SPK- Spark NZ (TELCO)

[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?

FY2021	Spark	Chorus
No. Shares	1,867m	447.025m
Share Price (10-10-2021)	$4.83	$6.85
Declared eps	20.6c	10.5c
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%.
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