, the 'Mainfreight' bin tracking experience that was successful.

I guess a major difference was that the Mainfreight bins were for hazardous chemicals and cost $3,000 each. So it was quite an expensive exercise to build a supply of spare bins. I dare say the bins you were looking at tracking would not have cost that much per bin? Part of the Mainfreight cost saving on bin tracking was not having to build many extra bins! But if you had to hold extra bins anyway for periodic high demand, then this economy of not building extra bins was not available to your client.

Like Mainfreight, your client would have had to fork out extra money for some 'repeater hardware', to track those bins over a large work spaces. But it is disappointing to know the cost of such work was significant in the context of several thousand dollars worth of ping location charges each month.

The high monthly charge of $30-$35 that Spark quoted you does sound like a cell phone network price (see separate quote box below) . I wonder if this was what Spark offered you rather than the LoRaWAN (for LoRa = Long Range) network that was so ably used by Mainfreight?

I am surprised you mentioned transmitter battery life as an issue, as I thought batteries lasted for months on the LoRa system. Perhaps the system Spark offered your customer -instead- was the one below?



Alternative cellular tracking technology based on 3G and 4G technology takes more battery to power up. Spark's second high-power LTE ('Long Term Evolution' signifying a fast download rate utilising the 4G network) particular tracking network (LTE Cat-M1), called ‘M1’ for short. M1 can transmit text messages.


Of course it might be that Mainfreight, being one of the largest transportation companies in the country, flexed their economy of scale muscles and, in addition, got an early adopter discount in exchange for Spark being allowed to promote the same system to other potential clients, - both factors that were not available for your customer.

I am also disappointed that the tracking equipment that could be attached to each bin looked vulnerable to damage. That is surely a thing that should have been done right at the design stage!



The challenge IMO is getting costs and technology to a point where it makes financial and/or practical sense.


I was going to end my Business Conference Summary IoT post with the following statement

"The cost of IoT implementation must be less than the cost of the asset you are trying to make more efficient to see a 'value return' on the exercise;"

I probably should have left it at the end.

SNOOPY

[Ferg]

Thanks Snoopy and a very interesting comparison.

I founds my project notes from 2018: there were ~2,000 bins used, of which my client owned about half of the bins (the other half being owned by their clients which was a problem of itself).

We got down to $25/month for 4G (from 30-35) and lower for the low frequency RFID option, but low frequency came with a lot of repeater upfront and monthly costs given a trial run with one client found a lot of black spots. 4G had a 6-12 month battery life depending on the number of pings and (I believe) distance to cell tower, whereas the low frequency option was 2-3 years battery life.

The capex cost was huge and the extra operating costs were about 5-10 times higher than existing methods (albeit with process tweaks). That is not an exaggeration; I put the recommendation and business case to the CEO & execs.

To put it into context, we had a stable business and "lost" maybe 1 bin per year and the occasional stiff penalty, but that was minor compared to IoT. The cost per bin was around $2,000 each. The useful life and ongoing repairs were such that we bought maybe 10 new bins per year as part of refreshing the fleet or more for a new client. So with Mainfreight they were comparing to a much larger capex cost which would have made IoT worth using. That amount of capex with MFT sounds like a completely different business case/justification....which I actually struggle to understand. Does it mean they didn't have their client circuits planned correctly and/or they didn't have excess linehaul capacity to get their bins back to the other city? Or were they undergoing major growth? (rhetorical)

If the unit was on the outside of the bin it was prone to either crushing by chain or fork hoist. Placed inside it would been immersed in, or exposed to, liquids - in some cases they could be boiling temperature, or in freezing conditions and/or exposed to a mix of toxic chemicals (e.g. tanning). The outside option was best but required a custom weld protection solution for each bin -> more capex. Great idea but the financials didn't work - unfortunately it was not even close such that I couldn't justify recommending it.

Cheers, Ferg.

P.S. For clarity - I have been involved in other large scale asset tracking projects (i.e. vehicle fleets, vending & postmix machines, wine barrels, rented IT equipment etc) and I have hands on experience with IT and programming etc. I would love to see Spark get into and profit from IoT given I think they (and eRoad) are the best positioned of all NZX companies to do so, but from an anecdotal perspective I struggle with the costs for the client. That said, my last work on that project was 2018 so some things may have changed since then.

[peat]

airtags?

sounds too obvious.

[Snoopy]

Rather than think in terms of industries, Spark see the requirements of customers can usually be encompassed by solving four key questions:

1/ How do I digitise my processes?
2/ I am solving a costly problem often related to waste, loss, compliance or health and safety. Where are my workers? Are they safe? Can they contact me if they're in trouble?
3/ Are there data and insights I'm leaving on the table today that would help me make better business decisions?
4/ If I'm looking at my business, where will customer experience be improved by the use of this data?

Once you can technically solve those questions, the cost of IoT implementation must be less than the cost of the asset you are trying to make more efficient to see a 'value return' on the exercise.


More information on the Internet of Things from this McInsey report (thanks Winner)

https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/iot-value-set-to-accelerate-through-2030-where-and-how-to-capture-it?cid=app

"5% of the use cased clusters combinations represent about 52% of the economic value of the IoT in 2020."

This shows there is value in picking your market right (basically factories and health), then operations optimisation is the key value centre that can be captured.

Voice activated assistance is a key driver, particularly in home based devices, and includes: Automated timing of operations, robotic cleaning, energy management, water leak detection and control and security. But compared to 2015 expectations business to business applications were behind. A lot of this is due to inertia in large organisations: adoption, having the front line change the way they do business, and having the right incentives in place are all challenging. To really capture global productivity gains, a lot of organisations must move ahead together.

McInsey estimates that the total value captured by by IoT in 2020 ($1.6 trillion), while considerable, is in the lower end of the range of the scenarios mapped out in 2015. By 2030 McInsey estimate value capture with IoT to increase to $5.5 trillion - $12.6 trillion in value globally, including the value captured by consumers and customers of IoT products and services.

McInsey found that the factory setting (which includes standardized production environments in manufacturing, standardised hospital procedures, and other areas) will account for the largest amount of potential economic value from the IoT, around 26 percent, in 2030. In simple terms, optimizing operations in manufacturing—making the various day-to-day management of assets and people more efficient. Manufacturing in this broad sense can include agriculture.

The human-health setting is second, representing around 10 to 14 percent of estimated IoT economic value in 2030. This will start with wearable health devices, like watches, able to check heart rate, ingestible cameras you can swallow so that doctors can get an internal picture of what is going on, and air and environmental sensors. This allows doctors to build better models of disease progression. IoT health revenue is predicted to rise to between $0.5 trillion and $1.8 trillion, by 2030.

Greenfield projects are the best projects where IoT progress can be made.

I think Spark is on the ball in the two principal growth markets (factory site optimisation and health), even if it is not quite clear exactly what game Spark will be playing with that ball for now.

Spark is not the limiting factor in adopting such IoT technology. More important is the marrying of technology with processes. How people work with existing systems determines the rate of technology adoption. The likes of Spark must be specific in what they can offer, communicate this message clearly, and be able to usefully roll out their solutions to whole communities.

SNOOPY

[mikelee]

What's going on with the SP? I see it hit a recent low of 4.44 from a high of around 4.8x pre-dividend. Surely the business is still growing and Spark have a large share of the pie in NZ. :confused:

[Sideshow Bob]

What's going on with the SP? I see it hit a recent low of 4.44 from a high of around 4.8x pre-dividend. Surely the business is still growing and Spark have a large share of the pie in NZ. :confused:

Yield play, that is getting pushed lower with interest rates on the rise??

[oldtech]

SPK has always fluctuated, take a look at the 5-year chart. However the 50-day and 200-day MA are still on the up (assuming I have got this chart thingy right, which is always a big assumption ...)

[bull....]

spk a yield play only. rising rates are a negative for these bond proxies.

trading in a range 4.38 - 4.95 for a couple years now. it will break the range at some stage

[Snoopy]

spk a yield play only. rising rates are a negative for these bond proxies.

trading in a range 4.38 - 4.95 for a couple years now. it will break the range at some stage


At 444 and with two 12.5c fully imputed dividends per year, I calculate that to be a 7.8% gross yield. But interest rates are on the way up (yay) and now I can get 3% gross on a 5 year term deposit (fantastic)! So THEREFORE I should sell my SPK shares, more than halve my income by putting the money in a five year term deposit (and just hope I don't need it for five years). I would like to thank our reserve bank governor for orchestrating a 'without any guarantee' of principal return 'higher interest offer' environment from my nearest bank (which I might need a telescope to find)?

None of that makes any sense. But I am merely a minnow reef fish in a giant ocean of interest rates market and no-one can fight the market - right? So I guess I will SELL SELL SELL Spark, then retreat inside a coral cage fortress for five years? For a meek little reef fish this is the only thing to do, so I will hold up in my coral cage and just look happy. And I will be safe in the knowledge that I am pleasing my Mr Market master :-(

SNOOPY

[bull....]

At 444 and with two 12.5c fully imputed dividends per year, I calculate that to be a 7.8% gross yield. But interest rates are on the way up (yay) and now I can get 3% gross on a 5 year term deposit (fantastic)! So THEREFORE I should sell my SPK shares, more than halve my income by putting the money in a five year term deposit (and just hope I don't need it for five years). I would like to thank our reserve bank governor for orchestrating a 'without any guarantee' of principal return 'higher interest offer' environment from my nearest bank (which I might need a telescope to find)?

None of that makes any sense. But I am merely a minnow reef fish in a giant ocean of interest rates market and no-one can fight the market - right? So I guess I will SELL SELL SELL Spark, then retreat inside a coral cage fortress for five years? For a meek little reef fish this is the only thing to do, so I will hold up in my coral cage and just look happy. And I will be safe in the knowledge that I am pleasing my Mr Market master :-(

SNOOPY

7.8% vrs 3% no brainer only unknown is potential risk of capital loss in the equation

[Snoopy]

7.8% vrs 3% no brainer only unknown is potential risk of capital loss in the equation


It has been so long now since I seriously sought out a fixed interest investment, I am having trouble remembering what my 'rule of thumb' for fixed interest investment was. Did I invest in a Turners bond a few years back yielding nearly 8%, or was that just a dream? The problem with these company issued bonds is that you get a bank debenture type return, with the equity risk on the upside effectively removed, but the equity risk on the downside, should that company get into trouble, still present. So, yes -it is coming back to me now-, I looked out for fixed interest returns which yielded a couple of hundred interest rate basis points above the equivalent company dividend yield. I was looking for a higher cash return up front to compensate for the removal of the upside equity risk.

Three Spark bonds I have been able to track down are SPF560 (4.51% coupon at listing, matures 10=03-2023) , SPF570 (3.94% coupon at listing, matures 07-09-2026) and SPF580 (3.37% coupon at listing, matures 07-03-2024). The last market traded yields on these bonds were 2.07%, 3.01% and 2.62% respectively. All figures are well below their interest issue yields. So anyone buying into these bonds at 'market prices' will be facing a very substantial capital loss when these bonds mature. I am not sure how much of that capital loss is built into those quoted yield prices though?

My 'rule of thumb' would suggest that with a gross yield on Spark shares of 7.8%, I should be looking at a Spark bond yield of something like 9.8% to compensate me for my risk. With this in mind, I am finding it hard to come to terms with why any investor would buy SPF560 bonds with a yield of just over 2%. I am wondering if some brokers have an 'electric shock treatment room', where they grab hapless potential investors, pin them down, then keep flicking the power switch until they agree to buy at such a price? Can anyone out there make make any sense of this?

SNOOPY

[pierre]

Bonds make no sense at all to me. Crappy, taxable interest rates, and inflation eating away at the purchasing power of the investment.
Ive just invested a 7 figure sum from the sale of a business in fully imputed dividend paying NZX companies including SPK.
I have no need of the capital so I'm happy to ride the roller coaster on the SPs of those companies. Over a 5-10 year time period the share values will sort themselves out.

I have retained sufficient cash to fund 3 years living expenses so as long as the divvies keep rolling in at or somewhere near current levels I will be happy.
No broker will be tempting or forcing me to invest in bonds unless and until the yields are at least 3% higher than the gross yield on my dividend shares. Can't see that coming any year soon.

[Snoopy]

Bonds make no sense at all to me. Crappy, taxable interest rates, and inflation eating away at the purchasing power of the investment.
Ive just invested a 7 figure sum from the sale of a business in fully imputed dividend paying NZX companies including SPK.
I have no need of the capital so I'm happy to ride the roller coaster on the SPs of those companies. Over a 5-10 year time period the share values will sort themselves out.

I have retained sufficient cash to fund 3 years living expenses so as long as the divvies keep rolling in at or somewhere near current levels I will be happy.


Serious commitment there Pierre, to the NZX, and a powerful vote for imputation credits to boot! My own little rant against bonds was not entirely theoretical either. I have recently agreed to take on the role of 'lead trustee' looking after a legacy for three under age trust beneficiaries. The amount of money in question is an order of magnitude less than yours, but is nevertheless a not insignificant sum for these three young people. The money is loosely targeted at offsetting student loan debt.

After consulting with a financial advisor, and given the amount of capital involved, I was informed that the solution was a managed fund. I was given a short list to choose from and maybe mix and match. But I was informed that I should be looking at a fund with around a 50% bond / 50% share content. I was happy with the fund managers suggested, but this '50% bond' bit got to me. They say the only two certainties in life are death and taxes. But to those two, I would add a third: Losing capital if you throw a whole lot of money at bonds with interest rates at all time lows. I had this image of these honed investment managers doing great things with their share portfolio, only to be undone by the 'footshot' of collapsing bond prices!

The logic put to me for buying into a balanced managed fund was this. If we head into a recession and share prices go down, then so will interest rates and so bond prices will go up, providing a natural hedge. However the Covid-19 experience would suggest to me that the lower interest rates were more entrenched by government policy than 'market forces'. My gut feeling is that if we get a second Covid-19 recession, share prices will fall, interest rates will fall but it will once again be a government induced interest rate fall. No sane individual is going to pull their money out of high yielding shares like Spark to invest in a 1% bond. Speaking for myself, I will be doing the exact opposite. Selling my fixed interest investments to put more money into high yielding 'utility' investments at bargain prices. At some point the government will tire of supporting low interest rates and interest rates will shoot up precipitating a 'bond crash'. But IMO, this will be a 'bond crash' for 'bond investors'. Companies issuing bonds will still be able to borrow at historically low rates, even at the top of the interest rate cycle. Companies are not going to collapse because of 'higher interest rates' per se. So who are the losers going to be? Governments, who can nevertheless get their money back through the tax take as the economy eventually improves. And Mom and Dad 'bond investors' who will suffer a massive capital hair cut, and never get their money back!

My feeling at the moment is that I should dictate that 50% of the money be dripped into one or more NZX share funds ( I am a bit nervous about going offshore as the money will be required in $NZ in 5-10 years time, so money invested offshore becomes in effect a foreign exchange rate gamble) and just keep half in cash for now to 'see what happens'. Anything to avoid investing in bonds. If I had implemented my partial 'share fund strategy', then I would already be underwater as the NZX fell away during the year. So far 'possum in the headlights' has proved a good strategy for 2021, but that can't continue. The other problem I face is that the parents of these young people have always had good incomes but are not what you call seasoned sharemarket investors. Thus they see the amount of money involved as 'play money' and something I should go for 'big bets' with. They are the kind of people who would see that if I put money into a share fund and it went down over the short term, then that would make me an incompetent share manager!

I did buy some SPK shares not long ago on my own behalf (cum dividend) - it was kind of a proxy to what I thought I should be doing with that trust money - and of course the SPK share price is down about 10% since then. I personally am not worried about this, as I am a long term investor (median holding time 13 years) and despite this 'set back', my all up average holding price for my Spark shares is only $3.49. I obviously have a high positive conviction about investing in Spark at this point in the business cycle. But I remember thinking the same just before the Chorus split, and there were quite a few lean years after that, even though the dividend remained good! The lesson here is no matter how good you think you are at individual share picking, some diversification is always a good insurance policy.



No broker will be tempting or forcing me to invest in bonds unless and until the yields are at least 3% higher than the gross yield on my dividend shares. Can't see that coming any year soon.


You have a lower bond tolerance even than I have Pierre!

SNOOPY

[RTM]

Bonds make no sense at all to me. Crappy, taxable interest rates, and inflation eating away at the purchasing power of the investment.
Ive just invested a 7 figure sum from the sale of a business in fully imputed dividend paying NZX companies including SPK.
I have no need of the capital so I'm happy to ride the roller coaster on the SPs of those companies. Over a 5-10 year time period the share values will sort themselves out.

I have retained sufficient cash to fund 3 years living expenses so as long as the divvies keep rolling in at or somewhere near current levels I will be happy.
No broker will be tempting or forcing me to invest in bonds unless and until the yields are at least 3% higher than the gross yield on my dividend shares. Can't see that coming any year soon.

I agree. But I end up scratching my head and wondering what I am missing when I see announcments such as this.
Just a lazy 100Mil raised so easily. The presentation of Ports supporting it is worth taking a look at.

I know the CRAIGS model portfolio a few years ago recommended having a % of ones money in bonds to stabilise income. I have a few, they have served me well, but interest rates were MUCH higher then.


https://www.nzx.com/announcements/382942
16/11/2021, 4:38 pm GENERAL
PORT OF TAURANGA LIMITED LAUNCHES BOND OFFER TO INSTITUTIONAL INVESTORS IN NEW ZEALAND

Port of Tauranga Limited (POT) has launched a NZ$100,000,000 seven-year new issue with final maturity in November 2028. The Notes will be issued to institutional investors in New Zealand.

Issuer: Port of Tauranga Limited
Instrument: Fixed Rate Notes
Issuer Rating: A- (stable) by S&P Global
Expected Issue Rating: A- (stable) by S&P Global
Launch Date: Tuesday, 16 November 2021
Closing Date: Thursday, 18 November 2021, 11.00 am or earlier at the Issuer’s discretion
Settle / Issue Date: Wednesday, 24 November 2021
Maturity Date: Friday, 24 November 2028
Issue Amount: NZ$100,000,000 of seven-year Notes
Indicative Issue Margin: 0.75-0.85% per annum
Listing: The Notes will not be listed on any exchange

[Snoopy]

I agree. But I end up scratching my head and wondering what I am missing when I see announcments such as this.
Just a lazy 100Mil raised so easily. The presentation of Ports supporting it is worth taking a look at.

I know the CRAIGS model portfolio a few years ago recommended having a % of ones money in bonds to stabilise income. I have a few, they have served me well, but interest rates were MUCH higher then.

https://www.nzx.com/announcements/382942
16/11/2021, 4:38 pm GENERAL
PORT OF TAURANGA LIMITED LAUNCHES BOND OFFER TO INSTITUTIONAL INVESTORS IN NEW ZEALAND

Port of Tauranga Limited (POT) has launched a NZ$100,000,000 seven-year new issue with final maturity in November 2028. The Notes will be issued to institutional investors in New Zealand.

Issuer: Port of Tauranga Limited
Instrument: Fixed Rate Notes
Issuer Rating: A- (stable) by S&P Global
Expected Issue Rating: A- (stable) by S&P Global
Launch Date: Tuesday, 16 November 2021
Closing Date: Thursday, 18 November 2021, 11.00 am or earlier at the Issuer’s discretion
Settle / Issue Date: Wednesday, 24 November 2021
Maturity Date: Friday, 24 November 2028
Issue Amount: NZ$100,000,000 of seven-year Notes
Indicative Issue Margin: 0.75-0.85% per annum
Listing: The Notes will not be listed on any exchange


That last line is worth noting. If the bonds are not listed on any exchange, then the pain of watching your capital diminish day by day as interest rates rise will be spared from bondholders. Of course that doesn't mean capital erosion isn't happening. It just means that bondholders don't see it, stuck in their low interest rate prison until the bonds finally expire. At that point, business risk of POT aside, bondholders will get all their capital back. But at an 'interest cost' as the interest they have received on the journey was well below prevailing market rates. The other 'benefit' is that all of your capital is locked up for 7 years with no possibility of withdrawal.

I am really struggling to think who might think this POT bond is an attractive investment. The same people who bought the Spark bond at a stitch over 2% perhaps? But what could be the motivation of these people? Or do these bondholders not know, while the faceless portfolio allocators assign bond positions to their out of sight clients, at the behest of their corporate bond creator masters?

SNOOPY

[peat]

Institutions with lower risk allocations diversify into these low return bonds so as to satisfy the rules for their risk averse clients

[Snoopy]

If the bonds are not listed on any exchange, then the pain of watching your capital diminish day by day as interest rates rise will be spared from bondholders. Of course that doesn't mean capital erosion isn't happening. It just means that bondholders don't see it, stuck in their low interest rate prison until the bonds finally expire. At that point, business risk of POT aside, bondholders will get all their capital back. But at an 'interest cost' as the interest they have received on the journey was well below prevailing market rates. The other 'benefit' is that all of your capital is locked up for 7 years with no possibility of withdrawal.

I am really struggling to think who might think this POT bond is an attractive investment. The same people who bought the Spark bond at a stitch over 2% perhaps? But what could be the motivation of these people? Or do these bondholders not know, while the faceless portfolio allocators assign bond positions to their out of sight clients, at the behest of their corporate bond creator masters?




Institutions with lower risk allocations diversify into these low return bonds so as to satisfy the rules for their risk averse clients.


Ouch! So basically I am correct! :-O~!#$%^&*())_+|\?? Does that align with the "risk=volatility" paradigm? With those POT bonds completely unlisted - with no trading possible - there is no volatility. So those bonds, by definition, are THEREFORE completely risk free!

SNOOPY

[850man]

SPK SP is a bit like a tyre with a nail in it and going flat day by day. Any thoughts on this learned traders?

[buy_high_sell_lo]

The NZX in general is a tyre with a nail in it right now, SPK isn't exempt from this loss of air.

[bull....]

spk a yield play only. rising rates are a negative for these bond proxies.

trading in a range 4.38 - 4.95 for a couple years now. it will break the range at some stage

watching the range , if it breaks timber ..... probably over time

[tango]

I know the CRAIGS model portfolio a few years ago recommended having a % of ones money in bonds to stabilise income. I have a few, they have served me well, but interest rates were MUCH higher then.


Funny you should mention Craigs. At one stage I was a client and they recommended SPK for dividends back when it was at the peak. Trustingly I invested. It's been a couple of years so after today's drop I am $250 away from break even. It's definitely not a winning investment for me... I don't see anything that SPK have on their future plans that will in any way accelerate their growth.

[Harrie]

I use SPK and IFT mainly as bond equivalents. Both have growth potential but the main reason for holding is the dividend yield. SPK fully imputed at around 5.6% is equivilent to a gross yield of 9.18% at a mtr of 39c and at a mtr of 33c a gross yield of 8.35%. I'm not really that concerned about the fluctuations around the capital price as I would not be if the capital value of my properties fluctuated. You may say that inflation is good for property capital values however if that is the case then assuming rental income remains constant then effectively rental yields fall. Why then invest in residential investment property with all the problems associated with tenants, no depreciation and the brightline test (and pay a management fee of 8% of rental income plus something like 2 to 3.5% selling fee off the capital value when selling) for a gross yield of around 3 to 5% when I can sit back and take a half yearly incomes in the form of dividends of around 8.5% gross. Now I am not saying that dividend income will always be the same but I think you can get the drift. The other aspect with defensive shares like SPK is that in inflationary times prices can rise (or costs reduced to keep similar margins)
I certainly would not be buying bonds at these levels, especially with inflationary pressures creeping in.
If you follow the strategy of bond equivalents being around 40% of total portfolio value then effectively you have a "balanced investment portfolio. The other 60% would be spread between Australian and international exposures along with growth stocks and small caps and maybe some commercial/industrial property partnerships/listed property funds

[Felonius]

Thank you for your thoughts Harrie.
What you are proposing sounds rather like the portfolio of The Milford Balanced Fund which has served us very well over a number of years.

[BIRMANBOY]

The beauty of SPK is not in the growth its in the dividend. Since they reccomended it as a dividend producer its a little unreasonable to expect growth from a fully grown monster:p. At its peak presumably it was still delivering a good yield but its so important to top up periodically when you get dips. Obviously impossible to know whats in the future SP wise but by looking back over the years you can pick price points to buy at when they happen. So for example looking at the 3year chart , if you bought at or around 4.30 you would have had several opportunities to add. Also looking at the 5 year chart what was high then is now a good price. Time in the market and buying in the dips will even out the occasional "bad buy" and you end up with not only a srtong dividend % but also a capital increase. I started buying in 2010 at 2.40 and have added at least a dozen times so now my gross dividend yield % is over 15% (on original capital) (plus considerable capital increase). So given the right discipline and some patience it has been a very reliable performer. Its hard to get good growth and strong dividends both so knowing what is best for your investment goals is crucial. I would hazard a guess that in 5 years you will have a better opinion of SPK if you have the patience:)
Funny you should mention Craigs. At one stage I was a client and they recommended SPK for dividends back when it was at the peak. Trustingly I invested. It's been a couple of years so after today's drop I am $250 away from break even. It's definitely not a winning investment for me... I don't see anything that SPK have on their future plans that will in any way accelerate their growth.

[tango]

The beauty of SPK is not in the growth its in the dividend. Since they reccomended it as a dividend producer its a little unreasonable to expect growth from a fully grown monster:p. At its peak presumably it was still delivering a good yield but its so important to top up periodically when you get dips. Obviously impossible to know whats in the future SP wise but by looking back over the years you can pick price points to buy at when they happen. So for example looking at the 3year chart , if you bought at or around 4.30 you would have had several opportunities to add. Also looking at the 5 year chart what was high then is now a good price. Time in the market and buying in the dips will even out the occasional "bad buy" and you end up with not only a srtong dividend % but also a capital increase. I started buying in 2010 at 2.40 and have added at least a dozen times so now my gross dividend yield % is over 15% (on original capital) (plus considerable capital increase). So given the right discipline and some patience it has been a very reliable performer. Its hard to get good growth and strong dividends both so knowing what is best for your investment goals is crucial. I would hazard a guess that in 5 years you will have a better opinion of SPK if you have the patience:)

Thanks for your advice. I think if I was buying right now I would be very pleased with SPK. The dividend yield is fantastic. My average buy price is $4.60 because I added when the price dropped to $4.45

At some stage I will probably buy more but the way the market is going there could be better buys in the next few months

[Nor]

If interest rates go up share price has to come down. That's been true for years now so why start to buy just when rates are finally starting to move? I've avoided the dividend payers for years now, just keeping what I bought at low averages.
It would be good to know a formula which could predict the theoretical final value of the dividend payers in this tightening cycle. Then one could buy if normal volatility achieved the price, without having to wait.

[Snoopy]

If interest rates go up share price has to come down. That's been true for years now so why start to buy just when rates are finally starting to move? I've avoided the dividend payers for years now, just keeping what I bought at low averages.
It would be good to know a formula which could predict the theoretical final value of the dividend payers in this tightening cycle. Then one could buy if normal volatility achieved the price, without having to wait.


The only thing certain in these investment markets is that 'this time' is not going to play out in exactly the same way as 'last time' or the time before that. The fact is interest rates could go either way. My feeling is that at some stage we are in for a delayed 'Covid-19 shock', Adrian will panic and interest rates will stall if not fall. I think we are months rather than years away from this. So I am looking to dollar cost average in the next few months into some good dividend payers (including Spark). I am happy with the yields available now, so I have no need to pick bottoms. If others can get a better deal than me then good on them.

SNOOPY

discl; topped up just before the dividend at a good yield, but am now down on that particular purchase (but with no need to crystallize that loss)

[Harrie]

Apart from your partner and children what asset do most people value the most?. Many years ago that probably would be your house, but IMO things have changed radically and now its...your smart phone.

Your smartphone is your connection to your career, your family and friends, social media, google, finding places, storing data, using data, txts emails, news podcasts, a payment mechanism and much more. Its actually your closest remote connection to everything. Think about the panic you go into if its stolen or even left behind somewhere!

So now consider what happens when you don't pay your bill to SPK (or another ISP) Thats right you have just lost your ability to stay connected. Enter SPK. Lots of beautiful renewable income streams because everyone wants to stay connected. Most will pay their ISP (internet service provider) before they pay the power bill.

Now think about what 5G will do and the development of the internet of things(IoT), revenue increases when travel starts up again, added services and connections, growing populations etc on top of those wonderful income streams and the potential for growth is just the bonus. Sure there is competition, but I am more than happy to use SPK as my main defensive stock because even another round of covid is not going to lead to customers dropping access to one of their most essential assets.

Dividends are also mainly paid out of free cash flow. Nice

[BlackPeter]

Apart from your partner and children what asset do most people value the most?. Many years ago that probably would be your house, but IMO things have changed radically and now its...your smart phone.

Your smartphone is your connection to your career, your family and friends, social media, google, finding places, storing data, using data, txts emails, news podcasts, a payment mechanism and much more. Its actually your closest remote connection to everything. Think about the panic you go into if its stolen or even left behind somewhere!

So now consider what happens when you don't pay your bill to SPK (or another ISP) Thats right you have just lost your ability to stay connected. Enter SPK. Lots of beautiful renewable income streams because everyone wants to stay connected. Most will pay their ISP (internet service provider) before they pay the power bill.

Now think about what 5G will do and the development of the internet of things(IoT), revenue increases when travel starts up again, added services and connections, growing populations etc on top of those wonderful income streams and the potential for growth is just the bonus. Sure there is competition, but I am more than happy to use SPK as my main defensive stock because even another round of covid is not going to lead to customers dropping access to one of their most essential assets.

Dividends are also mainly paid out of free cash flow. Nice

You are right - smartphones are important to people and Spark is one of the service providers. This is the plus side.

On the other hand however ... there are strong competitors for the service provider position and they are growing in size. Main competition is over price (which is nice for the user, but not desirable for the service provider). And hey - The monthly bill for my cell phone contract these days is lower than the monthly rental for my land line 30 years ago (not even considering inflation) ... despite me getting much more out of the cell phone.

While I agree that the Telecom industry will keep growing, am I not sure that being a player in this industry is for the shareholders a one way ticket to wealth.

Some players will do better than others but all will need to work really hard to stay on top of the ongoing changes.

I guess time will tell where Spark will end up in this race - but they didn't really made a lot out of their once incumbent position over the last two decades, didn't they?

[tango]

I was hoping SPK would expand more into offering cloud services and security services eg protection against DDOS attacks to NZX and Waikato DHB. There’s good money to be made in that field and it’s a less price sensitive service

Once upon a time I had a mobile and a landline.
Once upon a time I paid for toll calls.
Now with mobile technology changes and apps that allow phone calls I have only a mobile phone and I can’t remember the last time I paid for a toll call.

Surely Spark has lost toll revenue and landline revenue and will continue to do so. More companies are using VOIP instead of making toll calls through a toll provider

[mondograss]

I was hoping SPK would expand more into offering cloud services and security services eg protection against DDOS attacks to NZX and Waikato DHB. There’s good money to be made in that field and it’s a less price sensitive service

Once upon a time I had a mobile and a landline.
Once upon a time I paid for toll calls.
Now with mobile technology changes and apps that allow phone calls I have only a mobile phone and I can’t remember the last time I paid for a toll call.

Surely Spark has lost toll revenue and landline revenue and will continue to do so. More companies are using VOIP instead of making toll calls through a toll provider

Spark own Revera where Waikato DHB host their servers and their performance left a lot to be desired. I expect they will likely suffer hugely when both Azure and AWS open their data centres here.

[Nor]

The most sensible thing to do but also the hardest would be to save one's investable until one of the periodic mini crashes and then have the fortitude to buy. I'm not talking about 1929 style events. Wouldn't need to wait more than 2 years. Guaranteed.

[see weed]

My ASB watchlist is frozen on yesterdays closing prices and cannot get todays depth on anything, Anyone else having this problem?

[biker]

Yes. They’re working on it

[see weed]

Yes. They’re working on it
Thanks. That is what they told me to. It might have something to do with a lot of the bars opening at midnight down the Viaduct basin last night. At this rate, we might have to take the day off and knock off early and head for town:mellow:.

[Bad_jelly]

Fixed now!

[enzed staffy]

Thanks. That is what they told me to. It might have something to do with a lot of the bars opening at midnight down the Viaduct basin last night. At this rate, we might have to take the day off and knock off early and head for town:mellow:.


Seems theyre back - my watchlist has updated

[oldtech]

I was hoping SPK would expand more into offering cloud services and security services eg protection against DDOS attacks to NZX and Waikato DHB. There’s good money to be made in that field and it’s a less price sensitive service

Once upon a time I had a mobile and a landline.
Once upon a time I paid for toll calls.
Now with mobile technology changes and apps that allow phone calls I have only a mobile phone and I can’t remember the last time I paid for a toll call.

Surely Spark has lost toll revenue and landline revenue and will continue to do so. More companies are using VOIP instead of making toll calls through a toll provider

A few random thoughts:



Re mobile, all telcos including Spark have lost a lot of income from roaming revenues, which are typically described as "lucrative", thanks of course to border closures. For Spark this was $38 million in FY21 according to their Annual Report. Despite this, mobile service revenue grew 0.5 per cent, or 4.3 per cent when adjusted for the impact of roaming.
You mention cloud and security services - Spark's Cloud, security and service management revenue grew 5.5 per cent from FY20
Spark has 16 datacentres around the country. In August they announced they would be adding capacity at their Takanini datacentre which will (apparently) make it the largest in New Zealand once completed. How much business they will lose to AWS is anybody's guess ...
Spark also part-own the Southern Cross Cable, so there's another revenue stream.


Disc: Holder and employee

[Harrie]

You are right - smartphones are important to people and Spark is one of the service providers. This is the plus side.

On the other hand however ... there are strong competitors for the service provider position and they are growing in size. Main competition is over price (which is nice for the user, but not desirable for the service provider). And hey - The monthly bill for my cell phone contract these days is lower than the monthly rental for my land line 30 years ago (not even considering inflation) ... despite me getting much more out of the cell phone.

While I agree that the Telecom industry will keep growing, am I not sure that being a player in this industry is for the shareholders a one way ticket to wealth.

Some players will do better than others but all will need to work really hard to stay on top of the ongoing changes.

I guess time will tell where Spark will end up in this race - but they didn't really made a lot out of their once incumbent position over the last two decades, didn't they?

Yes BP, I certainly never ever suggested it was a one way ticket to wealth. What it is, is a stable dividend paying stock with some growth potential. This is an industry which is constantly subject to commerce commission scrutiny, so it will never monopolize the market in the communications industry, which is the reason why they have not been able to capitalise on their once dominant position. The govt allowed competition into the market purely to create competition, however they are growing against the competition albeit at a slower pace and that's a good thing.

[Snoopy]

The bare earnings numbers and history as a default necessary service provider lead to the impression of a 'steady as she goes' giant. But look at what has happened to the revenue break down over the five reporting years under review.




Product Category
Operating Revenue (FY2021)
Operating Revenue (FY2017)
Change
Change Percentage


Mobile
$1,311m
$1,197m
+$114m
+9.5%


Voice
$308m
$655m
-$347m
-47%


Broadband
$670m
$689m
-$19m
-2.8%


Cloud, Security & Service Management
$443m
$324m
+$119m
+36.7%


Procurement and partners
$414m
$345m
+$69m
+20.0%


Managed Data, Networks & Services
$282m
$207m
+$75m
+36.2%


Other Operating Revenues
$137m
$116m
+$21m
+18.1%


Total External Revenues
$3,565m
$3,533m[


Total Absolute Value of Changes


$764m



$764m/$3,565m = 21%

That is a measure of how much the business has changed in five years. Although overall revenue has barely changed, more than one in five dollars taken in has shifted to a different product category. I would suggest that is rather a large operational change. In fact I would struggle to think of any other NZ business that has transformed this much over the last five years (bar some start ups). Sometimes what you think you see, a boring steady dividend payer, is not a boring as you think it is.




Smartphones are important to people and Spark is one of the service providers. This is the plus side.

On the other hand however ... there are strong competitors for the service provider position and they are growing in size. Main competition is over price (which is nice for the user, but not desirable for the service provider). And hey - The monthly bill for my cell phone contract these days is lower than the monthly rental for my land line 30 years ago (not even considering inflation) ... despite me getting much more out of the cell phone.

Some players will do better than others but all will need to work really hard to stay on top of the ongoing changes.


You left out a couple of new revenue streams for Spark in the Smartphone space BP. Spark will now sell you a new cellphone on a monthly plan. So they now have a 'product income stream' added to the 'usage income stream', in a way they did not have back in the old landline day.

Furthermore, 'back in the day', all local call revenue was collected from the operator of each landline. But cellphones work on a 'caller pays' model. That means the local revenue associated with your cellphone number comes from all the calls you make PLUS all the calls that other people make to you. So although you are looking at your monthly phone bill, thinking how much money you have saved from the landline days (when you got unlimited minutes and numbers of local calls per month), in fact a large portion of this 'saving' is you transferring what used to be 'your' share of fixed local call costs onto other people.

Thus my thesis is that in the 'transition to mobile', the phone companies are not losing as much revenue as you think they are.



Once upon a time I had a mobile and a landline.
Once upon a time I paid for toll calls.
Now with mobile technology changes and apps that allow phone calls I have only a mobile phone and I can’t remember the last time I paid for a toll call.


You no longer have to pay for toll calls from landlines in the old 'per minutes' way. For example if you have a sick relative in another town who you want to ring every day you can get a 'My favourites' package that allows unlimited calls, (up to 2 hours per call) to a home phone or Spark mobile - any time, of day or night for a month. This costs $6 for one month. And if after a month the person has recovered, you can delete the package.



Surely Spark has lost toll revenue and landline revenue and will continue to do so. More companies are using VOIP instead of making toll calls through a toll provider


Yes. -47% over five years, as per the table I have quoted above.



I was hoping SPK would expand more into offering cloud services and security services eg protection against DDOS attacks to NZX and Waikato DHB. There’s good money to be made in that field and it’s a less price sensitive service


They have, +36.7% over five years.

SNOOPY

[BlackPeter]

You left out a couple of new revenue streams for Spark in the Smartphone space BP. Spark will now sell you a new cellphone on a monthly plan. So they now have a 'product income stream' added to the 'usage income stream', in a way they did not have back in the old landline day.



Not sure I understand. In the old days it was a (rather high) fixed fee for having the connection plus any toll calls you made.

Today it is (depending on your plan) some monthly payment including mainly free national calls plus some toll calls plus whatever data you use. The total however is for most users less than it used to be in the good old telecom days. So - sure, the Income streams for Telecom have changed, but the total didn't increase.



Furthermore, 'back in the day', all local call revenue was collected from the operator of each landline. But cellphones work on a 'caller pays' model. That means the local revenue associated with your cellphone number comes from all the calls you make PLUS all the calls that other people make to you. So although you are looking at your monthly phone bill, thinking how much money you have saved from the landline days (when you got unlimited minutes and numbers of local calls per month), in fact a large portion of this 'saving' is you transferring what used to be 'your' share of fixed local call costs onto other people.

Thus my thesis is that in the 'transition to mobile', the phone companies are not losing as much revenue as you think they are.




Not sure I can follow this argument either. In the good old days the subscriber of the landline paid a fixed fee plus tolls. If somebody else (from overseas) called you, than the overseas telecom typically would as well contribute to the cost of this call (unless they had some mutual agreement basically waving each others cost).

These days the owner of the plan pays a fixed monthly fee plus tolls (being data and toll calls). If somebody from a different provider calls you their provider may or may not (depending on the agreement between the respective providers) pay for parts of this call. Again - given that people receive calls as well as make calls, this is typically quite revenue neutral - the more the operator receives from other operators for incoming calls, the more they normally would have to pay these very operators for outgoing calls form their own network.

Packages for the user existed in the good old days (at least in the part of the world I am coming from) like today - this is just a way for the respective Telecom to maximise their revenue considering that running a telecommunication network costs exactly the same money whether it is in use or idle.

Check "Profit maximization for a monopoly" . However - these days telecom is not a monopoly anymore, which makes it more difficult to extract higher profits.

So - yes, I do see that some of the revenue streams have changed, but I don't see the total of all streams increasing.

[Panda-NZ-]

There are huge opportunities in the cloud.. running a "simplified" cloud could be a good option for spark.

Though there will be tough competition from big tech so that needs to be considered.

[Snoopy]

Not sure I understand. In the old days it was a (rather high) fixed fee for having the connection plus any toll calls you made.

Today it is (depending on your plan) some monthly payment including mainly free national calls plus some toll calls plus whatever data you use. The total however is for most users less than it used to be in the good old telecom days. So - sure, the Income streams for Telecom have changed, but the total didn't increase.


I think you do understand. It was I who did not make my point clear. I did not mean to suggest that Spark was on a growth path attracting more and more revenue from retail phone customers. I only meant to suggest that other streams of revenue were opening up. So it wasn't a given that as land line connections dried up, individual customer revenues would go down.



Not sure I can follow this argument either. In the good old days the subscriber of the landline paid a fixed fee plus tolls. If somebody else (from overseas) called you, than the overseas telecom typically would as well contribute to the cost of this call (unless they had some mutual agreement basically waving each others cost).


Yes I always had the impression there was a 'mutual forgiveness of costs' in both directions.



These days the owner of the plan pays a fixed monthly fee plus tolls (being data and toll calls). If somebody from a different provider calls you their provider may or may not (depending on the agreement between the respective providers) pay for parts of this call. Again - given that people receive calls as well as make calls, this is typically quite revenue neutral - the more the operator receives from other operators for incoming calls, the more they normally would have to pay these very operators for outgoing calls form their own network.


I just had a look at the Spark mobile plans on offer: $59.99 with unlimited talk, covering NZ and Oz is the cheapest 'pay monthly' plan. No mention of any extra charges when you connect to Vodafone or 2 degrees.

Alternatively the Spark copper landline is $55.20 per month. Local calls are 'free' (the good ol' kiwishare?), but toll calls are 24cpm (capped at $3) and calls to mobiles are 59cpm (capped at $5).

Personally, I have a Vodafone prepay mobile account. I got sent a text saying all the per minute charges are going up, so now might be a good time to transfer onto a monthly plan. I can't remember what the new charge rate per minute was. I just remember it was high enough that a medium length chat would empty my 'emergency account balance'. So I only use my mobile for texting now, I don't make voice calls.

I must admit I did not realise that Spark have dropped all their 'per minute' charging. So that changes the argument somewhat. The angle I was coming from was that 'we' landline dinosaurs have to pay a per minute charge to ring a cellphone. But you 'embracing the future' cellphoneites do not have to pay per minute to phone the landline, ringing the other way.



Packages for the user existed in the good old days (at least in the part of the world I am coming from) like today - this is just a way for the respective Telecom to maximise their revenue considering that running a telecommunication network costs exactly the same money whether it is in use or idle.


If you embrace the idea that telecommunication networks cost exactly the same whether it is in use or not, then because the landline callers to cellphones are 'paying per minute', but the cellphone callers to landlines are not, then effectively the landline customers are subsidising the cellphone customers (from a retail customer perspective anyway).

SNOOPY

[Zaphod]

A few random thoughts:

Spark has 16 datacentres around the country. In August they announced they would be adding capacity at their Takanini datacentre which will (apparently) make it the largest in New Zealand once completed. How much business they will lose to AWS is anybody's guess ...



It's worth noting that the Takanini datacentre is a co-lo* which is a service that the Amazon DC's don't provide. Probably not a major money spinner these days. We've used it in the past.

*For the benefit of those outside of the industry, this means a "co-location" which allows a customer to place physical servers and network infrastructure into the provided racks and attach to a very high bandwidth network connection.

[Zaphod]

Not sure I can follow this argument either. In the good old days the subscriber of the landline paid a fixed fee plus tolls. If somebody else (from overseas) called you, than the overseas telecom typically would as well contribute to the cost of this call (unless they had some mutual agreement basically waving each others cost).




Yes I always had the impression there was a 'mutual forgiveness of costs' in both directions.


Based on the thread above, I presume you both are referring to what is termed the 'terminal fee', which is a charge incurred by the telco that places the call from the the telco(s) that receives and connects the call to the destination. This occurs on the local cellular network too, although is not obvious from the existence of uncapped plans.

[bull....]

spark breaking down from its 2 yr sideways channel, t/a target suggests at least a 50c drop if confirmed

[mcdongle]

Ive been wondering if they are going to raise prices above inflation

[Mr Slothbear]

Ive been wondering if they are going to raise prices above inflation

they would do so with great risk to market share.

NZ telco industry incredibly competitive and cost or penalty to switching is non existent.

[JAX]

Ive been wondering if they are going to raise prices above inflation

Just got an email from Spark telling me my plan is changing and from now on they wont be paying for Spotify - I need to pay for that myself - albeit 50% off. So a price increase.

So that triggered me to look at the plan I was paying $60 a month for calls / texts (unlimited) and a measly 4gb of data + Spotify

Swapping to Kogan (a white label of Vodafone) and will pay $165 per year for unlimited calls and texts and 15gb data so $14 bucks a month for 3x the data and I guess Ill just pay for Spotify direct.

Pretty dangerous game playing with peoples plans - I should have checked sooner!

[dobby41]

Swapping to Kogan (a white label of Vodafone) and will pay $165 per year for unlimited calls and texts and 15gb data so $14 bucks a month for 3x the data and I guess Ill just pay for Spotify direct.

Pretty dangerous game playing with peoples plans - I should have checked sooner!

Interesting way of doing it.
That's $160 for the year.
That's 1.5GB data per 30 days (not 15G) so 1/3rd the data, not 3x.
To get back to 4G of data you'd need 2x 1.25G data packs as $11.90 each so another $24 - still less than the $60 (though there are other, better, prepay plans with Spark).
Still an interesting deal.

[BlackPeter]

Just got an email from Spark telling me my plan is changing and from now on they wont be paying for Spotify - I need to pay for that myself - albeit 50% off. So a price increase.

So that triggered me to look at the plan I was paying $60 a month for calls / texts (unlimited) and a measly 4gb of data + Spotify

Swapping to Kogan (a white label of Vodafone) and will pay $165 per year for unlimited calls and texts and 15gb data so $14 bucks a month for 3x the data and I guess Ill just pay for Spotify direct.

Pretty dangerous game playing with peoples plans - I should have checked sooner!

Just made the move to Kogan (they had a X-Mas special - one year for half the price you are mentioning) for me and wife ... - and it worked smooth and easy. Immediately operational after swapping the SIM and number transfer (during the working week) took 4 hours.

So far quite good, and soo much cheaper ...

[BlackPeter]

Interesting way of doing it.
That's $160 for the year.
That's 1.5GB data per 30 days (not 15G) so 1/3rd the data, not 3x.
To get back to 4G of data you'd need 2x 1.25G data packs as $11.90 each so another $24 - still less than the $60 (though there are other, better, prepay plans with Spark).
Still an interesting deal.

If you need more data - there are 48GB for $250 pa or 180GB for $330 pa.

No need to buy the additional data packs if you know in advance you need lots ...

https://www.kogan.com/nz/buy/kogan-mobile-prepay-mobile-starter-pack

But hey - I probably should not make too much advertisement for Sparks competition on this thread :):

Did I mention that Kogan / Vodafon reception is in many places better than Spark (well, at our place it definitely is ...)?

[JAX]

Interesting way of doing it.
That's $160 for the year.
That's 1.5GB data per 30 days (not 15G) so 1/3rd the data, not 3x.
To get back to 4G of data you'd need 2x 1.25G data packs as $11.90 each so another $24 - still less than the $60 (though there are other, better, prepay plans with Spark).
Still an interesting deal.

Yes you are right today .... but also you are wrong.

This is the plan - https://www.kogan.com/nz/buy/kogan-mobile-prepay-voucher-code-large-365-days-15gb-30-days-nz/

$330 per year which is still reasonable. BUT at various times of the year (sale type times) including Xmas just gone - the $330 a year plan and all the others are sold for half price. So $165 for 180gb (or 15gb a month) which is what I paid in early Jan. Also swapped my wife over from Skinny another Spark brand at the same time - so really 2 for the price of one.

Which is a pretty large saving from $60 x 12.

[mcdongle]

I wondered because vodafone uk have just raised their prices by about 10% with British Telecom following.. It will get here eventually i suppose with inflation what it is.

[dobby41]

Yes you are right today .... but also you are wrong.

Thanks for that - live and learn!

[percy]

Result had no surprises that I could see.EPS well up from 8 to 9.6.
Dividend level maintained.Ex div 24th March,Record 25th Mrch,Payment 8th April.

[airedale]

Result had no surprises that I could see.EPS well up from 8 to 9.6.
Dividend level maintained.Ex div 24th March,Record 25th Mrch,Payment 8th April.
Hi Percy, it looks like a small increase in the dividend from 12.5 cents to 14.7 cents.

[buy_high_sell_lo]

This half yearly report is a diamond in the rough.
Though on the surface the marginal increase in both top and bottom line may not seem extraordinary it is important to take into consideration the context of how this was achieved:

1. Covid impact on international borders which would have decimated roaming revenue
2. Lockdowns which have impacted overall sales
3. NZ economy is in a slowdown the numbers should suggest that Spark numbers should be flat or declining. Considering that GDP down and net migration for the year down 1700...

However despite all of these head winds Spark has maintained growth in its key mobile and IOT segments.
Though broadband was down this is a low margin product that is more an add on than a stand alone product.

Also note the dividend is maintained at 12.5 cents.

[Cyclical]

Interesting way of doing it.
That's $160 for the year.
That's 1.5GB data per 30 days (not 15G) so 1/3rd the data, not 3x.
To get back to 4G of data you'd need 2x 1.25G data packs as $11.90 each so another $24 - still less than the $60 (though there are other, better, prepay plans with Spark).
Still an interesting deal.

I assume you are having JAX up for getting bits and bytes mixed up? I checked the link and it is indeed 15GB (big B), so it's pretty good value, especially if you get that half price special. I'd move my daughter over to it from the Skinny $9 per 4 weeks pre-pay, but then I wouldn't be able to keep an eye on what's going through the home broadband and firewall haha.

[dobby41]

I assume you are having JAX up for getting bits and bytes mixed up? I checked the link and it is indeed 15GB (big B), so it's pretty good value, especially if you get that half price special. I'd move my daughter over to it from the Skinny $9 per 4 weeks pre-pay, but then I wouldn't be able to keep an eye on what's going through the home broadband and firewall haha.

Bad assumption - I well understand bits and bytes.
My comment was in relation to what the poster wrote so you'd have to follow the thread a bit.
Certainly at half price it is a good deal, at full price it is reasonable and powered by Voda so good network there too (mostly).

[JAX]

Yes you are right today .... but also you are wrong.

This is the plan - https://www.kogan.com/nz/buy/kogan-mobile-prepay-voucher-code-large-365-days-15gb-30-days-nz/

$330 per year which is still reasonable. BUT at various times of the year (sale type times) including Xmas just gone - the $330 a year plan and all the others are sold for half price. So $165 for 180gb (or 15gb a month) which is what I paid in early Jan. Also swapped my wife over from Skinny another Spark brand at the same time - so really 2 for the price of one.

Which is a pretty large saving from $60 x 12.


For those which were discussing this - its back - sort of - its buy one get one free, so effectively the same $13 a month as long as you need two. As mentioned I got one for the wife and one for myself so a very good deal. Just been in the US for the last 3 weeks - and the roaming was actually a better deal than Spark and Vodafone as well - not sure how they make any money out of this really.

https://www.kogan.com/nz/buy/kogan-mobile-prepay-voucher-code-large-365-days-15gb-30-days-nz/

[percy]

5 year high...

[Muse]

5 year high...

mental

i rarely pay attention to my investment in this and a bit surprised by it - whats driven it?

[couta1]

5 year high... Almost, it hit $5 in Sept 2020.

[percy]

Almost, it hit $5 in Sept 2020.

Yes $4.98.
I should not confuse 1 year charts with 5 year charts..lol.

[RTM]

5 year high...

Thanks Percy...wasn't watching this at all.

[Waiuta]

They're selling their towers so freeing up capital to do ????? Maybe a special dividend.

[Master98]

Once border fully open and international visitors coming back, then mobile roaming incoming will be surging.

[buy_high_sell_lo]

With so many speculative stocks selling off at the moment paired with rising interest rates making other safe haven assets with lower yields less attractive.

I imagine retail investors as well as funds are moving their money into safe equities with higher yields.

[Entrep]

lol, I also have a good chunk of these and when I saw this thread active assumed we had been selling off. Pleasantly surprised!

[dobby41]

They're selling their towers so freeing up capital to do ????? Maybe a special dividend.

They are investigating selling some towers.
Of course, that would lower the asset backing.

[Snoopy]

They are investigating selling some towers.
Of course, that would lower the asset backing.

That depends on what price they end up selling the towers for does it not? If the towers sell for above book value, then the asset backing goes up. If the towers sell for below book value then the asset backing goes down.

SNOOPY

[dobby41]

That depends on what price they end up selling the towers for does it not? If the towers sell for above book value, then the asset backing goes up. If the towers sell for below book value then the asset backing goes down.

SNOOPY

Too true but given they have just started investigating selling them it's probably a bit early to speculate.

[maclir]

Too true but given they have just started investigating selling them it's probably a bit early to speculate.

They've been discussing it publicly since at least August last year.

[RTM]

They've been discussing it publicly since at least August last year.

Here we go. We can't even look after our own cell phone towers.

https://www.nzx.com/announcements/395197

Be interesting see how the cash is div'ied up.

"Spark intends to release an updated capital management policy at its full year results on August 24. When assessing the most appropriate use of proceeds Spark will consider three key pillars – maximizing returns to shareholders, investment in future growth, and maintaining financial flexibility through an appropriate investment grade debt rating. The capital management policy will provide clarity on the proportion of proceeds allocated to each of these areas and the most effective means of returning proceeds to shareholders.”"

[Snoopy]

Here we go. We can't even look after our own cell phone towers.

https://www.nzx.com/announcements/395197

Be interesting see how the cash is div'ied up.


When I read 'Ontario Teachers Pension Plan' were buyers, a light went on in my memory from long ago - I know that name! And sure enough, that same outfit was involved in a certain 'Yellow Pages Buyout' back in 2007

https://www.nzherald.co.nz/business/telecom-gets-2-billion-for-yellow-pages/ABP27IMEUFJEGZFHMKHZZSQDFA/

That little foray did not end well for the Ontario teachers: $2.24billion extinguished!

https://www.nzherald.co.nz/business/yellow-pages-waits-for-revamp-after-loss/P6LEFHX7DONYFGEQKVS75EHX5U/

With a name like 'Ontario Teachers Pension Plan' you would think they might learn. Is buying a 70% share in a company where Spark retains operational control a good deal? From a Spark shareholder point of view it sounds like it. Are the Ontario Teachers setting themselves up for another spanking?

Craic (now there is a name from the past) might finally be able to put away his axe and order that automated wood splitter.

SNOOPY

[RTM]

Wasn't sure what effect it might have on the share price...pretty ho hum so far.
Ah well.



When I read 'Ontario Teachers Pension Plan' were buyers, a light went on in my memory from long ago - I know that name! And sure enough, that same outfit was involved in a certain 'Yellow Pages Buyout' back in 2007

https://www.nzherald.co.nz/business/telecom-gets-2-billion-for-yellow-pages/ABP27IMEUFJEGZFHMKHZZSQDFA/

That little foray did not end well for the Ontario teachers: $2.24billion extinguished!

https://www.nzherald.co.nz/business/yellow-pages-waits-for-revamp-after-loss/P6LEFHX7DONYFGEQKVS75EHX5U/

With a name like 'Ontario Teachers Pension Plan' you would think they might learn. Is buying a 70% share in a company where Spark retains operational control a good deal? From a Spark shareholder point of view it sounds like it. Are the Ontario Teachers setting themselves up for another spanking?

Craic (now there is a name from the past) might finally be able to put away his axe and order that automated wood splitter.

SNOOPY

[Muse]

Well that's a big ole price OTPP paid: 33.8x prospective proforma EBITDA. According to the AFR the purchase price stacks up well against other telco tower sales.

[percy]

Craic (now there is a name from the past) might finally be able to put away his axe and order that automated wood splitter.

SNOOPY[/QUOTE]

Always loved his trading of SPK.100% success record.
But what was more exciting were his "chain saw" and " whiskey still" stories.

[Snoopy]

Wasn't sure what effect it might have on the share price...pretty ho hum so far.
Ah well.


Buy he rumour sell the fact? The sale of the cell towers has been well signalled. The Spark share price is up over 10% since the start of the year. That is a pretty good performance in a falling market.

SNOOPY

[RTM]

Buy he rumour sell the fact? The sale of the cell towers has been well signalled. The Spark share price is up over 10% since the start of the year. That is a pretty good performance in a falling market.

SNOOPY

Agreed. Friend sold some recently, needed the cash. He’ll be happy.
I will continue to hold.

[percy]

Agreed. Friend sold some recently, needed the cash. He’ll be happy.
I will continue to hold.

Only a few months to their next divie.

[LaserEyeKiwi]

Well that's a big ole price OTPP paid: 33.8x prospective proforma EBITDA. According to the AFR the purchase price stacks up well against other telco tower sales.

Holy moly! That is a fantastic sale price by Spark. 33.8x EBITDA. LOL. Very well done.

Infratil will be hoping to do the same with Vodafone towers. KPG also intends to sell portion of its office portfolio to international pension funds, and I know another “utility” company that is setting up to sell off part of its “network” to potential pension fund investors, so it’s a growing trend seemingly.

[RTM]

Holy moly! That is a fantastic sale price by Spark. 33.8x EBITDA. LOL. Very well done.

Infratil will be hoping to do the same with Vodafone towers. KPG also intends to sell portion of its office portfolio to international pension funds, and I know another “utility” company that is setting up to sell off part of its “network” to potential pension fund investors, so it’s a growing trend seemingly.

It’s a pity the TELCO’s can’t work together a bit on tower design and placement. Maybe this might lead into this down the track.

[kiora]

It’s a pity the TELCO’s can’t work together a bit on tower design and placement. Maybe this might lead into this down the track.

Done
https://www.nzherald.co.nz/business/code-opens-door-to-cellular-tower-share/2KV27UCV3K63XLQFLFQ2GVHPSQ/
https://ecommercenews.co.nz/story/2degrees-unveils-new-infrastructure-sharing-agreement-passes-1b-milestone

[dobby41]

It’s a pity the TELCO’s can’t work together a bit on tower design and placement. Maybe this might lead into this down the track.

It's been allowed for many years but isn't popular.
Towers can get a little congested with aerials these days and placement depends on where your other aerials are so a shared tower won't always be in an optimal location for your coverage.

[Nor]

48c per share am I right? How much will we see? The equivalent of one year's extra dividend would be OK.

[RTM]

It's been allowed for many years but isn't popular.
Towers can get a little congested with aerials these days and placement depends on where your other aerials are so a shared tower won't always be in an optimal location for your coverage.

I guess that's a case. But give the size of our country and population...it would seem to make sense that one set of ariels / towers etc might be better for NZ Inc.

[Sideshow Bob]

Spark New Zealand Limited H2 FY22 Results - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/397478)

Spark delivers strong full year performance and announces plansto increase FY23 dividend and return up to $350 million to shareholders through on-market buy-back

• Disciplined strategy execution delivering strong full year performance with revenue back in growth,EBITDAI1 at the top end of guidance, and NPAT2 in growth
• Spark outperformed the market in mobile service revenue growth3• Total FY22 dividend of 25 cents per share, 100% imputed, and guiding to an FY23 total dividend of 27 cents per share, 100% imputed
• ~$900 million in TowerCo proceeds to be used to maximise shareholder value, invest for growth, and maintain financial strength and flexibility

[bull....]

that was a surprise the intention to increase div next yr

[ronaldson]

Very unusual aggregate of 6.018m shares traded at the close today via the match pricing - the most spirited auction I have seen in a while on the NZX.

[Baa_Baa]

Very unusual aggregate of 6.018m shares traded at the close today via the match pricing - the most spirited auction I have seen in a while on the NZX.

https://www.nzx.com/regulation/NZXO/announcements

[ronaldson]

Thanks BB. I have tended to overlook the significance of these announcements in the past, and I still don't entirely understand. But other more liquid shares I hold such as ARG, CEN, MCY, ARV and even less liquid such as SAN also experienced larger volumes than normal at market close today. So I will be alert in future.

[Sideshow Bob]

https://www.nzx.com/announcements/407104


• Reported revenue1, EBITDAI2, and NPAT all in growth, driven by one-off proceeds fromthe strategic divestment of a majority stake in Spark’s TowerCo business
• Up to $350 million to be returned to shareholders through an on-market share buy-backand an additional ~$90-$110 million to be invested in digital infrastructure and emergingtechnologies in the second half
• While adjusted revenue increased as a result of a standout performance in mobile, higherproduct costs and intensifying competition in broadband and cloud contributed to marginpressure in the half, with adjusted EBITDAI and NPAT declining
• H1 FY23 dividend of 13.5 cents per share declared, 100% imputed

[Sideshow Bob]

Buyback announced

https://www.nzx.com/announcements/407100

Spark New Zealand Limited (Spark) has announced today that it has allocated up to NZ$350 million to undertake an on-market share buy-back that will commence after the release of the new 3-year strategy on 5 April 2023.

As mentioned in Spark’s H2 FY22 results and market announcement on 24 August 2022, in July 2022 the Ontario Teachers’ Pension Plan agreed to acquire a 70% interest in Spark’s “TowerCo” business.

Spark received net cash proceeds of $911 million at completion of the TowerCo transaction, which occurred on 14 October 2022.
Spark has considered options for returning a portion of the proceeds from this transaction to shareholders and wishes to proceed with the on-market share buyback of up to $350 million. The shares will be acquired on the NZX and ASX, at prices that are in line with the prevailing market price from time to time during the period of the buy-back.

Spark will announce the commencement and further details of the buy-back in line with NZX Listing Rules requirements (including NZX Listing Rule 4.14.2) in due course.

Leading up to and throughout the period of the buy-back, Spark will continue to assess market conditions, its prevailing share price, available investment opportunities and all other relevant considerations. Spark reserves the right to vary, suspend without notice, or terminate the buy-back programme at any time.

[percy]

https://www.nzx.com/announcements/407104


• Reported revenue1, EBITDAI2, and NPAT all in growth, driven by one-off proceeds fromthe strategic divestment of a majority stake in Spark’s TowerCo business
• Up to $350 million to be returned to shareholders through an on-market share buy-backand an additional ~$90-$110 million to be invested in digital infrastructure and emergingtechnologies in the second half
• While adjusted revenue increased as a result of a standout performance in mobile, higherproduct costs and intensifying competition in broadband and cloud contributed to marginpressure in the half, with adjusted EBITDAI and NPAT declining
• H1 FY23 dividend of 13.5 cents per share declared, 100% imputed

I liked the result together with the increased divie and share buy back,however The Market did not..lol.

[676767]

I liked the result together with the increased divie and share buy back,however The Market did not..lol.

Doesn't look like the market likes a lot today..

[airedale]

Doesn't look like the market likes a lot today..
Increased dividend, and share buy-back, then the SP drops 6.9% The irrational Mr Market puts SPK up for sale.

[percy]

Increased dividend, and share buy-back, then the SP drops 6.9% The irrational Mr Market puts SPK up for sale.

Spark will also invest $350 million for growth, with ~$90-$110 million of incremental investment in digital infrastructure and emerging technologies in FY23

[Snoopy]

Spark certainly is one for the 'dividend hounds'. I haven't yet written the summary conclusion to my Buffett tests. But it is clear the background conditions to run the so called "Buffett Spreadsheet' to value Spark will not be fulfilled. This means we need to apply alternative valuation techniques. My standard 'go to' alternative method is 'capitalised dividend valuation'. This is capitalising the average dividend paid over the last five years.

To reprise, -because I haven't done this for a while- 'capitalising the dividend' is actually a fairly crude method of valuation. Implicit is the assumption that the company is 'no growth', and that the performance of the last five years will be reflective of company performance in the current year. Of special mention in this case is that Spark dividends have been consistently greater than underlying earnings. One way to think of this is that directors, who have more up to date and comprehensive knowledge of Spark than we shareholders do, are optimistic that underlying business will improve. IOW we shareholders are benefitting from director 'insider knowledge'. Another benefit of capitalised dividend valuation is that it does not require anyone to forecast any dividend payouts from the company. So there is no forecasting error. All the figures I use in the valuation are based on dividends actually paid

Gross Dividend Calculations

FY2017 P2:
11.0c (Ordinary, 100% imputed) + 1.5c (Special, 80.6% imputed):
= 11.0c (FI) + 1.209c (FI) + 0.291c (NI) = 11.0c/0.72 + 1.209c/0.72 +0.291c = 17.25c (gross dividend)

FY2018 P1:
11.0c (Ordinary, 100% imputed) + 1.5c (Special, 75% imputed):
= 11.0c (FI) + 1.125c (FI) + 0.375c (NI) = 11.0c/0.72 + 1.125c/0.72 + 0.375c = 17.22c (gross dividend)

FY2018 P2, FY2019 P1, FY2019 P2, and FY2020 P1 (All 75% imputed): 11.0c (ordinary) + 1.5c (ordinary) = 12.5c (total)
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2020 P2:
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2021 P1, FY2021 P2, FY2022 P1:
12.5c (Ordinary, 100% imputed) = 12.5c (FI) = 12.5c/0.72 = 17.36c = 17.36c (gross dividend)




Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY201712.5c+12.5cN/Ac + 17.25c17.25c


FY201812.5c+12.5c17.22c + 16.15c33.37c


FY201912.5c +12.5c16.15c +16.15c32.30c


FY202012.5c + 12.5c16.15c + 16.15c32.30c


FY202112.5c + 12.5c17.36c + 17.36c34.72c


FY202212.5c + ?c17.36c + ?c17.36c


Total167.3c



Now we come to selecting the capitalisation rate in this ultra low interest rate environment. I have selected a figure of 5% for Chorus. But Chorus is a regulated monopoly. I think Spark shareholders need a greater implied return than that, to compensate for the risks of competition and technological change. I think a 6% gross interest return on your shares bought would be fair. The five year historical average gross dividend received by shareholders from Spark was:

167.3 / 5 = 33.46c

The capitalised dividend value of Spark (fair value) is therefore: 33.46c/0.06 = $5.58

Of course no self respecting value investor would target 'fair value' as a price purchase target. Value investors want a discount! For a utility type investment like Spark I think a discount of 10% is reasonable target. So I am setting my target purchase price at $5.58 x 0.9 = $5.02.

I have been buying SPK cum that 12.5c fully imputed dividend today!



Gross Dividend Calculations

FY2019P1, FY2019P2, FY2020 P1, FY2020 P2:
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2021 P1, FY2021 P2, FY2022 P1, FY2022P2, FY2023 P1:
12.5c (Ordinary, 100% imputed) = 12.5c (FI) = 12.5c/0.72 = 17.36c = 17.36c (gross dividend)

FY2023 P2: (this dividend not yet paid at time of posting)
13.5c (Ordinary, 100% imputed) = 13.5c (FI) = 13.5c/0.72 = 18.75c = 18.75c (gross dividend)




Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY201912.5c + 12.5c16.15c + 16.15c32.30c


FY202012.5c + 12.5c16.15c + 16.15c32.30c


FY202112.5c + 12.5c17.36c + 17.36c34.72c


FY202212.5c + 12.5c17.36c + 17.36c34.72c


FY202312.5c + 13.5c17.36c + 18.75c36.11c


Total170.15c



Now we come to selecting the capitalisation rate in this ultra low interest rate environment. I have selected a figure of 5% for Chorus (from a March2021 low interest rate perspective). But Chorus is a regulated monopoly. I think Spark shareholders need a greater implied return than that, to compensate for the risks of competition and technological change. I think a 6.5% gross interest return on your shares bought, in today's rising interest rate environment, would be fair. The five year historical average gross dividend received by shareholders from Spark was:

170.15 / 5 = 34.03c

The capitalised dividend value of Spark (fair value) is therefore: 34.03c/0.065 = $5.24

Of course no self respecting value investor would target 'fair value' as a price purchase target. Value investors want a discount! For a utility type investment like Spark I think a discount of 10% is reasonable target. So I am setting my target purchase price at $5.24 x 0.9 = $4.72.

SNOOPY

discl: holder, but have not purchased recently.

[ziggy415]

Snoopy, I see Vodafone is rebranding and becoming a standalone entity, what discount do you envisage as spark shareholders free up cash to take up " ONE" (vodafone) impending listing

[Snoopy]

Snoopy, I see Vodafone is rebranding and becoming a standalone entity, what discount do you envisage as spark shareholders free up cash to take up " ONE" (Vodafone) impending listing


An excellent question. Actually Vodafone NZ has been a stand alone entity, divorced from the global Vodafone, for some time.

https://www.vodafone.com/news/technology-news/vodafone-group-completes-sale-of-vodafone-new-zealand

"31 Jul 2019: Vodafone Group Plc (“Vodafone”) has completed the sale of 100% of Vodafone New Zealand Limited (“VFNZ”) to a consortium comprising Infratil Limited and Brookfield Asset Management Inc. for a cash consideration equivalent to an Enterprise Value of NZ$3.4bn (€2.1bn), implying an FY’19 multiple of 7.3x Adjusted EBITDA and 16.2x Adjusted OpFCF"

What you are seeing is a local company now adopting its own 'One NZ' branding, and ditching the 'brand usage fee' they are paying to global Vodafone.

Moving on to a probable 'market float' sell down at some point, a lot will depend on how 'Vodafone NZ' (I will keep calling it that for now) is 'dressed up ' for sale. By that I mean what debt levels a prospective floated entity is saddled with. I think we can take it as a given that 'Vodafone NZ' will be marketed as an 'asset stripped' package (the cellphone towers are already gone, with Brookfield and Infratil pocketing the profits).

Personally I have a Vodafone cellphone and am very happy with it. And I say that after migrating there from Telecom (as Spark was then) and more latterly Two Degrees. But I will try and not let personal satisfaction bias colour my investment decision making! I think Spark have sharpened up their cellphone offering in recent years.

Operating EBITDA at Spark over FY2021 was $1,150m. That equates to: $1.150m/1,872m = 61.4cps on an historical retrospective basis.

Line that up with yesterday's closing price of $5.025 and I get an historical EBITDA multiple of: 502.5/61.4 = 8.2. I would think Brookfield/Infratil would be looking to float at similar multiples to ensure themselves a nice profit. So I don't see too much fundamental room for the SPK share price to decline in a 'one on one' float stand off with 'Vodafone NZ'. Having said that a major new NZX float like that would induce 'reef fish' behaviour from fund managers, as they struggle to balance their telecommunications sector exposure. So I think we could see a 5% fall in the share price of Spark, which will put it neatly into my accumulation share price zone.

Therein I think will lie the real opportunity in any Vodafone NZ float. The opportunity to buy more Spark shares at bargain prices!

SNOOPY

[mcdongle]

Skinny upping their prices.

https://www.skinny.co.nz/17-plan - $16 becomes $17 - 1.25GB to 1.5GB

https://www.skinny.co.nz/27-plan - $26 becomes $27 - Stays the same

https://www.skinny.co.nz/40-plan - $36 becomes $40 - 4.5GB to 5GB

https://www.skinny.co.nz/50-plan - $46 becomes $50 - 12GB to 15GB

[Sideshow Bob]

https://www.nzx.com/announcements/408876

Gotta love (not) the HR corporate speak - and their Leadership "Squad" :laugh:

[winner69]

https://www.nzx.com/announcements/408876

Gotta love (not) the HR corporate speak - and their Leadership "Squad" :laugh:

Better than Synlait’s Director of this and Vice Presidents of that

[airedale]

Squad? the slang term for a foot soldier is "squaddie".

[Snoopy]

FY2021 results are out. So time to try and find how the exciting new growth divisions are shaping up.

P68 of AR2021 is where the true calculation of profitability starts:



Operating Revenuesless Product Costsless Labour Costs (1)
less Other Operating Expenses (1)equals EBITDA


'Other Operating Revenues'$137m$67m$19m
$15m$36m



Notes

1/ 'Labour Costs' and 'Other Operating Expenses' are estimated in fractional proportion (f) to the percentage of revenue turned over by the 'Other Operating Revenues' business unit.

f= 137/3565 = 3.843%; Labour Cost = 0.03843 x $491m = $19m, 'Other Operating Expenses' = 0.03843 x $385m = $15m

-------------------


EBITDA is a good proxy for cashflow. But barring some trunk transmission assets, most of the equipment at Spark is not long lived. Indeed there is significant investment now replacing the old PSTN telephone system and continuing the 5G mobile roll out. In my assessment, this means EBIT is the more important measure.

Depreciation & Amortisation ('Other Revenue') = 0.03843 x $523m = $20m

EBIT= EBITDA - DA = $36m - $20m = $16m

The interest charge against 'Other Revenue' = 0.03843 x [$34m - $81m] = -$2m.

NPAT = 0.72(EBIT - I) = 0.72($16m-$2m) = $10m

On page 68 of AR2021 we learn "Other operating revenues include revenue from Qrious, Internet of Things, Spark Sport, and exchange building sharing arrangements." I had previously assumed this category included 'Spark Health' as well. But it could be the Spark Health referred to as a promising potential future revenue business unit has yet to start from a zero base.

Whatever, the NPAT estimate for all those promising future growth initiatives looks to have turned the corner from loss making, and is now a small positive number. Albeit in overall terms, that profit is not significant.

When the FY2022 results came out, 'Spark Sport' was very much 'still in the picture' as part of the 'exciting growth story' (at HY2023, Spark exited Spark Sport for a one off write off of $52m). So how did the total of the exciting new growth divisions -at the time- shape up?

P87 of AR2022 is where the true calculation of profitability starts:



Operating Revenuesless Product Costsless Labour Costs (1)
less Other Operating Expenses (1)equals EBITDA


'Other Operating Revenues'$152m$72m$20m
$16m$44m



Notes

1/ 'Labour Costs' and 'Other Operating Expenses' are estimated in fractional proportion (f) to the percentage of revenue turned over by the 'Other Operating Revenues' business unit.

f= 152/3694 = 4.114%; Labour Cost = 0.04114 x $495m = $20m, 'Other Operating Expenses' = 0.04114 x $381m = $16m

-------------------


EBITDA is a good proxy for cashflow. But barring some trunk transmission assets, most of the equipment at Spark is not long lived. Indeed there is significant investment now replacing the old PSTN telephone system and continuing the 5G mobile roll out. In my assessment, this means EBIT is the more important measure.

Depreciation & Amortisation ('Other Revenue') = 0.04114 x $520m = $21m

EBIT= EBITDA - DA = $44m - $21m = $23m

The interest charge against 'Other Revenue' = 0.04114 x [$26m - $74m] = -$2m. So underlying Net Profit After Tax is:

NPAT = 0.72(EBIT - I)= 0.72($23m-$2m)= $15m

On page 89 of AR2022 we learn "Included in 'Other operating revenues' is revenue from Qrious (Artificial Intelligence, data and analytics), Internet of Things, Spark Sport, Connect 8 (the construction contractor, now fully brought back in house by buying out the Electra shareholding) and exchange building sharing arrangements." I had previously assumed this category included 'Spark Health' as well. But it could be the Spark Health referred to as a promising potential future revenue business unit has yet to start from a zero base.

Whatever, the NPAT estimate for all those promising future growth initiatives looks to have improved by 50%, even if the overall contribution to Spark profit remains small.

SNOOPY

[Snoopy]

This is a little exercise I like to run on all my companies just to check they are not overloaded with debt. MDRT is the answer to the question:

"How many years would it take to repay your borrowing debt if you decided to repay that debt by pouring all this years net profit into debt repayment, and continued to do the same in subsequent years?"

In other calculations I have been concerned with 'normalised profit', as I am concerned with sustainable earnings trends. However in this case I need the recognised profit from all sources, as determined by current accounting standards. For FY2021 that was $384m.

The total long and short term debt at Spark at EOFY2021 balance date was $1,403m (p89 AR2021). From that figure I like to take off the balance sheet cash balance of $72m. So at EOFY2021, for Spark:

MDRT = ($1,403m-$72m) / $384m = 3.47

My 'rule of thumb' is that any MDRT between 2 and 5 represents a 'medium level' of debt. 3.47 is right in the middle of that range. Whether that is a good result depends on the kind of company being assessed. Generally if you have a stable cashflows that are not affected too much by business cycles, it becomes more 'capital efficient' for shareholders if you crank the debt up a bit This is exactly the situation that I see Spark in. That means I am quite happy with Sparks debt position.

Conclusion: Pass Debt Test


This is a little exercise I like to run on all my companies just to check they are not overloaded with debt. MDRT is the answer to the question:

"How many years would it take to repay your borrowing debt if you decided to repay that debt by pouring all this years net profit into debt repayment, and continued to do the same in subsequent years?"

In other calculations I have been concerned with 'normalised profit', as I am concerned with sustainable earnings trends. However in this case I need the recognised profit from all sources, as determined by current accounting standards. For FY2022 that was $410m.

The total long and short term debt at Spark at EOFY2022 balance date was $1,526m (p108 AR2022). From that figure I like to take off the balance sheet cash balance of $71m. So at EOFY2022, for Spark:

MDRT = ($1,526m-$71m) / $410m = 3.55

My 'rule of thumb' is that any MDRT between 2 and 5 represents a 'medium level' of debt. 3.55 is right in the middle of that range. Whether that is a good result depends on the kind of company being assessed. Generally if you have a stable cashflows that are not affected too much by business cycles, it becomes more 'capital efficient' for shareholders if you crank the debt up a bit This is exactly the situation that I see Spark in. That means I am quite happy with Sparks debt position.

Conclusion: Pass Debt Test

SNOOPY

[Snoopy]

First, an apology. It looks like I wrote the equivalent of a short story about Spark over 2021 and never penned the final chapter! This post is the missing 'summary post' for my previous posts 1806, 1807, 1609 and 1810 on this thread. With my forum settings, I have to go back 17 pages to find these posts.

Spark fails the Buffett test, because earnings per share were largely flat over the five year period test period (no eps growth). Meanwhile, net profit margin was showing a declining trend, except for a one off 'profit bump' between between FY2018 and FY2019. This was principally due to falling labour costs, the result of both standardization of processes and automation. But it becomes hard to continue such savings year after year.

Failing the Buffett test does not necessarily mean that Spark is a poor investment though. It just means that we need to look at the investment under different valuation models. If we assume that Spark is a 'no growth' business over the business cycle, then we can look at 'capitalised dividend valuation' as an investment yardstick. Post 1819 summarizes this, based on a gross yield of 6%. I should add this 'capitalised dividend analysis' was done on 24th August 2021, before the dream of interest rates dropping to a permanently lower notch for the foreseeable future was shattered. The Spark share price was $4.84 on that day. That looked favourable against a $5.58 capitalised dividend valuation.

In the last few days (post 1068) I have redone my 'capitalised dividend valuation' for FY2023 using a gross interest rate of 6.5%. If I had known then what I do now, I would not have dropped my acceptable gross yield down to 6% back in August 2021. Reworking my historical gross yield calculation from post 1819 using today's 6.5% gross yield expectation gives me a revised fair historical 'capitalised dividend value' of:

33.46c/0.065 = $5.15 (on 24-08-2021)

So back on 24th August, that $4.84 market value was still below my 'with hindsight' 'capitalised dividend value' of $5.15. But much of the earlier 'margin of safety' from my post 1819 former valuation of $5.53 was gone. This is a good reason why I would never buy a share at what I deem 'fair value'. I always buy for a purchase price 'below fair value' (10% discount minimum), that will allow for any overoptimism I put into my 'fair value' calculations.

A great advantage of using "capitalised dividend valuation" is that. being a 'zero growth' model, any real growth that does occur, we as investors get 'for free'. This brings me to my post 1811 where I look at the contribution of the growth side of the Spark business: Qrious (data processing and AI) , Internet of Things and Spark Sport. That shows me that for FY2021 these 'growth businesses' delivered $10m to the bottom line from normalised profits of $375m. That works out as 2.66% of profits, which I see as margin of error stuff. (The recent closure of 'Spark Sport' puts a further cloud over Spark's growth ambitions. But this is judging historical growth plans with the benefit of hindsight that was not available 'back in the day'). With the growth engine at Spark not really firing, I would say using a 'capitalised dividend revaluation model' for valuing the Spark share is reasonable.

Despite the failure of Spark to jump all the Buffett test hurdles using a FY2021 perspective, I would say the on market trading price of $4.84 'back in the day' offering a 6% discount on my revised $5.15 'capitalised value' was a fair price. The Spark share back in August 2021 was not a compelling buy. But it was certainly not something a portfolio investor looking for income should be looking to sell either.

SNOOPY

[Ricky-bobby]

First, an apology. It looks like I wrote the equivalent of a short story about Spark over 2021 and never penned the final chapter! This post is the missing 'summary post' for my previous posts 1806, 1807, 1609 and 1810 on this thread. With my forum settings, I have to go back 17 pages to find these posts.

Spark fails the Buffett test, because earnings per share were largely flat over the five year period test period (no eps growth). Meanwhile, net profit margin was showing a declining trend, except for a one off 'profit bump' between between FY2018 and FY2019. This was principally due to falling labour costs, the result of both standardization of processes and automation. But it becomes hard to continue such savings year after year.

Failing the Buffett test does not necessarily mean that Spark is a poor investment though. It just means that we need to look at the investment under different valuation models. If we assume that Spark is a 'no growth' business over the business cycle, then we can look at 'capitalised dividend valuation' as an investment yardstick. Post 1819 summarizes this, based on a gross yield of 6%. I should add this 'capitalised dividend analysis' was done on 24th August 2021, before the dream of interest rates dropping to a permanently lower notch for the foreseeable future was shattered. The Spark share price was $4.84 on that day. That looked favourable against a $5.58 capitalised dividend valuation.

In the last few days (post 1068) I have redone my 'capitalised dividend valuation' for FY2023 using a gross interest rate of 6.5%. If I had known then what I do now, I would not have dropped my acceptable gross yield down to 6% back in August 2021. Reworking my historical gross yield calculation from post 1819 using today's 6.5% gross yield expectation gives me a revised fair historical 'capitalised dividend value' of:

33.46c/0.065 = $5.15 (on 24-08-2021)

So back on 24th August, that $4.84 market value was still below my 'with hindsight' 'capitalised dividend value' of $5.15. But much of the earlier 'margin of safety' from my post 1819 former valuation of $5.53 was gone. This is a good reason why I would never buy a share at what I deem 'fair value'. I always buy for a purchase price 'below fair value' (10% discount minimum), that will allow for any overoptimism I put into my 'fair value' calculations.

A great advantage of using "capitalised dividend valuation" is that. being a 'zero growth' model, any real growth that does occur, we as investors get 'for free'. This brings me to my post 1811 where I look at the contribution of the growth side of the Spark business: Qrious (data processing and AI) , Internet of Things and Spark Sport. That shows me that for FY2021 these 'growth businesses' delivered $10m to the bottom line from normalised profits of $375m. That works out as 2.66% of profits, which I see as margin of error stuff. (The recent closure of 'Spark Sport' puts a further cloud over Spark's growth ambitions. But this is judging historical growth plans with the benefit of hindsight that was not available 'back in the day'). With the growth engine at Spark not really firing, I would say using a 'capitalised dividend revaluation model' for valuing the Spark share is reasonable.

Despite the failure of Spark to jump all the Buffett test hurdles using a FY2021 perspective, I would say the on market trading price of $4.84 'back in the day' offering a 6% discount on my revised $5.15 'capitalised value' was a fair price. The Spark share back in August 2021 was not a compelling buy. But it was certainly not something a portfolio investor looking for income should be looking to sell either.

SNOOPY

Haha Snoopy ya fence sitter! I bought a small amount a while back… not too sure what I’m going to do with them… I mainly invested for the liquidity/Div yield and shallow swing in price… it’s never really going to be a money maker or is it?..

[Snoopy]

Haha Snoopy ya fence sitter! I bought a small amount a while back… not too sure what I’m going to do with them… I mainly invested for the liquidity/Div yield and shallow swing in price… it’s never really going to be a money maker or is it?..


Fence sitting? Not really. It should not be a surprise that a well and widely researched share like Spark should trade around fair value. That is what happens in a well informed market. FWIW I think your approach sounds very sensible. Buy on the dips and hang in there for the dividends. That is basically what I have done. The liquidity gives you a ready exit should you require it. Personally I have never sold any SPK, even at what I feel might be cyclical highs. Because I am having trouble finding alternative investments that I understand that are selling at a discount to fair value.

As for 'never really going to be a money maker', well that depends on your time-frame and outlook. If I can round up a few Spark shares and get a 6.5% (or a bit better) gross yield, then I am very happy with that. I can't see any real evidence that Spark will give you an 'investment home run' in the foreseeable future. But 'stealing a base' here and there for a more modest (and less liable to be struck out) return I can cope with, and appreciate. For me an investment in Spark is almost a bond proxy. I haven't invested in bonds for quite a few years now as I prefer investments like this to be part of my 'insurance policy' against portfolio volatility. A return that gives a good premium to bank interest rates without too much risk.

There was once an investor on this forum called Craic who made quite a nice supplementary retirement income trading SPK shares, and SPK shares alone. He more or less did trade the swings on the Spark share price and made quite good money from doing so. Not what you call 'hit it out of the ball park' money. But good enough to enjoy a comfortable retirement. I wouldn't have followed his example myself, because it is not my style (I am not a trader). But I just mention it, because there is more than one way to skin a cat in this investment game. With SPK you can choose your investment style and make your moves to suit.

SNOOPY

[mshierlaw]

There was once an investor on this forum called Craic who made quite a nice supplementary retirement income trading SPK shares, and SPK shares alone. He more or less did trade the swings on the Spark share price and made quite good money from doing so. Not what you call 'hit it out of the ball park' money. But good enough to enjoy a comfortable retirement. I wouldn't have followed his example myself, because it is not my style (I am not a trader). But I just mention it, because there is more than one way to skin a cat in this investment game. With SPK you can choose your investment style and make your moves to suit.

SNOOPY

Quite easy to see how Craic could have & could still do this, lots of swings & a modest upward trend. Happy retirement Craic. :t_up:

14526

[percy]

Loved Craig's posts.Chain saws and making his own grog.
His SPK trading was a joy to hear about.
Another poster I miss is Janner.
Wonder if both are now in the big market up in the sky.?

[Snoopy]

Returning to my favourite Spark 'growth' reference:

https://investors.sparknz.co.nz/FormBuilder/_Resource/_module/gXbeer80tkeL4nEaF-kwFA/Spark%202023%203-Year%20Strategy%20FINAL.pdf

Slide 69 suggests that revenue from 'Other Revenue' (that is the revenue category that includes the three hot growth prospects) will grow by $80-$90m (from $130m) by EOFY2023. That represents a compounding annual growth rate 'g' of:

$130m(1+g)^3=($210m to $220m) => g= 17% to 19%

"Growth in IoT driven by explosion of connected devices to grow to~1m." That sounds like a big lift in monitoring fees piggy backing on cellphone towers that are largely already equipped with the gear they need. Such growth sounds quite profitable.

"Growth in Digital Heath driven by new revenue opportunities supported by the introduction of the Digital Health Platform." This part of the growth agenda, I find the most opaque. Spark runs the nationwide 111 service, for example. Would this move to the new 'Digital Health Platform'? If it does that isn't really growth because the same service was already operating under another business unit envelope.

Health Board ICT infrastructure is highly fragmented, and includes many unsupported legacy systems.

https://www.reseller.co.nz/article/683500/dhb-owned-nz-health-partnerships-hires-former-telecom-executive-lead-procurement/

That means there is definitely room for some serious IT spend, even though most of that seems directed towards customized software systems as designed by the likes of Oracle. But Spark may be stuck with the 'operational crumbs' in this space, unless this is where Qrious fits into the Spark business plan.

"Growth in Sport driven by increasing subscriber base." That sounds like a recipe for cashflow going straight to the bottom line - good stuff. Although it may be that Spark Sport is not yet profitable, this early in the business development cycle.


Another little look at the 'other revenue' growth engine which carries the hopes of reigniting Spark. The following table is summarised information from:

FY2021 Summary Presentation: https://investors.sparknz.co.nz/FormBuilder/_Resource/_module/gXbeer80tkeL4nEaF-kwFA/FY21%20Results%20Summary_FINAL.pdf

FY2022 Summary Presentation: https://investors.sparknz.co.nz/FormBuilder/_Resource/_module/gXbeer80tkeL4nEaF-kwFA/FY22%20Results%20Summary%20FINAL%20V2.pdf

HY2023 Summary Presentation: https://investors.sparknz.co.nz/FormBuilder/_Resource/_module/gXbeer80tkeL4nEaFkwF/H1_FY23_Results_Summary_FINAL.pdf.






Spark SegmentFY2020FY2021FY2022FY2023 (FY2020 forecast)


Other Revenue$130m$137m$152m$210m-$220m



Notes

1/ 'Other Revenue' includes: Qrious (Artifical intelligence and data processing), Internet of Things (remote monitoring of location and information), Spark Sport (wound up during FY2023), Connect 8 (infrastructure construction and repairs, brought back in house in FY2022) and rental of space to third parties in exchange buildings.

2/ Internet of Things (IoT) networks cover 99% of the population by EOFY2021 (c.f. 82% at EOFY2020). 450k devices are now connected across a range of industries including utilities health and logistics.

'Summer of Cricket' sees Spark Sport viewers top 240k over FY2021 (no dollars mentioned).

3/ Over FY2022 IoT connections increased by 75% to 832k. However corresponding revenue increased by only 22%. Meanwhile, a second 'successful' season of cricket was delivered with no numbers quoted. Improved returns were sought with 'strategic partnership opportunities'.

4/ The picture at 'Spark Health' is a little confusing. We are told that over FY2021 revenue increased by 10.6% on a revenue base of $200m ( 0.106 x $200m = $21.2m). However, this does not tie in with the 'total of other revenue' for FY2021 being only $137m. The only way I can make sense of this would be for Spark to have their regular phone and broadband arrangements for hospitals and health centres under the 'voice' and 'broadband' product segments, with 'specialist health centre add ons' recorded under 'other revenues'. This is just my speculation, trying to make sense of the figures. A specialist 'digital health platform' (whatever that means) was set to launch in Q1 FY2022. Given most medical facilities would have been well set up for broadband and other standard telecommunications before FY2021, I am going to assume that the revenue increase of $21.2m over FY2021 was for 'specialist health centre add ons'.

'Spark Health' revenue grew 46% over FY2022, driven by continued growth in telco, IT services (presumably these two are not part of 'other revenue'}, and health products (whatever those are, which are part of other revenue.) 1.46 x $21.2m = $31m. The HY2023 update simply suggested that 'continued growth' was expected.

The HY2023 update merely said that Digital Health Revenues were maintained (implying zero growth). The best forecast target for FY2023 is now a 10-15% growth in Digital Health Revenue for the full year (but that revised figure is below the annual 2023 budget.)



Sport in general is seen as a $500m revenue market in total, which leaves plenty of room for growth from whatever relative meagre revenue that Spark Sport currently has. Yet Sky TV total satellite subscription revenue was $582m (which includes more than just sport). It is hard to know how many Sky subscribers are 'sport subscribers'. If it was 75% that would give SkyTV 0.75 x $582m = $437m (Total programming fees paid by Sky for content were $342m, and I would pick the lions share of that was for sports rights). If the rest of the 'Sport' market was split between 'Spark' and 'Others', we would be looking at normalised 'Spark Sport' revenue of just over $30m.


5/ Shock update on Spark Sport for HY2023, where the anticipated 'strategic partner opportunities' saw Spark Sport unload their whole operation!. Spark provisioned for a $52m hit on this news (even though Spark Sport revenues increased in the HY2023 period, albeit offset by higher content costs)!

6/ Connections continue to grow on the IoT networks, with 1,200k connections at HY2023 (+44% in just six months). That means that Spark are on track to well exceed their connection goals of 1m for FY2023 (see first quoted post).

-----------------

Summary

For the three growth engines:

a/ Spark Sport has been shut down (estimated revenue $30m @EOFY2022).
b/ Spark Health growth has stalled - zero growth so far in 2023. Some of this stalling might be due to the difficult transition to Te Whatu Ora (Health New Zealand), as all of the disparate health boards merge into one. That could be stalling the adopting of new technology (estimated revenue $31m, or $30m in round figures @EOFY2022).
c/ The Internet of Things is going better than expected, in terms of connections. But profit growth is only one third of connections growth. I would expect profit growth to be less than connections growth. But is that connections/profit growth ratio what was was expected? There may have been some front loading of costs as IoT systems are set up (the profit margins on devices -one offs- may be less than the profit margins of running those devices - continuing revenues). By subtraction the IoT revenue at EOFY2022 was:

$150m - $30m - $30m - $10m (*) = $80m
(*) The $10m here I am assuming to be income from renting out Spark cabinet space to other providers (a pure guess on the amount).

This means my estimate for 'other revenue' for FY2023, assuming Spark Sport is reclassified as a discontinued business unit, is:
$0m + $30m + $80m x (1.22x1.22) = $150m
(I am assuming here that the 6 month revenue growth rate for 1HY2023 continues into 2HY2023). That is well below the $210m to $220m target set in FY2020, even if you allow for the exit from Spark Sport

SNOOPY

[Snoopy]

The problem with clouds is there is a lot of vapour.
I would prefer local governments stick to the knitting of their role. Its not like they don't have enough to do.


From HYR2023
“In cloud we saw an ongoing mix-shift towards public cloud, which has impacted private cloud revenue and margins, while the uncertain economic environment has contributed to lower managed service project activity. We are focused on accelerating simplification across our business portfolio and maximising our competitiveness in hybrid cloud, which is showing strong demand as customers seek diversification and a transition path to public cloud services.”

I went to 'google translate', but I couldn't find an option to translate from 'telespeak' to 'english'. I am concerned about reduced profitability for Spark in the cloud'. But I cannot for the life of me figure out what the above paragraph means. A 'private cloud' is a Spark customer paying to have their data stored in a remote location. But what is a 'public cloud'? And what is a 'hybrid cloud'? And where is this 'path to public cloud services' that Spark expect some of their customers to follow?

SNOOPY

[mondograss]

From HYR2023
“In cloud we saw an ongoing mix-shift towards public cloud, which has impacted private cloud revenue and margins, while the uncertain economic environment has contributed to lower managed service project activity. We are focused on accelerating simplification across our business portfolio and maximising our competitiveness in hybrid cloud, which is showing strong demand as customers seek diversification and a transition path to public cloud services.”

I went to 'google translate', but I couldn't find an option to translate from 'telespeak' to 'english'. I am concerned about reduced profitability for Spark in the cloud'. But I cannot for the life of me figure out what the above paragraph means. A 'private cloud' is a Spark customer paying to have their data stored in a remote location. But what is a 'public cloud'? And what is a 'hybrid cloud'? And where is this 'path to public cloud services' that Spark expect some of their customers to follow?

SNOOPY

Public cloud is public providers like Azure or Amazon. Both of which are actively building out their offerings here. Private cloud is where the data center is not shared with anyone else, so it's private to the user. But Spark often operated private cloud data centers on behalf of others. Hybrid is as the name suggests, a mix of the two. In other words, they are seeing a lot of people wanting to go to Azure or AWS, and think they can make some money helping them transition.

[Snoopy]

Public cloud is public providers like Azure or Amazon. Both of which are actively building out their offerings here.


Appreciate your reply Mondograss. So 'public' is being used in the English sense as in 'English public schools' which are 'private schools' in NZ speak. IOW schools you have to pay money to attend. This is what confused me. When I read about the 'public cloud', I got excited and was all set to ring my local council about getting free access to some 'community cloud' they were running for their residents and ratepayers!



Private cloud is where the data center is not shared with anyone else, so it's private to the user. But Spark often operated private cloud data centers on behalf of others.


Using my new understanding of the lingo, I was under the impression that Spark already offered 'public cloud'. So I see the likes of Amazon and Azure are direct competitors for Spark in that space.

That leaves me a little confused on what a Spark 'private cloud' service might be. Could it be Spark getting a hard drive from a customer, and then installing that hard drive in a remote data centre owned by Spark for exclusive use of that customer? Surely not! So any privacy from 'private cloud space' must surely be in the form of a firewall that excludes other customers from part of a larger Spark owned storage device. But if that is what happens, it sounds suspiciously like how a 'public provider' might operate. That means I have not solved the answer to the question:

"What is the difference between a 'public cloud space' and a 'private cloud space'?"



Hybrid is as the name suggests, a mix of the two. In other words, they are seeing a lot of people wanting to go to Azure or AWS, and think they can make some money helping them transition.


Spark want to make money from customers moving from one of their data-centres to the data-centre of someone else? How could that work?

SNOOPY

[clip]

Appreciate your reply Mondograss. So 'public' is being used in the English sense as in 'English public schools' which are 'private schools' in NZ speak. IOW schools you have to pay money to attend. This is what confused me. When I read about the 'public cloud', I got excited and was all set to ring my local council about getting free access to some 'community cloud' they were running for their residents and ratepayers!



Using my new understanding of the lingo, I was under the impression that Spark already offered 'public cloud'. So I see the likes of Amazon and Azure are direct competitors for Spark in that space.

That leaves me a little confused on what a Spark 'private cloud' service might be. Could it be Spark getting a hard drive from a customer, and then installing that hard drive in a remote data centre owned by Spark for exclusive use of that customer? Surely not! So any privacy from 'private cloud space' must surely be in the form of a firewall that excludes other customers from part of a larger Spark owned storage device. But if that is what happens, it sounds suspiciously like how a 'public provider' might operate. That means I have not solved the answer to the question:

"What is the difference between a 'public cloud space' and a 'private cloud space'?"



Spark want to make money from customers moving from one of their data-centres to the data-centre of someone else? How could that work?

SNOOPY

Public cloud = customers, business rent their own servers and services from providers like Amazon AWS, Microsoft Azure

Private cloud = Spark run their own data center and rent out physical or virtual servers and services to customers - basically the same thing at AWS/Azure offer, however "private" as you typically have a private, secure connection from your office to the provider, rather than being accessible via the public internet. Caveat, you can have the same thing from a public provider too by adding a "private secure connection" component for an extra fee.
Generally hard to compete with the big boys on price, so unless customers have high security/data sovereignty requirements (e.g. must be held/hosted within new zealand) you're fighting a losing battle.

The way I read it is that spark are losing customers to Azure/AWS because they will be cheaper, and both are also opening data centers within NZ in the next wee while (Microsoft are saying they will be open in NZ by 2024).


"We are focused on accelerating simplification across our business portfolio and maximising our competitiveness in hybrid cloud, which is showing strong demand as customers seek diversification and a transition path to public cloud services.”"

This part sounds a bit optimistic to me, trying to offset the bad news they are losing share to public cloud providers. However, some customers like to have less-critical stuff in public cloud, and more critical stuff in private cloud - if something goes wrong with your critical server, you can drive over to the spark datacenter, access your server, replace a part etc, or at least phone spark and get them onto it. This is "hyrid cloud" when you have a mixture of stuff either in public/private, or public/on-premise (in your office), or all three etc.

[Snoopy]

Public cloud = customers, business rent their own servers and services from providers like Amazon AWS, Microsoft Azure

Private cloud = Spark run their own data center and rent out physical or virtual servers and services to customers - basically the same thing as AWS/Azure offer , however "private" as you typically have a private, secure connection from your office to the provider, rather than being accessible via the public internet.


Right, so the essential difference with 'private' storage is that you have your own private line linking your work premises to the remote storage site. Got it.



Caveat, you can have the same thing from a public provider too by adding a "private secure connection" component for an extra fee.


Caveat noted. It does look like, in practice, the dividing line between 'private cloud storage' and 'public cloud storage' is pretty thin.

SNOOPY

[mondograss]

Yes it is a pretty thin line. Sparks (private cloud) data centers did allow you to install your own equipment (one client of mine had to do just that to get what they wanted) whereas for the Public cloud providers that's not an option, you get the same public offerings as everyone else. That doesn't alway suit people, particularly if they have a lot of legacy systems that have very specific requirements. So private cloud is a decent middle ground. On the private cloud front, Sparks competitors are the likes of CDC (i.e. IFT).

I suspect that Spark are being overly optimistic about how much they can make migrating people from one to another, but no doubt that it is not an easy thing to do so if they run a decent consulting shop they should do OK from the general progression away from companies hosting their own physical data center and putting it all in the cloud instead.

[Ricky-bobby]

Yes it is a pretty thin line. Sparks (private cloud) data centers did allow you to install your own equipment (one client of mine had to do just that to get what they wanted) whereas for the Public cloud providers that's not an option, you get the same public offerings as everyone else. That doesn't alway suit people, particularly if they have a lot of legacy systems that have very specific requirements. So private cloud is a decent middle ground. On the private cloud front, Sparks competitors are the likes of CDC (i.e. IFT).

I suspect that Spark are being overly optimistic about how much they can make migrating people from one to another, but no doubt that it is not an easy thing to do so if they run a decent consulting shop they should do OK from the general progression away from companies hosting their own physical data center and putting it all in the cloud instead.

Thanks guys, really interesting. So pretty much spark are offering the same as CDC (IFT)? If this is the case my interest is spark is increasing, as this is a money spinner. Just look at the IFT results!

[Snoopy]

Generally hard to compete with the big boys on price, so unless customers have high security/data sovereignty requirements (e.g. must be held/hosted within New Zealand) you're fighting a losing battle.

The way I read it is that spark are losing customers to Azure/AWS because they will be cheaper, and both are also opening data centers within NZ in the next wee while (Microsoft are saying they will be open in NZ by 2024).


Confirmed. From slide 5 of 1HYP2023
"Cloud mix-shift trend continues, with volume growth in lower-margin public cloud and co-location being offset by lower private cloud volumes and repricing."



"We are focused on accelerating simplification across our business portfolio and maximising our competitiveness in hybrid cloud, which is showing strong demand as customers seek diversification and a transition path to public cloud services.”"


This part sounds a bit optimistic to me, trying to offset the bad news they are losing share to public cloud providers.


I understand the drive to send production of goods offshore to save labour costs. But I fail to see why putting your data into large overseas data-banks should be cheaper than putting that data into the same electronic hardware run from a data-centre in New Zealand. You don't need to look far to see that there is not a strong economic argument to run datacentres offshore. If it was cheaper to do this overseas, why are Azure/AWS and Microsoft planning to set up data-centres of their own here in New Zealand?

Why do Spark consider they 'cannot match' these overseas providers? Their 1HY2023 report indicates, without spelling it out in those words, that they are suffering from corporate cost bloat in their data-centre business. If they can fix that, why can't they go toe to toe with the overseas players?



However, some customers like to have less-critical stuff in public cloud, and more critical stuff in private cloud - if something goes wrong with your critical server, you can drive over to the spark data-centre, access your server, replace a part etc, or at least phone spark and get them onto it. This is "hybrid cloud" when you have a mixture of stuff either in public/private, or public/on-premise (in your office), or all three etc.


This 'private wire' argument rings a bit hollow to me. I understand you can have a private connection at both your end and the data-centre end. But what about in between? Does each private connection have their own private wire that they hang themselves from telegraph pole to telegraph pole? Wouldn't the 'private wires' go into a common all enveloping common plastic conduit?

Furthermore, if you are truly worried about privacy, why would you entrust your data to a US controlled corporate that operates outside the envelope of New Zealand law? I guess many NZ businesses are not worried about that, which is why they are moving to 'Microsoft Azure'/'Amazon AWS'. But it seems to me such businesses are giving away a lot, to save very few -if any- dollars. At least if you have a problem with Spark, you can phone them in New Zealand and speak to a New Zealand operator and they can send a New Zealand technician down to sort out a New Zealand domiciled electronic box. I think Spark has a real trump card to play here in the service aspect of what they do.

I am not fully on board with your definition of a 'hybrid cloud' Clip either. The whole idea of splitting private company held information information into two baskets. one where it doesn't matter too much if it is hacked, and another where it does, sounds problematic.

SNOOPY

[mondograss]

A lot of good questions there Snoopy. A couple of things to bear in mind:
1) Data sovereignty, most if not all govt data isn't allowed to reside offshore. Good for Spark you'd have thought, yet they've made very little headway in convincing the govt to let them host it. Yet Azure, AWS and CDC will almost certainly pick up a lot of work in this space. FWIW when Waikato DHB was hacked in that ransom-ware attack, it was using the Spark data center in Takanini. Though I'm not saying that was necessarily Sparks fault it will have tarnished their reputation somewhat.
2) Scale really matters in this business. AWS and Azure and even CDC have a buying power that Spark will always struggle to match when it comes to hardware and on the Azure\AWS front they put a lot of software development effort into their offerings, which Spark will never be able to match.

So I think Spark will be stuck mostly doing private cloud hosting of legacy systems that can't easily be migrated to public cloud and a bit of consulting. The big end of town will mostly go to Azure\AWS to get the global interconnectivity it needs and the govt will mostly go to CDC and probably public cloud for the less sensitive stuff now that there's NZ located data centers.

[Snoopy]

FWIW when Waikato DHB was hacked in that ransom-ware attack, it was using the Spark data center in Takanini. Though I'm not saying that was necessarily Sparks fault it will have tarnished their reputation somewhat.


Very interesting. I can't say I am pleased (being a Spark shareholder). But it is important for us to know these things.

SNOOPY

[676767]

This 'private wire' argument rings a bit hollow to me. I understand you can have a private connection at both your end and the data-centre end. But what about in between? Does each private connection have their own private wire that they hang themselves from telegraph pole to telegraph pole? Wouldn't the 'private wires' go into a common all enveloping common plastic conduit?

SNOOPY

Its a bit more technical than that, there isn't a 'private wire' per customer straight through to the Datacenter, they all run down the same lines. It's more a logically separated network just for you that is considered "trusted". This is separate from the Internet and other customers private networks so no one but you and you service provider can route through it. When using public cloud you would usually (although not always) need to access it via the Internet which would be running it over an "untrusted" network. Certain companies will try and avoid this for obvious reasons (security, data sovereignty, ddos, etc)




I am not fully on board with your definition of a 'hybrid cloud' Clip either. The whole idea of splitting private company held information information into two baskets. one where it doesn't matter too much if it is hacked, and another where it does, sounds problematic.

SNOOPY

Its less about 'this data is less important, lets send it to the cloud' and more about 'what is the most appropriate solution to host this'

Very few of the people moving to azure / aws will be doing a straight pickup and dump of their infrastructure from a private cloud provider to a public cloud one. If they are, they are doing it wrong and most likely are going to be spending more in the long run. The big change is moving from things like an on premise email server to O365 (I.e IaaS to SaaS). Or moving a self hosted Database server from Iaas to PaaS, where they now only need to administer a Database, rather than looking after and scaling a whole server that hosts a database as they previously had to. This is where Spark can't really compete with the big public cloud providers as they don't offer these solutions (nor should they).

However, there will pretty much always be a need for physical infrastructure which is where the 'hybrid cloud' strategy is coming in for a bunch of businesses.

Networking, Firewalling and having some compute or IaaS in a local datacenter is advantageous.
Big scalable workloads (Saas or PaaS) are pretty much always better in the cloud (webservers, databases, email, storage)

Designing, building and managing these networks are where the big bucks are for Spark...

[Snoopy]

eps = (Normalised Earnings) / (Total Shares on Issue, EOFY)

FY2017: ($396m - 0.72($20m) )/ 1833m = 20.8cps
FY2018: ($365m - 0.72($10m) )/ 1835m = 19.5cps
FY2019: ($409m - 0.72($15m) )/ 1836m = 21.7cps
FY2020: ($427m - 0.72($35m-$2m) - $10m -$7m)/ 1837m = 21.0cps
FY2021: ($384m - 0.72($28m - $16m) ) / 1867m = 20.1cps

Notes

1/ Figures for FY2017 and FY2018 are derived from the re-reported profit figures as presented in the December 4th 2018 Analysts Briefing, titled 'Updates to External Reporting'. These updates alter the financial reporting for the FY2017 and FY2018 year as though the subsequently applied new accounting standards NZ IFRS15 (on apportioning revenues and costs) and NZ IFRS16 (on the balance sheet representation of leases) were already in force over FY2017 and FY2018. Doing this means that all calculated results are compared under the same set of accounting standards.

2/ For FY2017, I have removed the $20m of profit that resulted from the one off sale of surplus land on Mayoral Drive.

3/ For FY2018, I have removed the $10m of profit resulting from a 50% sale of formerly 100% owned subsidiary 'Connect 8 Limited' (an infrastructure civil construction business).

4/ For FY2019 I have removed from profit $2m from the sale of a long term investment/business, $11m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations, making a grand total of $15m to be adjusted for.

5/ For FY2020 I have removed $35m of 'other gains' (that includes $5m from the sale of a long term investment or former subsidiary, $28m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations). I have offset this with $2m of rent concessions that would not have been granted outside of a Covid-19 environment. Furthermore I have removed a one off $10m downward adjustment to the tax bill that was a result of a law change reinstating the depreciation allowance on commercial buildings. Finally I have brought in a retrospective adjustment of $7m from FY2021. This adjustment relates to "reflect a reduction in net earnings of $7 million for the amortisation of reacquired rights that were previously regarded as indefinite life and therefore not amortised."

6/ For FY2021 I have removed $28m of 'other gains' (that includes $1m from the sale of a minority shareholding in long term investment 'Now New Zealand' (a boutique broadband retailer), $9m from the sale of Property Plant and Equipment (primarily mobile plant and equipment) and $18m from a gain on lease modifications and terminations). I have offset this against a one off refund of $16m of historic wire and maintenance charges that was charged to some fibre broadband customers.

Original Concluding Remarks: Some of the changes in profit from year to year could almost be seen as rounding errors. I don't want to make a judgement just on that. I need to sleep on this result before I decide what to do.

Conclusion: Average normalised earnings over the past five years was 20.6cps. The high of 21.7cps was 5% higher than average and the low of 19.5cps was 5% less than the average. This is just about as flat as corporate earnings get in the real world. My BT4 test (post 1810 below) has discussed the reduced likelihood of cost cutting in the future being able to maintain profits. My growth initiative research (post 1812) does not give any hint of a significant boost in top line revenue going forwards. Looking at the trend in the last five years of earnings, as used in the 'Buffett Model', is meant to be the indicator of whether a company is able to continue positive 'eps' growth into the future. The spreadsheet part of the Buffett valuation model does not work unless this is the case. There is no clear historical pattern of increasing earnings per share here. Furthermore it looks like increasing 'eps' into the future is going to get harder. For these reasons, I cannot see any reason to overturn the actual 'eps' numbers calculated because of unusual market conditions (e.g. the Covid-19 environment). The numbers do tell the story. The result of this test for Spark is a 'fail'.


Buffett Test 1 may be found in post 1806. Not enough has changed year to year to warrant me rewriting it. So we are straight into Buffett Test 2.

eps = (Normalised Earnings) / (Total Shares on Issue, EOFY)



FY2018:($365m - 0.72($10m) )/1835m = 19.5cps


FY2019:($409m - 0.72($15m) )/1836m = 21.7cps


FY2020:($427m - 0.72($35m-$2m) - $10m -$7m)/1837m = 21.0cps


FY2021:($384m - 0.72($28m - $16m) ) /1867m = 20.1cps


FY2022:($410m - 0.72($26m) ) /1872m = 20.9cps



Notes

1/ Figures for FY2018 are derived from the re-reported profit figures as presented in the December 4th 2018 Analysts Briefing, titled 'Updates to External Reporting'. These updates alter the financial reporting for the FY2018 year as though the subsequently applied new accounting standards NZ IFRS15 (on apportioning revenues and costs) and NZ IFRS16 (on the balance sheet representation of leases) were already in force over FY2018. Doing this means that all calculated results are compared under the same set of accounting standards.

2/ For FY2018, I have removed the $10m of profit resulting from a 50% sale of formerly 100% owned subsidiary 'Connect 8 Limited' (an infrastructure civil construction business).

3/ For FY2019 I have removed from profit $2m from the sale of a long term investment/business, $11m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations, making a grand total of $15m to be adjusted for.

4/ For FY2020 I have removed $35m of 'other gains' (that includes $5m from the sale of a long term investment or former subsidiary, $28m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations). I have offset this with $2m of rent concessions that would not have been granted outside of a Covid-19 environment. Furthermore I have removed a one off $10m downward adjustment to the tax bill that was a result of a law change reinstating the depreciation allowance on commercial buildings. Finally I have brought in a retrospective adjustment of $7m from FY2021. This adjustment relates to "reflect a reduction in net earnings of $7 million for the amortisation of reacquired rights that were previously regarded as indefinite life and therefore not amortised."

5/ For FY2021 I have removed $28m of 'other gains' (that includes $1m from the sale of a minority shareholding in long term investment 'Now New Zealand' (a boutique broadband retailer), $9m from the sale of Property Plant and Equipment (primarily mobile plant and equipment) and $18m from a gain on lease modifications and terminations). I have offset this against a one off refund of $16m of historic wire and maintenance charges that was charged to some fibre broadband customers.

6/ For FY2022 I have removed $26m of 'other gains' (that includes $10m from the sale of Property Plant and Equipment (primarily mobile plant and equipment) and $16m from a gain on lease modifications and terminations)

Conclusion: Average normalised earnings over the past five years was 20.6cps (the same as FY2021). The high of 21.7cps was 5% higher than average and the low of 19.5cps was 5% less than the average. This is just about as flat as corporate earnings get in the real world. Next a review on input costs.




Financial YearLabour ExpenseFinance Expense


2018$513m$77m


2019$475m$85m


2020$511m$94m


2021$491m$81m


2022$495m$74m



The table above shows labour expenses have been held down, and interest costs are at cyclical lows. But I would expect upward pressure on both these cost staples as we look to FY2023. Growth initiative research (post 1982) does not give any hint of a significant boost in top line revenue going forwards. Nevertheless mobile service revenue growth continues to exceed expectations, which largely covers the 'new class' growth initiatives and cloud services not performing to expectations

Looking at the trend in the last five years of earnings, as used in the 'Buffett Model', is meant to be the indicator of whether a company is able to continue positive 'eps' growth into the future. The spreadsheet part of the Buffett valuation model does not work unless this is the case. But it is clear there is no clear historical pattern of increasing earnings per share here.

Conclusion: Fail test.

SNOOPY

[Snoopy]

ROE= (Normalised earnings) / (Shareholder Equity EOFY)

FY2017: $382m / $1,601m = 23.9%
FY2018: $358m / $1,483m = 24.1%
FY2019: $398m / $1,465m = 27.2%
FY2020: $386m / $1,493m = 25.9%
FY2021: $375m / $1,503m = 25.0%

Conclusion: Pass Test



ROE= (Normalised earnings) / (Shareholder Equity EOFY)

FY2018: $358m / $1,483m = 24.1%
FY2019: $398m / $1,465m = 27.2%
FY2020: $386m / $1,493m = 25.9%
FY2021: $375m / $1,503m = 25.0%
FY2022: $397m / $1,475m = 26.9%

Conclusion: Pass Test

SNOOPY

[clip]

Confirmed. From slide 5 of 1HYP2023
"Cloud mix-shift trend continues, with volume growth in lower-margin public cloud and co-location being offset by lower private cloud volumes and repricing."



I understand the drive to send production of goods offshore to save labour costs. But I fail to see why putting your data into large overseas data-banks should be cheaper than putting that data into the same electronic hardware run from a data-centre in New Zealand. You don't need to look far to see that there is not a strong economic argument to run datacentres offshore. If it was cheaper to do this overseas, why are Azure/AWS and Microsoft planning to set up data-centres of their own here in New Zealand?

Why do Spark consider they 'cannot match' these overseas providers? Their 1HY2023 report indicates, without spelling it out in those words, that they are suffering from corporate cost bloat in their data-centre business. If they can fix that, why can't they go toe to toe with the overseas players?



This 'private wire' argument rings a bit hollow to me. I understand you can have a private connection at both your end and the data-centre end. But what about in between? Does each private connection have their own private wire that they hang themselves from telegraph pole to telegraph pole? Wouldn't the 'private wires' go into a common all enveloping common plastic conduit?

Furthermore, if you are truly worried about privacy, why would you entrust your data to a US controlled corporate that operates outside the envelope of New Zealand law? I guess many NZ businesses are not worried about that, which is why they are moving to Azure/AWS and Microsoft. But it seems to me such businesses are giving away a lot, to save very few -if any- dollars. At least if you have a problem with Spark, you can phone them in New Zealand and speak to a New Zealand operator and they can send a New Zealand technician down to sort out a New Zealand domiciled electronic box. I think Spark has a real trump card to play here in the service aspect of what they do.

I am not fully on board with your definition of a 'hybrid cloud' Clip either. The whole idea of splitting private company held information information into two baskets. one where it doesn't matter too much if it is hacked, and another where it does, sounds problematic.

SNOOPY

Mondo and 67 have basically covered all responses. Pricing - economies of scale. Spark's Takanini datacenter can supposedly support up to 1200 racks IF full based on this article (https://www.reseller.co.nz/article/558596/inside-60m-takanini-data-centre/). Amazon datacenters have 2000 racks based on this article (https://www.enterpriseai.news/2014/11/14/rare-peek-massive-scale-aws/) and they have 87 data centers. With scale everything becomes cheaper - power, cooling, computer components, land/lease space etc.

Racks is a VERY rough unit of measurement to compare scale. A rack is basically a cabinet you put servers and networking components in - they are units of physical space. They could be more or less full. E.g. I have a previous customer where we rented 1 whole rack of space in a data center - however, in that, we only had 3 physical servers.
In a standard size rack, you could physically fit more than 40 servers.
Spark may be renting out physical space e.g. 1 whole rack of space to a customer, whether it is fully utilized or not. Whereas Amazon/AWS rent out services hosted on their own servers in that space, meaning AWS racks are generally full and are utilizing all available space/resources. I don't know what Spark offer in terms of renting physical space, if they keeps rack full etc.
Spark's cost for power, cooling, lease does not decrease much whether they are 50% utilized or 100% utilized. So if they don't have good uptake, their profit margins are smaller, or they have to raise prices to cover costs, further pushing customers towards cheaper public cloud options.

Re. private wire - and what about inbetween - it's the same wires, but a router at each end creates a "private tunnel" between the 2 endpoints, so the data sent between them is encrypted and can't be accessed by others. For example, my house is the office, and your house is the data center, and I am sending mail (data) to you. When mail goes from my house to your house, it has a very strong password and giant padlock in it, so the data sent between us is private. Doesn't mean that we have a physical road/wire between our houses that nobody else can use.

A big decider of whether you go public/private cloud comes to data sovereignty, as others said, you're not allowed to store govt data outside of NZ, previously this was the case also with medical data although this has changed over the past years and Azure/AWS is now OK. There may be other companies with specific policies around where data can be stored - e.g. if you have commercial secrets you may require that to be hosted in NZ. Or your password vault may need to be stored on your own premises, while your data itself that is accessed with those passwords is on public cloud - meaning you are running a hybrid cloud environment.

[Snoopy]

Net Profit Margin = (Normalised Profit) / (Operating Revenue)



FY2017: $382m / ($3,505m - $20m)= 11.0%


FY2018: $358m / ($3,533m - $10m) = 10.2%


FY2019: $398m / $3,518m = 11.3%


FY2020: $386m / $3,588m = 10.8%


FY2021: $375m / $3,565m = 10.5%



Notes

1/ Turnover across FY2017 and FY2018 has had revenue from asset sales removed from the revenue total.
2/ Turnover from asset sales is not included in the revenue that I have quoted for FY2019, FY2020 and FY2021.

I want to drill down a bit more into that big profit margin lift [ (11.3%-10.2%)/10.2% = 10.8% in one year, which is >2% inflation] between FY2018 and FY2019. If I look at the segmented result (AR2019 p52),



Product Category
Operating Revenue (FY2019)Product Margin (FY2019)Product Margin %ge (FY2019)
Operating Revenue (FY2018)Product Margin (FY2018)Product Margin %ge (FY2018)


Mobile
$1,271m$775m61.0%
$1,237m$732m59.2%


Voice
$486m$310m63.9%
$573m$369m64.4%


Broadband
$685m$344m50.2%
$665m$350m52.6%


Cloud, Security & Service Management
$400m$327m81.8%
$370m$315m85.1%

/
Procurement and partners
$365m$43m12.3%
$357m$40m11.2%


Managed Data, Networks & Services
$197m$104m52.8%
$207m$111m53.6%


Other Operating Revenues
$114m$51m44.7%
$114m$49m43.0%



I can see the product categories with the highest 'Product Margin' are:

1/ 'Cloud, Security & Service Management' ' and
2/ 'Voice'.

But 'Voice' was on the decline (-$87m in lost revenue on a year vs year comparison). When a high margin business unit declines like this, it puts pressure on the up and coming 'product unit revenues' to fill the gap. Cloud, Security & Service management is too small to do that on their own (+$30m - equivalent to +$30m x 81.8/63.9= +$38m in revenue indicative of profit substitution terms). But combine that with the growth in mobile revenue, also very profitable, at: +$34m x 61.0/63.9=$32m and for broadband +$20m (equivalent to a profit equivalent revenue offset of $20m x 50.2/63.9 = +$16m) and we are covering those lost 'voice unit' profits: $38m + $32m + $16m = $86m. This means profit indicated revenue offset from the remaining business units is minimal (actually slightly negative). Yet none of this explains the increasing profit margin 'year on year'.

It looks like the biggest contributor to the profit margin increasing was a very significant labour cost saving (a $475m-$513m=$38m drop in the wage bill over the year- see table below). There is a lot of automation behind the scenes that will be contributing to this. But can it continue? Here is what has happened to the wage bill in the five years under review.



Financial Year
Labour ExpenseFinance Expense


2017$550m$75m


2018$513m$77m


2019$475m$85m


2020$511m$94m


2021$491m$81m



This table suggests to me that the big savings in labour have already been made. Alongside of this, I have recorded the annual finance expense (the second column of the table).

A fall in the 'under 3 month' NZD Commercial debt ($228m-$155m=$73m), both in capital being borrowed and interest paid on that capital, looks like the explanation for interest payments saved over FY2021 (see AR2021 p89). There are $100m in domestic notes maturing in each of FY2022 and FY2023 too. Refinancing those at lower interest rates should take the pressure off the interest bill in the next two or three years. Yet the picture that is emerging here is that taking cost out of the business looks to be an exercise that will get more and more difficult going forwards. That means it will be increasing revenue on the 'top line' from the up and coming revenue sources going forwards that will be required to 'fuel growth' going forwards.

In summary, I think there is room for 'surprise on the upside' if some of the new business units start to get traction in their specialty markets. I think 5G could yet prove to be a profit margin game changer too. Yet doing this cold hard numbers exercise has reinforced to me that Spark is not a sure bet. The fact that there has been some quite good execution of the business plan over the last five years, while the net profit margin has shrunk - albeit not significantly so - seals the fate of Spark for me when lined up against this criterion.

Conclusion: Fail test


Net Profit Margin = (Normalised Profit) / (Operating Revenue)



FY2018: $358m / ($3,533m - $10m) = 10.2%


FY2019: $398m / $3,518m = 11.3%


FY2020: $386m / $3,588m = 10.8%


FY2021: $375m / $3,565m = 10.5%


FY2022: $397m / $3,694m = 10.7%



Notes

1/ Turnover across FY2018 has had revenue from asset sales removed from the revenue total.
2/ Turnover from asset sales is not included in the revenue that I have quoted for FY2019, FY2020, FY2021 and FY2022.

-------------------------

How much do the level of interest rates affect normalised profit? I don't normalise for those! But I do note that while the interest payments on debt have decreased year on year ($81m -> $74m), the amount of capital borrowed has increased ($1,403m -> $1,526m) (see AR2022 p108)! And this in spite of Foreign Currency Medium Term currency borrowing going down on paper (in fact the FMTNs have not changed in their home currency - this is a snapshot NZD exchange rate effect.) The increase in debt is termed a 'temporary working capital impact' (PR2022, slide 22) .

One reason for the interest paid drop is the switch to new lower rate 'green bond (sustainability related)' funding ($365m dollars worth). This replaced the $160m of borrowings formerly taken out with the Hong Kong and Shanghai bank and Mitsubishi UFU Financial Group Bank. (I believe this $200m jump in overall debt will be reversed when a 'planned surplus' of $200m is banked from the TowerCo proceeds.)

Short term debt (due within 12 months), -mostly on variable interest rates-, represents $293m/ $1,526m = 19.2% of the total (down from 26.6% in the previous year). If short term debt rates rise an incremental 2 percentage points, this will increase the company interest bill by: 0.02 x $293m = $5.9m. That is back to where the interest bill was at EOFY2021, so not a massive deal. And I haven't adjusted that figure for the $200m reduction in debt, once the TowerCo surplus proceeds are absorbed.

Of course, all this excludes the effect of 'lease interest' due on the sale and leaseback of Spark's network cellphone towers to 'TowerCo'. I would regard such money as a 'network running expense', rather than a true finance cost.

In summary, you don't need a mathematicians eye to describe the profit margin history of this company. It is flat.

Conclusion: Fail test

SNOOPY

[Snoopy]

If the odd one off tax adjustments were taken out of the FY2021 Spark result, then the underlying tax bill for the year was even less, only $155m. $155m is $181m - $155m = $26m short of the actual underlying tax bill paid by Spark. So:

1/ IF $181m was the actual tax paid to give 100% imputed dividend AND
2/ $155m was the normalised requirement for tax to pay THEN

the underlying dividend imputation rate at Spark over FY2021 was only $155m/$181m = 85.64%. This is more in line with earlier imputed tax rates of 80.6% and 75% paid over FY2019 and earlier.




Hi Snoopy

I did a bit of a dive into the Spark tax numbers. Keep in mind that IC's are deducted from the ICA when they are paid, not declared so the recent final dividend will not appear in the ICA until the interim report next year (being FY22H1).



Imputation Credit Account: Transaction SummaryBalanceReference


ICA Account 01-07-2020$0(AR2020 p94)


add Taxes Paid$188mAR2021 p65 (AR2021 Cashflow Statement)


less IC's attached to Dividends -$179m (1)


less Other-$27m (balancing figure) (2)


equals Closing Balance 30-06-2021 -$18m (AR2021 p101)



Notes

1/ $179m being the total of: FY20H2 Div $230m (AR2021 p91) + FY21H1 Div $231m (AR2021 p91):
= $461m x 0.389 = $179m

Sub Note: 0.389 is the number you apply to the declared dividend to get the IC's where they are fully imputed (.389 = .28/.72). Declared dividends paid during FY2021, being FY2020H2 (paid September 2020) and FY2021H1 (paid March 2021) were both fully imputed.

2/ Full reconciliation on current and deferred tax all stacks up, except for the -$27m above.

--------------------------

The fact they are showing tax payable of $23m (AR2021 p63, Balance Sheet) suggests they have not paid more tax than they should have. A reconciliation of the current tax account shows:



Tax Payable (Current Liabilities)AmountReference


Opening Balance$44m (3)(AR2020 p55, Balance Sheet)


add Current Year Tax Expense$172m (AR2021 p100)


less Current Year Adjustment-$4m (AR2021 p100)


less Taxes Paid-$188m (p65 AR2021, Cashflow Statement)


equals Closing Balance $23m (p63 AR2021, Balance Sheet)



(3, Snoopy clarification) To make the column addition work, this figure needs to be $43m. This indicates the $44m quoted may be subject to rounding error.

Instead of having paid more tax than they should have, they owed (and paid) tax for the previous year, being $39m (AR2020 p94). So the $188m paid was $39m for the prior year and $149m for the current year ($188m - $39m = $149m). Note the opening balance was $43-$44m, less I'm assuming the $4m current year tax adjustment to give a payment for the prior year of $39m.

Tax Expense:
Tax Calculation (AR2021 p100) & Profit & Loss Statement (AR2021 p62) both show $169m



Current Year Tax Expense$172m (AR2021 p100)


less Year Tax Adjust prior period -$4m (AR2021 p100)


less Deferred Tax Expense -$4m(AR2021 p100)


add Deferred Tax Adjustment prior period+$5m(AR2021 p100)


equals Tax Expense Classified$169m(AR2021 p100)



Rather than being funny business with tax, I view the amount payable as being real (ie Spark owes $23m) and that for whatever reason they went OD on the ICA account. It could be that included in the $188m of tax payments were overseas tax payments that do not count towards the ICA. Notice in the Reconciliation of Income Tax Expense (AR2021 p100) there are two adjustments for $6m, one being taxes paid overseas and the other being for a different tax rate.

Either someone miscalculated the available IC's or there was an unknown tax receipt/refund (4) that put a spanner in the works. Notice the prior year had $1m tax receivable (AR2020 p55, Balance Sheet) but AR2021 p63 (Balance Sheet) has $0 tax receivable and does not show any tax receipts - I suspect any such receipts have been netted off against the payments made so we do not have 100% visibility. I am curious as to what penalties they will cop for the negative ICA balance.

(4) Maybe the ICA was good when the dividend was declared but there was a tax receipt/refund between the payment date and year end. Or a combination of all 3.....receipt + stuff up + non-NZ payments.

FERG

P.S. Don't use the $155m - that is a notional tax figure and, other than in the AR note/reconciliation (AR2021 p100), does not appear in any journals made by Spark or in any amounts payable or paid or tax returns etc.


I am still intrigued as to how over a considerable period of time Spark can pay fully imputed dividends of 25cps seemingly significantly ahead of their core earnings (refer post 1994). So I have reformatted into tabular form Ferg's work he did on this topic in 2021 (see reformatted quoted post above), and will now perform a similar exercise on the FY2022 results.



Imputation Credit Account: Transaction SummaryBalanceReference


ICA Account 01-07-2021-$18m(AR2021 p101)


add Taxes Paid$160mAR2021 p82 (AR2022 Cashflow Statement)


less IC's attached to Dividends -$182m (1)


add Other$24m (balancing figure) (2)


equals Closing Balance 30-06-2022 -$16m (AR2022 p120)



Notes

1/ $182m being the total of imputation credits attached to: FY21H2 Div $233m (AR2022 p110) + FY22H1 Div $234m (AR2022 p110):
= $467m x 0.389 = $182m

Sub Note: 0.389 is the number you apply to the declared dividend to get the IC's where they are fully imputed (.389 = .28/.72). Declared dividends paid during FY2022, being FY2021H2 (paid September 2021) and FY2021H1 (paid March 2022) were both fully imputed.

2/ Full reconciliation on current and deferred tax all stacks up, except for the $24m above.

--------------------------

One way to pump up your imputation credit balance beyond what might be expected is to pay your tax in advance, before it is due. The fact Spark are showing 'tax still payable' of $40m (AR2022 p80), on the Balance Sheet. suggests they have not paid more tax than they should have. A reconciliation of the current tax account shows:



Tax Payable (Current Liabilities)AmountReference


Opening Balance$23m (3)(AR2021 p63, Balance Sheet)


add Current Year Tax Expense$177m (AR2022 p119)


add Current Year Adjustment+$1m (AR2022 p119)


less Taxes Paid-$160m (p82 AR2022, Cashflow Statement)


equals Closing Balance $40m (p80 AR2022, Balance Sheet)



(3) To make the column addition work, this figure needs to be $22m. This indicates the $23m quoted may be subject to rounding error.

Spark owed (and subsequently paid) tax for the previous year, being $19m (AR2021 p101). So the $160m of tax paid in the cashflow statement over FY2022 was $19m for the prior year and $141m for the current year ($160m - $19m = $141m). Note the declared opening balance was $22m-$23m before adding back a $1m current year tax adjustment to give the 'IRD book closing tax payment' for the prior year of $23m.


Tax Expense Statement
Tax Calculation (AR2022 p119) & Profit & Loss Statement (AR2022 p79) both show $171m



Current Year Tax Expense$177m (AR2022 p119)


add Year Tax Adjust prior period +$1m (AR2022 p119)


less Deferred Tax Expense -$8m(AR2022 p119)


add Deferred Tax Adjustment prior period+$1m(AR2022 p119)


equals Tax Expense Classified$171m(AR2022 p119)



Summary Conclusions

A/ At the close of FY2022, Spark owes taxation authorities $40m. There is nil offset taxation recoverable to set against this figure (tax losses are held in Australia, but are not on the books - presumably because there is little chance they will ever be utilised).

B/ For reasons undeclared, the New Zealand imputation credit account had turned negative at both previous balance dates (by -$16m at EOFY2022). Nevertheless, we are told that the imputation credit account was restored to an unspecified positive balance on 31st March 2022, in accordance with IRD requirements (see post 2001 for an explanation of this).

C/ The 'other' imputation credit account adjustment which I have highlighted in 'red' in both my post and the post I have referenced by Ferg, remain opaque. I accept these net adjustments must have happened, because the imputation account transactions have to tell the story of the year on year change in imputation account balance. But, despite how official these figures look in the tables, as presented, they are 'fudge factors'. I remain concerned as to how imputation credits of the order of -$27m and $24m respectively can 'disappear' and 'appear' like this. The only 'saving grace spin' I can put on this, is that over a two year window these mysterious changes have almost cancelled each other out (-$27m+$24m = only -$3m).

I raise the matter of 'imputation credit balance', not because it is an obscure accounting point. The reason for my close attention is because the imputation credit balance available determines Spark's ability to pay fully imputed dividends. And if, for example, 20% of the dividend were to suddenly becomes not imputed, that would significantly affects Spark's value proposition as an investment.

SNOOPY

[Sideshow Bob]

https://www.nzx.com/announcements/409262

Spark New Zealand commences on-market share buy-back

Further to previous market announcements, Spark New Zealand Limited (Spark) has announced today that it is commencing an on-market share buy-back of up to $350 million on 6 April 2023.

[Snoopy]

The following post is talking about the FY2021 tax year......



Spark's accounting year ends 30 June

IRD EOY for Imputation credits is 31 March

Spark will report for their year to 30 June - reported to IRD - but considered 31 March year for tax purposes.

(For a dividend paid in April 2021, Spark) will have all of 2021/22 year (IRD tax year ending 31-03-2022) to make up those credits attached to the dividend, in tax payments.


Thanks for that information.



Spark's interim dividend was paid also on 9 Apr 2021 - in the subsequent 31 March 2022 IRD Imputation year (Snoopy note: although this payment was still in the Spark FY2021 reporting year that ends on 30th June 2021). So this may result in a negative ICA account at 'Spark balance date', if credits are attached to dividends paid as they were in the Interim 9 April 2021 Div pay-outs.


I am not sure I fully appreciated what you were saying in this post from over a year ago nztx, when you wrote it. Sorry I am a bit slow :(.

But now I see that it is:

A/ The mismatch in the IRD tax reporting year (ending 31st March) and the company reporting date (30th June) - COMBINED WITH
B/ Actual dates that provisional tax payments to the IRD are due

- that has caused the 'negative imputation credit issue' in the Spark Annual Report for FY2021 Please allow me to explain in my own words, that which you already know......

-------------------------------------

The IRD were happy, all the way through this scenario, because -as far as they were concerned- for the company tax year ended on 31-03-2021.....

Both of the dividends paid in the twelve months prior to that 31-03-2021 IRD balance date, -being the dividends paid on:

i/ 03-04-2020 (the interim dividend for the Spark FY2020 year) AND
ii/ 02-10-2020 (the final dividend for the Spark FY2020 financial year)

- were fully matched off against tax paid by Spark, and the consequent imputation credits, available on the IRD books.

Now we move to the 09-04-2021 dividend payout. This was paid out of earnings that are subject to provisional tax payable over the IRD FY2022 year (even though this payment was made during the Spark FY2021 financial year). Provisional tax can be due on different dates, depending on what provisional tax system is opted into.

https://www.ird.govt.nz/income-tax/provisional-tax/paying-your-provisional-tax/payment-dates-for-provisional-tax

The three provisional tax system choices are either :

1/ the 'Ratio Option',
ii/ the 'Standard Option' or
iii/ the 'Accounting Income Method'.

We don't know which of these methods Spark has chosen. But we don't need to know that. Because the earliest that any provisional tax payment is due under any of the three methods is 28th May 2021. That in turn means that if Spark chooses to pay a dividend 'early' on 09-04-2021, then the IRD are not 'worried about the Spark imputation credit account going negative'. As far as the IRD are concerned, tax payments from those earnings are not yet due, That means the imputation account for those 09-04-2021 dividend feeding earnings did not even exist on 09-04-2021, at the time this dividend was paid! As long as the IRD get their tax due on the appropriate provisional tax date, the earliest being 28-05-2021, then Spark has fulfilled their fiduciary tax paying duty, and the IRD are happy.

Any negative imputation credit balance in the Spark balance sheet, might be best thought of as a reminder of an IRD tax bill that is coming up. Yet it is not negative from an IRD perspective, because it represents a tax bill not yet due.

Contrast that to the Spark perspective, where not only have the earnings that enabled that 09-04-2021 dividend to be paid been banked. They have already been passed on to shareholders as a dividend. And consequently the associated tax liability for Spark to eventually pay to the IRD tax on those profits has been 'set in stone'. It is this that has been recorded in the Spark balance sheet as 'income tax due' in the form of a 'negative imputation credit'. So perhaps it is best to think of those negative imputation credits as a reminder to Spark that the dividend associated with those imputation credits has already been paid, and they had better not miss paying these imputation credits to the IRD when due!

SNOOPY