SPK- Spark NZ (TELCO)

[Snoopy]

Again I have gone back 18 months to answer this post, because it has been bothering me how all those highly paid accounting types at Spark HQ -apparently- stuffed up big time by letting their imputation credit balance go negative. Again this post it talking about FY2021.

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).

I have modified Ferg's words of wisdom above by adding a qualification in brackets:
"Keep in mind that IC's are deducted from the ICA when they are paid, not declared (but even then deducted only when the tax is due)."

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.

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, your possible explanations for the negative ICA balance have credence. In particular, I am thinking about the reinstatement of depreciation on commercial buildings, as part of the Covid-19 response. The reintroduction of such a depreciation allowance was made for the 2020-2021 financial year. That meant future declared profit for any business that owned commercial premises would now be lower than expected, before the reintroduction of this depreciation allowance. If a company was using the provisional tax system, where tax due was based on the previous years profits, then this could result in a company paying too much tax over the IRD tax year ending 31st March 2021. That seems to me to be the most likely source of an 'unexpected refund' for Spark. Because although Spark do not own office towers, they do own exchange buildings (and until recently cellphone towers) scattered around the country.

However, as explained in my post 2000, I think there is a simpler explanation. The negative imputation credit balance as set out in AR2021 from an IRD perspective, did not exist, never existed, and is merely an accounting reporting construct. It only exists from a Spark perspective, because Spark have chosen to pay a dividend in April, which is in FY2021, as defined by Spark (FYE 30/06/2021), whereas from an IRD perspective, this same dividend was paid in FY2022 (FYE 31/03/2022), Thus the dividend was paid (April 2021) before the tax bill on the earnings used to pay that dividend was due (probably August 2021). And to account for a tax bill yet to be paid but not due, phantom 'negative imputation credits' were booked by Spark. This is all resulting from the downstream consequences of the mismatch of financial year ends, where Spark sees their financial year ending on one date, whereas IRD sees the year of that April dividend payment ending nine months later.

SNOOPY

[Snoopy]

This is a comparison between 3 methods of measuring net profit after tax. The first one, most quoted in the glossy Spark presentations is 'Net Profit After Tax'. This is recorded in this table below under the monicker 'Net earnings'. This is how the 'often highlighted in presentations' NPAT is described in Spark's 'Statement of Profit and Loss and Other Comprehensive Income'.

Nevertheless in any year, there are often transactions or expenses that are 'one offs', that take away from the general picture of how the core of the business is doing. As an investor, I look for repeatable results. So I like to look through these 'one offs', so that I can get a better understanding of long term earnings trends. To enable me to do this, I calculate something I call 'normalised earnings', which is the second NPAT measure that I have tabulated.

The third NPAT measure is called 'Total Comprehensive Income'. This income measure takes 'Net Earnings' but further incorporates changes in values of hedge contracts based around currency swaps and interest rates swaps. Spark is partly financed by overseas capital, which is borrowed at overseas interest rates over period(s) of several years. Hedging contracts can provide certainty of NZ dollar denominated interest payments while these loans are outstanding, and certainty on the NZ dollar capital repayment that will ultimately be required to pay back loan capital at the end of each overseas loan term. Nonetheless, 'annual reporting' is required to reflect fair market values of these contracts should they be suddenly and prematurely cancelled. These annual adjustments are required to be incorporated in annual profit figures by NZ accounting standards, despite there being no plans by Spark to terminate these arrangements early. Typically these annual adjustments are volatile in size and may be positive or negative. This is why TCI is a more volatile measure of net profit than the other two methods I have described. To further add to the volatility, equity investments by Spark, as measured by a change in market value of such investments over a year, are also incorporated into the TCI profit calculation.

Year	Normalised NPAT	Total Comprehensive Income (TCI)	Shares EOFY	Normalised eps	Net Earnings ps	TCI ps	dps (tax paid)	EOFY NTA
FY2018:	($365m - 0.72($10m) ) = $358m	$357m	1835m	19.5cps	19.9cps	19.5cps	24.0cps	84.0cps
FY2019:	($409m - 0.72($15m) ) = $398m	$437m	1836m	21.7cps	22.3cps	23.8cps	23.3cps	79.8cps
FY2020:	($427m - 0.72($35m-$2m) - $10m -$7m) = $386m	$483m	1837m	21.0cps	23.2cps	26.3cps	23.3cps	81.3cps
FY2021:	($384m - 0.72($28m - $16m) ) = $375m	$354m	1867m	20.1cps	20.6cps	19.0cps	25.0cps	80.5cps
FY2022:	($410m - 0.72($26m) ) = $397m	$427m	1872m	20.9cps	21.2cps	22.8cps	25.0cps	78.8cps
Total				103.2cps	107.2cps	113.4cps	120.6cps

Notes

1/ Normalised earnings = Net Earnings (+/-) One off Adjustments. Normalisation details are in post 1994.

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

3/ Dividend payments recorded are those paid during the financial year in question (not dividends declared in that financial year).

4/ Gross dividend payments I have calculated in post 1968. After tax dividend figures are the respective gross numbers multiplied by 0.72.

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

Looking at this 'five year picture', overall it is TCI NPAT that in total best correlates with dividend payments. This is slightly worrying to me, as it could indicate that dividend payments are being partially funded by one off revaluations and temporarily favourable movements in hedging contracts. It is in the nature of these hedging contracts that 'what goes up must come down' as each hedging contract runs its course. So using any such positive changes to fund dividends is not sustainable.

Another way to boost dividend payouts to shareholders -ahead of money earned-, is to pay out some company capital to shareholders to bolster their dividends. There is some evidence this is happening. The company's share capital has reduced by 5.2cps over the five years we are examining. That 5.2c makes up most of the difference between dividends paid out over that period and TCI NPAT over the same time-frame. However, shareholder capital does not contain imputation credits. So this does not explain how Spark can pay fully imputed dividends at a higher rate than its underlying earnings, no matter which of the three measures of NPAT earnings you choose to use. More investigation is required to see just what is going on here.

SNOOPY

[Snoopy]

This does not explain how Spark can pay fully imputed dividends at a higher rate than its underlying earnings, no matter which of the three measures of NPAT earnings you choose to use. More investigation is required to see just what is going on here.

My snout is out! I am going full detective mode into sniffing out where Spark's imputation credits have come from. Like any good detective case, we have to start from what we know 'for sure', and work from there. What we do know is that:

1/ A company can only gain NZ imputation credits by paying NZ income tax to the NZ government IRD.
2/ As at 30th June 2020, Spark's imputation credit balance was $0m. (AR2020 p94). IOW imputation credits were exhausted on that date.

So.......if we add up the tax paid from the cashflow statements subsequent to the EOFY2020 balance date, that will give us the maximum imputation available to Spark since. I am going to stick to a two year time frame, as that is the information that we have fully documented via the FY2020 and FY2021 annual reports.

NZ Imputation Credits Available FY2021-FY2022	Income Tax Paid	Imputation Credits Available	Reference
FY2021	$188m		(AR2021 p65)
Tax Effects of Non-NZ Profits FY2021	($6m)		(AR2021 p100)
Taxes Paid in Foreign jurisdictions FY2021	($6m)		(AR2021 p100)
FY2022	$160m		(AR2022 p82)
Tax Effects of Non-NZ Profits FY2022	($7m)		(AR2022 p119)
Total	$329m	$329m

NZ Imputation Credits Paid Our FY2021-FY2022	Dividend Paid	Imputation Credit Attached	Reference
FY2021 Previous Year Second half year dividend	$230m	$89.4m	(AR2021 p91)
FY2021 First half dividend	$231m	$89.8m	(AR2021 p91)
FY2022 Previous Year Second half year dividend	$233m	$90.6m	(AR2022 p110)
FY2022 First half dividend	$234m	$91.0m	(AR2022 p110)
Total		$360.8m

Imputation Credits Paid calculations

1/ 0.3888 is the number you apply to the declared dividend to get the IC's where they are fully imputed (.3888 = .28/.72)

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


So to summarise using 'the jewellery theft analogy':

1/ On the evening of 30-06-2020, 'the safe was empty'.
2/ Over the year $329m of jewels were put into the safe.
3/ Over the year $361m of jewels were taken out of the safe.

This is all on a cashflow basis remember.

How is this possible? Unless some of those jewels taken out were counterfeit? Any real detectives out there able to solve this mystery?

SNOOPY

[nztx]

My snout is out! I am going full detective mode into sniffing out where Spark's imputation credits have come from. Like any good detective case, we have to start from what we know 'for sure', and work from there. What we do know is that:

1/ A company can only gain NZ imputation credits by paying NZ income tax to the NZ government IRD.
2/ As at 30th June 2020, Spark's imputation credit balance was $0m. (AR2020 p94). IOW imputation credits were exhausted on that date.

So.......if we add up the tax paid from the cashflow statements subsequent to the EOFY2020 balance date, that will give us the maximum imputation available to Spark since. I am going to stick to a two year time frame, as that is the information that we have fully documented via the FY2020 and FY2021 annual reports.

NZ Imputation Credits Available FY2021-FY2022	Income Tax Paid	Reference
FY2021	$188m	(AR2021 p65)
Tax Effects of Non-NZ Profits FY2021	($6m)	(AR2021 p100)
Taxes Paid in Foreign jurisdictions FY2021	($6m)	(AR2021 p100)
FY2022	$160m	(AR2022 p82)
Tax Effects of Non-NZ Profits FY2022	($7m)	(AR2022 p119)
Total	$329m

Notes

1/

It might all be in timing of dividends payment - Snoopy

The IRD Imputation year end is 31 March each year

Spark distribute dividends in April & Oct each year

The following is excerpt from a note in the 2022 AR (page 122) -

Spark has a negative 16 million imputation credit account balance as at 30 June 2022 due to the timing of dividend and tax payments (30 June 2021: negative 18 million). The imputation credit account had a positive balance as at 31 March 2022 and 31 March 2021.

Any negative ICA credits from April forwards only need to be made up on/by 31 March IRD Imputation account year end - the next year

From Jun 2020 to 31 March 2022 there were only 3 distributions Oct 20, Mar 21 & Oct 21
(3 x 4.861cps ICA credits)

The final div payment always doglegs it over into the next Spark financial year - past Y/e 30 Jun balance with the Oct payment

Effectively both distributions say for 2022 Spark year only need to require SPK to find / pay enough to cover allocated imputation credits finally by 31 March 2023 - in the year following

Of course they may pay Prov Tax or buy tax credits to achieve full ICA coverage position at 31 March
or credit position, which they are reporting in the 2022 AR


The "negative 16 million imputation credit account balance as at 30 June 2022" is after payment of
the 8.4.22 Interim 2022 dividend, so it looks like tax was paid or tax credits purchased in Jun 2022
Quarter, if the undisclosed Mar 31 2022 balance was insufficiently in credit to carry full imputed Apr 22 Div.

[Snoopy]

It might all be in timing of dividends payment - Snoopy

The IRD Imputation year end is 31 March each year. Spark distribute dividends in April & Oct each year

The following is excerpt from a note in the 2022 AR (page 120) -
"Spark has a negative 16 million imputation credit account balance as at 30 June 2022 due to the timing of dividend and tax payments (30 June 2021: negative 18 million). The imputation credit account had a positive balance as at 31 March 2022 and 31 March 2021."

Any negative ICA credits from April forwards only need to be made up on/by 31 March IRD Imputation account year end - the next year

From Jun 2020 to 31 March 2022 there were only 3 distributions Oct 20, Mar 21 & Oct 21
(3 x 4.861cps ICA credits)

Effectively both distributions say for 2022 Spark year only need to require SPK to find / pay enough to cover allocated imputation credits finally by 31 March 2023 - in the year following

Or in dollar terms:
$89.4m+$89.8m+$90.6m = $269.8m was the tax money Spark needed to pay to IRD by 30-03-2022, and they did that. In fact the cashflow statement(s) shows that a total of $329m in tax was paid over the two year period ending 30-06-2022. $329m > $269.8m, so the required tax payments are well covered.

As you say, the fourth tax payment of $91.0m covering the dividend paid in April 2022 may not have been due to the IRD until March 2023, due to the mismatch of Spark's tax year with IRD's tax year.

We can debate exactly when this final tax payment might be due. But there is no doubt that eventually this tax bill would have to be paid.

$360.8m - $329m = $31.9m is the shortfall of tax that must be paid to allow for four half years of fully imputed dividends between 01-07-2020 and 30-06-2022.

The "negative 16 million imputation credit account balance as at 30 June 2022" is after payment of the 8.4.22 Interim 2022 dividend, so it looks like tax was paid or tax credits purchased in Jun 2022 Quarter, if the undisclosed Mar 31 2022 balance was insufficiently in credit to carry full imputed Apr 22 Div.

If we look at AR2022 p120 (which you have quoted above) the negative imputation credit was $16m at balance date. That is not enough to cover the shortfall of $31.9m. So something tricky looks to be happening here, which you have recognised in the part of your quote above that I have highlighted in bold.

Of course they may pay Prov Tax or buy tax credits to achieve full ICA coverage position at 31 March or credit position, which they are reporting in the 2022 AR

Yes they may have paid some provisional tax for their FY2023 income (IRD income year for Spark being 01-03-2022 to 01-03-2023) that reduced the negative imputation credit balance down to $16m as at 30-06-2022. But how can paying future tax to cover tax paid on an historical dividend be sustainable? Maybe it might work as a one off. But it looks like Spark are paying out more imputation credits that they earn every dividend, as a matter of policy. If your underlying earnings are not growing each year, and I can mount an argument that at Spark (see normalised earnings in post 2002) they are not, how is such a tax payment policy sustainable?

One interpretation of my post 2002 is that since 01-07-2021, Spark are using their existing (and declining) asset base to 'pay income tax' (sic) on phantom earnings that they never had, to maintain an illusion of what is in reality a 'topped up 12.5cps' fully imputed dividend from 'earnings' that were never earned. Or in the terms you put it, that are rather less incriminating "buying tax credits to achieve full ICA coverage position". Either way you frame it, how can Spark keep doing this?

SNOOPY

[nztx]

Or in dollar terms:
$89.4m+$89.8m+$90.6m = $269.8m was the tax money Spark needed to pay to IRD by 30-03-2022, and they did that. In fact the cashflow statement(s) shows that a total of $329m in tax was paid over the two year period ending 30-06-2022. $329m > $269.8m, so the required tax payments are well covered.

As you say, the fourth tax payment of $91.0m covering the dividend paid in April 2022 may not have been due to the IRD until March 2023, due to the mismatch of Spark's tax year with IRD's tax year.

We can debate exactly when this final tax payment might be due. But there is no doubt that eventually this tax bill would have to be paid.

$360.8m - $329m = $31.9m is the shortfall of tax that must be paid to allow for four half years of fully imputed dividends between 01-07-2020 and 30-06-2022.



If we look at AR2022 p120 (which you have quoted above) the negative imputation credit was $16m at balance date. That is not enough to cover the shortfall of $31.9m. So something tricky looks to be happening here, which you have recognised in the part of your quote above that I have highlighted in bold.



Yes they may have paid some provisional tax for their FY2023 income (IRD income year for Spark being 01-03-2022 to 01-03-2023) that reduced the negative imputation credit balance down to $16m as at 30-06-2022. But how can paying future tax to cover tax paid on an historical dividend be sustainable? Maybe it might work as a one off. But it looks like Spark are paying out more imputation credits that they earn every dividend, as a matter of policy. If your underlying earnings are not growing each year, and I can mount an argument that at Spark (see normalised earnings in post 2002) they are not, how is such a tax payment policy sustainable?

One interpretation of my post 2002 is that since 01-07-2021, Spark are using their existing (and declining) asset base to 'pay income tax' (sic) on phantom earnings that they never had, to maintain an illusion of what is in reality a 'topped up 12.5cps' fully imputed dividend from 'earnings' that were never earned. Or in the terms you put it, that are rather less incriminating "buying tax credits to achieve full ICA coverage position". Either way you frame it, how can Spark keep doing this?

SNOOPY

How about untaxed gains sitting in Spark Reserves, if there are some ?

No tax credits from tax paid for those - probably necessitates a bit of add to
to avoid messy part imputed exercises ..

The Tax buying exercises from Tax Pool in some circumstances may not only
cover the full previous year depending on when done, but could also extend
to covering earlier period's shortfalls or adjustments to tax due I would suspect ..

[Snoopy]

Time only will tell if this proves to be a spark or a fizzle.

Best Wishes
Paper Tiger

I did my annual reconciliation on my NZ share portfolio last night, based on that 31st March tax year. The likes of the Waltzingironman would be horrified to learn I accomplished this using the good old pen and paper. But I prefer it this way, because if I had automated the whole process, I am sure that I wouldn't be able to resist firing up the computer and looking at it far too often.

I was rather horrified at how many losers I had harboured in my NZX portfolio over 2022-2023. Only four of my twelve outperformed my comparative 'fixed interest index', those being (in order of ascendance)" PGG Wrightson, Mercury Energy, Spark and Chorus. In truth I only have a small holding in Chorus. So it was Spark that did the heavy lifting on my positive return team of four.

Spark and I go back a long way, well before it was Spark in fact. I remember all those years ago scrambling some cash to get a minimum holding together (this was well before the days of Sharesies too). And in all the years since I have never -willingly- sold any ( I think there were a couple of capital returns where some of my shares got cancelled along the way, and some 'Telecom' cash ended back in my account.)

If I take the number of shares I hold and divide by two, then I can look back and see the time and date I held that number of shares. This gives me a 'median share holding time', in the case of Spark, of August 2007. If my maths is correct that was 16 years ago. The price of Telecom shares as they were then (back in the day) was $4.49. So about 50c per share capital gain in 16 years is my lot? Well, I was also getting a pretty decent yield all that time. And my records show an average acquisition price over my entire period of ownership of $3.56. So I must have done some judicious selling somewhere along the way to get my average purchase price down to that level.

Hang on, didn't I just open my story on Spark with the declaration that I had never sold any? Yes that is strictly true. But I did back out my Chorus shareholding at the price it was quoted on the first day of trading, when that shareholding 'split' from my Spark (or Telecom as it was then) holding. I think that is the right way of treating what happened. Because I never paid a cent for any of my Chorus shares.

Well before this (early 2000s?) I had set up Telecom to be the star of my portfolio, as Telecom became the roadway, over which the Dot Com craze and the internet would furnish my road to riches. I didn't really understand all the Dot Com businesses at the time. I did have enough nous though, to figure out that all the methods and assumptions that went into measuring the values of those new dot com businesses were crazy. So I didn't invest in any of them, joining the likes of Warren Buffett who was widely pilloried at being past his prime, not understanding the new way to do business, and labelled a fuddy duddy 'has been' investor. When the Dot Com bust came, all of those 'its different this time' 'once in a lifetime reset' investors were themselves reset by having their share portfolios and bank accounts reset to zero (or less).

With the piggy backers gone, my road to riches dream that I had rolled out by investing in Telecom sputtered. We were back to the boring days of investing in land lines and mobiles and that dial up screech that was the internet of the day. The saving grace was that everyone did seem to need a telecommunications line of some kind. So even though my road to riches dream was shattered, I was getting a steady income from my Telecom shares.

At that point we had the smartest woman in New Zealand running the show at Telecom, one Theresa Gattung. She had the government of the day so far twisted around her little finger that Telecom was going to milk those monopoly network profits AND be the leading retailer to boot, using customer confusion to boost profits. So great were those potential profits, that Telecom would end up being valued at around 25% of the value of the entire listed NZX. Except the leader of that government was one Helen Clark. And Theresa was about to find out that actually she was only the second smartest woman in the country. The unravelling of Chorus from what was then spoken of as 'New Telecom' had begun.

This brings us to 2011. My spun off Chorus shares went into the bottom drawer, because I didn't know how to value the coming fibre broadband network that would result from the Chorus build out plan. Yet I did understand the potential treasure that any monopoly business might become. So better to hold on rather than throw away. Meanwhile my Telecom, soon to be Spark, shares slowly declined to flat-lined. I managed to pick up a few more Telecom/Spark shares in the ensuing decade, and had the patience to pick them up when they were out of favour, simply because they were out of fashion. This means, overall, I have no reason to complain about my Spark investment. Even during those Covid lock-downs, while other shares' dividends faltered, Spark was always there to pay the bills. So Spark and I have ended up in a 'love in the end' relationship rather than a 'love at first sight' one.

Did I just use the four letter 'L' word then? What was that someone said about 'never falling in love with your shares'? With all my shares, love must be earned. And that means seeing how my chosen share in any industry stacks up against the opposition. Telstra, and British Telecom are the two 'like market' measuring sticks I am most familiar with. Over the years, I feel Spark has taught both of these companies a lesson, in how to transform what was a natural monopoly into a thriving 21st century competitive retail business.

To end my retrospective on a boring note, I intend to hold my Spark shares for the foreseeable future. And the steadying influence my Spark shares had on my portfolio over a tumultuous 2022/2023 is a very good reason for doing that!

I hope you enjoyed this little bedtime tale, and hope it helps you fizzle away into sweet dreams. Good night everyone (and big cats everywhere)!

SNOOPY

[Ricky-bobby]

https://announcements.nzx.com/detail/409498 Looks like they are moving more towards data centres?… good move as I see Vodafone dominating with new starlink partnership. 100% cell phone coverage, will be a game changer.

[Snoopy]

https://announcements.nzx.com/detail/409498 Looks like they are moving more towards data centres?

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.

Funnily enough, Amazon don't seem to be too worried about 'private cloud providers' like Spark. In fact it doesn't sound like they acknowledge that 'private cloud providers' will even exist in the future.

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

https://www.enterpriseai.news/2014/1...ive-scale-aws/

"There is very little talk of public cloud, and that is because Amazon believes that, by its nature, cloud means it cannot be private. Over the long haul, Amazon believes the massive scale of the public cloud will mean that very few organizations will run their own datacenters."

"Those with the most cloud capacity in the most regions with the richest features will win the business, and with a few exceptions (such as financial services clouds or massive supercomputing centers with near 100 percent utilization and special needs hardware and software), the resources of the public cloud will not only be good enough, but will be better than what a lot of organizations could build and support themselves."

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

It does make you wonder about Spark betting their future growth on going up against companies like Amazon and Microsoft. But maybe enough 'private cloud' crumbs will fall under the radar of the public cloud behemoths to allow Spark to exist in the 'private cloud space?

Amazon AWS says they are spending about $NZ7.5billion to set up their data centre infrastructure in Auckland.
https://www.lancom.tech/our-resource...ng-to-auckland

I think this spending includes every expense under the sun, including staff salaries and power bills for few years of operation. But it is a big number, seemingly an order of magnitude larger than Spark is set to spend.

The Spark datacentre in Takanini took $NZ60m (albeit 2014 dollars) to set up
https://www.reseller.co.nz/article/5...i-data-centre/

Albeit there is a significant expansion work at this site, a physical doubling of it in size, scheduled for completion in mid 2023 (Slide 34 Spark FY2024 to FY2026 Strategy). Spark's total new investment program into data-centres in NZ, looks to add up to $250-$300m (Slide 67 Spark FY2024 to FY2026 Strategy).




Spark Projected Data Centre Revenue to FY2026

Spark's total business to business capital investment program looks to deliver $4.1b-$4.3b in total IT and Managed Sevices revenue with 'the cloud' accounting for 45% of that - $1.8-$11.9b by 2026 (Slide 31 Spark FY2024 to FY2026 Strategy). That looks like a projected revenue gain of 60% over three years.

The worry I have about this is that it is all very well to set lofty goals. But when you see real sales information as quoted bekow (from PRHY2023 Slide 5}

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

"Competitive pressures squeezed margins in broadband and cloud."

CLOUD, SECURITY AND SERVICE MANAGEMENT REVENUE

$214m (4.5%) decrease vs. H1 FY22

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.

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

You do wonder on the ability of Spark to execute their data-centre dreams.

SNOOPY

[Snoopy]

Another way to boost dividend payouts to shareholders -ahead of money earned-, is to pay out some company capital to shareholders to bolster their dividends. There is some evidence this is happening. The company's share capital has reduced by 5.2cps over the five years we are examining. That 5.2c makes up most of the difference between dividends paid out over that period and TCI NPAT over the same time-frame. However, shareholder capital does not contain imputation credits. So this does not explain how Spark can pay fully imputed dividends at a higher rate than its underlying earnings, no matter which of the three measures of NPAT earnings you choose to use. More investigation is required to see just what is going on here.

Just noticed this admission in the FY2021 to FY2023 Strategic Outlook, Slide 6.

"(Solid progress made) in the Dividend Sustainable total dividend of 25cps or above that is not supplemented by debt."

This is an admission that as the FY2020 drew to a close, the dividend was being 'beefed up' by taking on more borrowings. The last dividend paid during FY2020 was the interim dividend for FY2020. That dividend was only 75% imputed. Looking back further, the previous four semi-annual dividends were likewise only 75% imputed.

Spark management were obviously aware that 'borrowing to supplement the dividend' was not a sustainable policy. Since FY2021, all subsequent half year dividends have been fully imputed. But how (considering the mismatch between underlying earnings and dividends) ? That is the question I am still grappling with.

SNOOPY