SPK- Spark NZ (TELCO)

[bull....]

i forgot to add yest that seasonality july is normally a good mth
since 2015 over 60% probabilty of being a positive mth. of course nothing guaranteed as june was normally good but was a bad one this yr but i guess we have oversold to add to probabilty as well for a bounce in july

aug is normally positive seasonally too. but sept not normally

[Snoopy]

If dividends have been roughly 100% of taxable earnings over the years then imputation credits would be available.

If tax is fully paid on earnings, then any dividends paid from those earnings are 'fully imputed dividends'. So pay out 100% of taxable earnings each year and all of your dividends are fully imputed.

I agree that depreciation is a real cost to a business over the long term but the Connexa sale resulted in a tax free gain on sale so it would appear the towers appreciated in nominal dollar terms.

I would have thought that there would be a large depreciation recovered in the tax adjustments but I do not understand these enough to comment.

What you say would normally be 100% correct Aaron. Except you neglected to add one important bit of information. The towers were sold to Connexa. They are no longer owned by Spark. So there is no depreciation to recover.

Maybe they wrangled the sale to sell the assets at written down book value with a big goodwill portion in the sale.

If you looked at the Connexa books (which we can't do), there would no doubt be a large dollop of goodwill on there, because Connexa bought the towers well above book value from Spark.

More importantly the proceeds of the sale were to benefit the shareholders, which I guess it has with reduced debt and sharebuybacks.

Yes, except that at EOHY2024 debt had risen to $1,587m from just $1,052m six months earlier (FY2023 balance date): All that investment in 5G and datacentres you see..... And I notice that the bank debt at EOFY2022, before the tower asset sales occurred was $1,526m. So in the the 18 months to December 2023, covering the period of the cell tower sales, bank debt has actually gone up a bit.

Regarding the share buybacks the share price has gone from just under $5.50 to just under $4.50 over the last couple of years. Wouldn't the share buyback make the remaining shares more valuable?

In theory yes. The same profits spread over less shares, would point to the remaining shares being more valuable. The number of shares on issue after the buyback ended in December 2023 was 1,814,2m.. There were 1,871.6m shares on issue at the June 2022 balance date. So the increase in value of each of the shares remaining, as a result of the buyback program is theoretically 1871.6/1814.2= 3.16% per share over the last couple of years. Nice to have. But the reality is that this gain has been overwhelmed by other negative market factors over the last two years.

Those willing to look through the current short term market conditions, and so have consequently been buying SPK shares over the last three months (like me) are of course set to benefit from the buyback when the share price rises that extra 3.16% - eventually.

A great big dividend would have been better, but maybe they did not have the imputation credits to cover it.

Correct. Spark used all the imputation credits they had (and more apparently) to pay juicy fully imputed dividends. Any more return via dividend would likely be unimputed. So the capital efficient way to repay further cash, on top of the fully imputed dividend payments, to shareholders, is via the mechanism of a share buyback.

SNOOPY

[kiwikeith]

Correct. Spark used all the imputation credits they had (and more apparently) to pay juicy fully imputed dividends. Any more return via dividend would likely be unimputed. So the capital efficient way to repay further cash, on top of the fully imputed dividend payments, to shareholders, is via the mechanism of a share buyback.

SNOOPY

As Buffet points out, if a company is buying back shares at less than the intrinsic value, it is creating value for the remaining shareholders. If it buying back shares at more than intrinsic value, it destroying value for the remaining shareholders.

[Aaron]

What you say would normally be 100% correct Aaron. Except you neglected to add one important bit of information. The towers were sold to Connexa. They are no longer owned by Spark. So there is no depreciation to recover.

because Connexa bought the towers well above book value from Spark.SNOOPY

If the sale was in the 2023 financial year and the towers were sold for more than written down (for tax purposes) book value then the only time you would get depreciation recovered income for tax purposes would be in the year of sale.

I am not even sure how they account for the assets in Spark as I have not read that much. Infrastructure networks might not be depreciated like say a building. As I said earlier I would need to read a lot more to add much to the discussion.

[X-men]

Great momentum bull!! $4.40!!

I reconk it will hooping around $4.50 going to result date...buy back will push it higher!

[Snoopy]

As Buffet points out, if a company is buying back shares at less than the intrinsic value, it is creating value for the remaining shareholders. If it buying back shares at more than intrinsic value, it is destroying value for the remaining shareholders.

I have had a glance at the Spark buyback notices from 2023. The first in April reported 246,777 shares bought back at an average price of $5.079 and 140,112 at $4.720. The last in December reported 1,197,603 shares bought back at $5.1679. Looking at where Spark shares are trading today, at $4.40, those buybacks don't look too clever. But it is very easy to say such things with the benefit of hindsight.

Look back at the chart for CY2023, and you will see the share price started the year at just under $5.40 and ended the year at just under $5.20. There were a couple of dips along the way when the share price flirted with 'bargain levels' of $4.80. But on the whole it looks like the share price buyback just followed the market along. This is not how I would have done things. I would have taken a more 'buy in the dips' approach. However, Spark had more constraints on their buyback than I would have had as a private investor.

For a start Spark cannot be seen to be 'driving the market price'. That means they must limit their purchases to about 10% maximum of the trading volume on any particular day. Secondly having announced the buyback, there would be internal corporate pressure to do just that. Imagine if the buyback had been announced to the NZX, but then some Spark underling had decided that 'the value was not there' so the buyback fell well short of the announced target. That would make senior management look inept, and would probably get the underling the sack (even if, with hindsight, the underling was proved to be right).

So did Spark botch the 2023 buyback? With the benefit of hindsight, one might say yes. But hindsight managers have huge advantages, such as being able to see the health system telecommunications budget cut backs, and the full extent of the current recession, which were not available to actual Spark operational managers at the time. The more important question to ask is, does the market value of Spark shares reflect the intrinsic value of the company? My capitalised dividend valuation measure:
https://www.sharetrader.co.nz/showth...=1#post1047369

would suggest the intrinsic value of Spark shares is actually $5.40. Considering all of those 2023 buybacks were at share price levels well below that figure, the argument can be made that all of those 2023 share buybacks were adding value.

As an investor I always like to buy 'below fair value' and for a utility type company the discount I seek is at least 10%. So this means buying Spark shares in the $4.80-$4.90 range. This is why I have been a bit fast and loose with my Spark buying spree in 2024. $4.675?, $4.355? , $4.06? $4.18? It really didn't matter. All of those purchases were massive bargains as far as I was concerned. If you start worrying about the minutiae of a few cents either way, trying to outplay Mr Market, you are missing the wood from the trees as far as I am concerned. I know this kind of thinking is an anathema to traders. But really if you haven't been able to see the massive bargain price opportunity on Spark shares that has been in your face for three months now, perhaps you should reflect on your investment mindset?

SNOOPY

[Snoopy]

If the sale was in the 2023 financial year and the towers were sold for more than written down (for tax purposes) book value then the only time you would get depreciation recovered income for tax purposes would be in the year of sale.

You can't book 'depreciation recovered' on assets that you don't own any more though. They aren't on your balance sheet any more. They are no longer your assets. What you do have here is a profit on the sale. That is how this part of the increase in tower value flowed through to Spark, not via 'depreciation recovered'.

Although if you wanted to be perverse about it, I suppose you could say that the theoretical 'depreciation recovered' that would have happened if Spark had retained ownership of the towers morphed into part of the 'tower asset sale profit'. The two are in fact the same number, so 'depreciation was recovered' in the sales process. But I am sure any real accountants reading this will regard such thoughts as 'accounting heresy' and my reputation in their eyes will have just plunged even lower than it is now as a result. So best I leave things there.

SNOOPY

[Aaron]

You can't book 'depreciation recovered' on assets that you don't own any more though. They aren't on your balance sheet any more. They are no longer your assets. What you do have here is a profit on the sale. That is how this part of the increase in tower value flowed through to Spark, not via 'depreciation recovered'.

Although if you wanted to be perverse about it, I suppose you could say that the theoretical 'depreciation recovered' that would have happened if Spark had retained ownership of the towers morphed into part of the 'tower asset sale profit'. The two are in fact the same number, so 'depreciation was recovered' in the sales process. But I am sure any real accountants reading this will regard such thoughts as 'accounting heresy' and my reputation in their eyes will have just plunged even lower than it is now as a result. So best I leave things there.

SNOOPY

Whatever Snoops, maybe JeffW or Ferg could help me out on this one at the risk of their reputation in your eyes, anyway.

[Rawz]

I think you just have;

Gain on sale
Loss on sale

Via the PnL

But you both talking about the same thing just different words?

[Snoopy]

Whatever Snoops, maybe JeffW or Ferg could help me out on this one at the risk of their reputation in your eyes, anyway.

I have the upmost respect for the opinions of JeffW and Ferg on accounting matters Aaron. They are real accountants. I am not, (apart that is for my C+ pass in the ACCY101 paper in 19 mumble mumble all those years ago). But I like to think that I have picked up some subsequent 'assessment accounting knowledge' from an investment perspective over my investment journey over the years since.

SNOOPY