SPK- Spark NZ (TELCO)

[Jay]

You should look at what plan you are on now, vs what plans they have available. If you haven't changed for a long time, you may find you can get the same thing or better/faster, for cheaper than what you are paying now - and keep the email address.

This depends on where you live and what type of internet you need/want, how much data you use etc. But you can get standard everyday fibre for $81 a month - might already be cheaper than what you're on now?

Everyday fibre $81/month
Standard fibre $91/month

Yeah found that out twice, signed up to a "special" deal, then without telling you bring something out better and cheaper while you're still on the original plan and paying more

[Jiggs]

Why do my Spark shares drop in price 5-10% every autumn and spring then rise up the same again in midsummer and midwinter?

How many of you sell at the middle and end of each year and buy again at the equinox?

[mshierlaw]

Why do my Spark shares drop in price 5-10% every autumn and spring then rise up the same again in midsummer and midwinter?

How many of you sell at the middle and end of each year and buy again at the equinox?

Graph shows that generally lows are when the stock goes ex dividend. I buy on the intersection with the lower trend line.
Spark 2017 - 2024.JPG

[Ricky-bobby]

Traders delight… so time to jump in or not quite right?..

[Jiggs]

I’ve noticed it drops ex dividend. But the dividend is only 2 or 3 percent. Why the 5 to 10 pc drop? Naive Henny Penny shareholders? “The sky is falling on my head!”

[mshierlaw]

Traders delight… so time to jump in or not quite right?..

If I was looking for more I would have bought CD. Still good buying XD at this price IMHO.

HUGE reballancing tonight.

[Snoopy]

Gross Dividend Calculations

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, FY2024 P1:
13.5c (Ordinary, 100% imputed) = 13.5c (FI) = 13.5c/0.72 = 18.75c = 18.75c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2019	12.5c + 12.5c	16.15c + 16.15c	16.15c
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 + 12.5c	17.36c + 17.36c	34.72c
FY2023	12.5c + 13.5c	17.36c + 18.75c	36.11c
FY2024	13.5c + ?c	18.75c + ?c	18.75c
Total			172.75c

Now we come to selecting the capitalisation rate. Spark Bonds (SPF570 and SPF580) are currently trading in the secondary market at yields of around 6%. I think Spark shareholders need a greater implied return than that, to compensate for the risks equity ownership. Having said that, from an operational perspective Spark is a very stable company. So I think a 6.5% gross interest return on your shares bought, in today's high interest rate environment, would still be fair. The five year historical average gross dividend received by shareholders from Spark was:

172.75 / 5 = 34.55c

The capitalised dividend value of Spark (fair value) is therefore: 34.55c/0.065 = $5.32

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 $5.32 x 0.9 = $4.78. With the share closing at $4.74 on Friday, did I just 'ring the bell'?

Gross Dividend Calculations

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, FY2024 P1, FY2024 P2:
13.5c (Ordinary, 100% imputed) = 13.5c (FI) = 13.5c/0.72 = 18.75c = 18.75c (gross dividend)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
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 + 12.5c	17.36c + 17.36c	34.72c
FY2023	12.5c + 13.5c	17.36c + 18.75c	36.11c
FY2024	13.5c + 13.5c	18.75c + 18.75c	37.50c

Now we come to selecting the capitalisation rate. Spark Bonds (SPF570, SPF590 and SPF600) are currently trading in the secondary market at yields of around 5.1-5.3%. That is well down on the 6% of September 2023
Even so, Spark shareholders need a greater implied return than that, to compensate for the risks equity ownership. Having said that, from an operational perspective Spark is a very stable company. So I think a 6.5% gross interest return on your shares bought, in today's slightly less high interest rate environment, would still be fair. The five year historical average gross dividend received by shareholders from Spark was:

175.35 / 5 = 35.07c

The capitalised dividend value of Spark (fair value) is therefore: 35.07c/0.065 = $5.40

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 $5.40 x 0.9 = $4.86. With the share closing at $4.76 on Friday, 'Ring ring'?

SNOOPY

[Snoopy]

Presentation link:
https://investors.sparknz.co.nz/Form...mary-FINAL.pdf

Accompanying Conference Call Link:
https://investors.sparknz.co.nz/Form...nouncement.mp3

This is not a 'time sequential report' of the above presentation and accompanying conference call. I have taken the broad reporting subject areas discussed in the first half of the conference call, and added to those topics some 'analyst questions asked answers', from the latter half.

Comparative financial reporting numbers used are adjusted by removing FY2023 one offs:
a/ Stripping out the expenses incurred in closing down Spark Sport, AND
b/ Removing the profits from the cell tower sell down.
However, opex costs for Spark Sport have not been removed from the prior comparative period.

1/ Spark net profit was down 4.8% on the pcp (HY2023), due to increased interest payments and lease costs (principally to Connexa - the 'sold down to' mobile phone tower infrastructure provider).

2/ Cashflow was down on the pcp, due to the larger share of the investment capital program, including investments in CRP (the 'cost reducing program'?), going through in the first half year. $286m of this years capital investment from a $510-$530m capital investment .program was spent, including the Takanini data centre expansion, completed in the first half of the financial year. The key driver of cashflow going forwards will be the improvement in EBITDA. Marketing and acquisition costs are incurred 'up front', before the customers 'come on board' in the second half year. Mobile price increases, larger Data Centre scale, and IT product growth (following on from a pcp decline), should improve the top line in 2HY2024. 'New product offerings' often include greater automation, and that in turn lowers the cost base going forwards. Mobile handset sales saw a more subdued retail environment in the first half.

3/ Mobile remains central to Spark's growth., +6.3% c.f. prior period (HY2023), or $30m. Service revenue and pay-monthly ARPU growth was driven by price increases, connection growth, and $7m of growth in roaming revenues, which are tracking above pre-Covid levels (now at 107% of that total, which from an outbound perspective is 'sitting pretty high', even if inbound remains subdued). The Spark mobile brands (which include Skinny) captured 47% of total connection growth in the half. But travellers re-entering the market had a negative effect on ARPU. Overall, Spark mobile market share was 44% of mobile service revenue over the period.

Enterprise segment (business) revenue (ARPU) declined, reflecting the highly competitive nature of this market. Some 'shedding of lines', -not losing a customer altogether but reducing the number of lines in and out of a business-, added to the revenue loss.

Data over the 4G network is increasing exponentially and the investment in 5G, while not necessarily earnings positive while being rolled out, can be seen as 'future proofing' the whole mobile network. If Spark were not spending as much on 5G today, then they would be spending more on 4G instead. Once 5G service is available throughout the country, then it can be 'charged for' at a price premium.

A Connexia (mobile phone tower owning company) build program for new towers is underway, albeit at a low 'start up' level. Downstream lease cost increases for Spark are expected to be modest over the next couple of years, more in line with inflation. For Spark today, $5m is the 'net loss' compared to the comparative period connected to Connexia (or at least the costings in the Spark share of this) and RCG (the combined rural build out program venture with 2 degrees and 'One NZ'), with by far the majority of that extra money being Connexia related. This extra cost reflects the 'start up phase' of these two build out programs, with this 'incremental loss' expected to improve over time.

The impact of Connexia on Spark NPAT level is relatively neutral. Spark avoids depreciation, because they don't own the towers any more. There is a lower interest bill, because the capital injection associated with the sale has reduced the need for borrowing. The biggest component of the future 'tower programmed build out' is still a couple of years away.

4/ Wireless broadband (using Spark's own mobile network) grew to 31% of the total Spark broadband customer base.

5/ The 'total cloud revenue' was flat. But profit was up, because the cost base has been reset. A 'hybrid cloud service' was launched in the half year. The private and public cloud grew as well. But there was an $8m (or 10%) decrease in 'service management revenue', primarily due to lower public sector demand, - leading to an overall flat result.

6/ The 10MW incremental gain in Takanini data centre capacity is now being 'fully billed'. In fact, 88% of total Spark data centre capacity is already committed under contract, and has clear revenue pathways. The 'Cloud Cost Reset' will see labour cost reductions flow through to the second half. 'Hyperscaling', with respect to comments made by Spark in their own context, encompasses the size and commitments of data centres already planned by Spark, but not those an order of magnitude in size above that!

7/ High tech and virtual technology revenue, includes the 'Internet of Things', - where revenue grew strongly by 13% to $35m (now 1.8m customer connections). Several converged technology 'proof of concept' trials are underway for customers. High tech (which includes digital identification start up MATTR), is the area where most improvement in profitable execution is needed. MATTR is not expected to be commercially significant in a Spark group context, until FY2026 at the earliest. Meanwhile, there is the 'Ministry of Primary Industries' (MPI) fishing boat visual imaging project already in place, while initiatives in measuring water quality, and road network quality are potential further applications. 5G is the 'backbone investment' that will commercially enable all of this technology.

High tech data business Qrious, - encompassing professional services and virtual transformation-, has also been also impacted. But this is more a 'business environment' and 'election uncertainty' issue. Qrious is expected to 'bounce back' in 2HY2024.

8/ Spark's Digital Health operation was down, due to the public sector slowdown (principally 'Te Whatu Ora'/ 'Health NZ' related). The private sector is now seen as 'the growth opportunity here e.g. via 'private hospitals' and 'primary care'. But digitisation of government health is still 'going to occur' and 'needs to occur', indicating that growth in Spark Health has been postponed rather than cancelled. The half year downturn is more about the economic environment and the 'shift in uncertainty', that the threat of 'countrywide citizen level job cuts' and restructuring creates.

9/ The 'cost out' over FY2024, originally forecast to be $40m-$60m, including product cost decline by $5m as voice costs continue to decline, is set to be 'more than modestly' exceeded.

10/ Spark is looking for a 'return' of 9-10% ('return' meaning, a 'net operating profit after tax' over 'invested capital') on data centres once operating at capacity. Third party partners may be brought in to help fund these data centres. A 9-10% return ensures that the IRR is above WACC. The signed customer contracts include an inflation adjustment element This is a higher return that global hyperscale data centres are generating. But remember, global hyperscale is on a 'next level' compared to Spark 'hyperscale'.

11/ 'eps' is running below 'dps'. Are fully imputed dividends sustainable? 'Full imputation' is confirmed for FY2024. Looking further out, it will be the improvement of free cashflow that will be needed to support the payment of a fully imputed dividend. Increasing free cashflow is part of the business plan. This is the basis on which dividend imputation is approached. But no 'long term guidance' by Spark was given as firm on imputation.

12/ On telecommunications competition, the market remains competitive. But no significant market share swap has occurred between the 'big 3 players' in either mobile or broadband.

SNOOPY

[Entrep]

Some bids hit today

[Snoopy]

11/ 'eps' is running below 'dps'. Are fully imputed dividends sustainable? 'Full imputation' is confirmed for FY2024. Looking further out, it will be the improvement of free cashflow that will be needed to support the payment of a fully imputed dividend. Increasing free cashflow is part of the business plan. This is the basis on which dividend imputation is approached. But no 'long term guidance' by Spark was given as firm on imputation.

Amongst the half year presentation questions, the above analyst's question was one that particularly caught my eye. I expressed my same concern about this matter a year ago.

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.

Time for an update, to see if earnings really are keeping up with those increased dividends.

SNOOPY