Putting 'Dollar Values' on the Growth FY2021 update: (Part 3)
Quote:
Originally Posted by
Snoopy
https://investors.sparknz.co.nz/Form...gy%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 Revenues |
less Product Costs |
less Labour Costs |
less Other Operating Expenses |
equals 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 Revenues |
less Product Costs |
less Labour Costs |
less Other Operating Expenses |
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. 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
Capitalised Dividend Valuation (FY2021.5 perspective)
Quote:
Originally Posted by
mikelee
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 Declared |
Gross Dividends |
Gross Dividend Total |
FY2017 |
12.5c+12.5c |
N/Ac + 17.25c |
17.25c |
FY2018 |
12.5c+12.5c |
17.22c + 16.15c |
33.37c |
FY2019 |
12.5c +12.5c |
16.15c +16.15c |
32.30c |
FY2020 |
12.5c + 12.5c |
16.15c + 16.15c |
32.30c |
FY2021 |
12.5c + 12.5c |
17.36c + 17.36c |
34.72c |
FY2022 |
12.5c + ?c |
17.36c + ?c |
17.36c |
Total |
|
|
167.3c |
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
Minimum Debt Repayment Time (MDRT) (FY2021 perspective)
Quote:
Originally Posted by
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