SPK- Spark NZ (TELCO)

[Biscuit]

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
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%.

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 credits 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, Vodaphone and 2 degrees. So I may have to rethink that 'acceptable monopoly yield' that I have attributed to Chorus

SNOOPY

Given the first nine lines of your comparison table (favour SPK), its hard to see how you arrived at the comparative figures in the last two lines, Snoopy.

[Snoopy]

Given the first nine lines of your comparison table (favour SPK), its hard to see how you arrived at the comparative figures in the last two lines, Snoopy.

If you look under 'Note 2' you will see a reference to each of the posts in the respective threads in which I derived 'fair value'. I may have to rework that Chorus figure as I did that just before the FY2021 Chorus results came out (but I was using Chorus projections). Of course as a value investor I do not seek to buy a share at fair value. I am after shares that I can buy below fair value, so I have a bit of a safety buffer just in case some of my assumptions turn out to be optimistic.

SNOOPY

[percy]

Given the first nine lines of your comparison table (favour SPK), its hard to see how you arrived at the comparative figures in the last two lines, Snoopy.

I will use Direct Broking figures.
.......................................eps........ ..........pe..................yield............... ..divie..............share price.
SPK...............................20.74........... ....23.31................5.17%................25 cps.............$4.83
CNU...............................10.46........... ....65.49................3.58%...............24.5 cps............$6.85

So investing $100.000 which do I choose.?
$100,000 will buy 20,703 SPK shares providing $5175.75 in divies.
$100,000 will buy 14,598 CNU shares providing $3,576.51 in divies
There fore I would receive 44.71% more in divies by investing in SPK.or $1,599.24 more.

[Biscuit]

I will use Direct Broking figures.
.......................................eps........ ..........pe..................yield............... ..divie..............share price.
SPK...............................20.74........... ....23.31................5.17%................25 cps.............$4.83
CNU...............................10.46........... ....65.49................3.58%...............24.5 cps............$6.85

So investing $100.000 which do I choose.?
$100,000 will buy 20,703 SPK shares providing $5175.75 in divies.
$100,000 will buy 14,598 CNU shares providing $3,576.51 in divies
There fore I would receive 44.71% more in divies by investing in SPK.or $1,599.24 more.

Yes, on first glance it is hard to see the value proposition in CNU, but then I haven't looked in detail as they don't really interest me. What's interesting about them? They are building a domestic fibre network. Sounds fairly limited and just the sort of thing the commerce commission would regulate so no exponential profit growth and high risk tech-wise.

[BlackPeter]

Yes, on first glance it is hard to see the value proposition in CNU, but then I haven't looked in detail as they don't really interest me. What's interesting about them? They are building a domestic fibre network. Sounds fairly limited and just the sort of thing the commerce commission would regulate so no exponential profit growth and high risk tech-wise.

I recon CNU is as exciting as AIA, POT or any of the Gentailers.

They do provide an essential service and operate as monopolist (or as the Gentailer's, in an oligopoly).

Predictable income, but big SP changes are still possible, however more likely based on a change of the regulatory framework (these things do happen ...) or the markets perception of what a fair PE for a given earnings would be.

Not sure I would buy CNU today, but for sure there have been amazing opportunities in the past (and might come again). In 2013 it was possible to buy a CNU share for less than $1.50 ... quite healthy capital appreciation over these 8 years for a boring infrastructure company, wasn't it?

One thing which I didn't see in the recent discussion is the fact that Chorus will start to reap over the next couple of years the fruits of its huge fibre rollout investment, i.e. capex will drop (when everybody connected) and income will rocket. Obviously - politics easily might curtail these future earnings, but I think markets at the moment assume they won't. That's why CNU is trading currently at a premium compared to SPK which is just another replaceable Telecom company.

Discl: hold neither CNU nor SPK

[percy]

I think a lot comes down to whether you see "fibre" or "wireless" as the future.
I have a "wireless" connection,and am in the "wireless" camp.
I own SPK shares, while the trust I am a trustee of holds CNU and SPK.,

[BlackPeter]

I think a lot comes down to whether you see "fibre" or "wireless" as the future.
I have a "wireless" connection,and am in the "wireless" camp.
I own SPK shares, while the trust I am a trustee of holds CNU and SPK.,

That's the problem with predicting things which are in the future :

We should however not forget that Sparks WiFi transceivers need (and use and presumably pay for) as well CNU's glass fibre network to stay in operation - the WiFi over the air part are only the last handful of hundred meters - the reminder is CNU's glass fibre ...

[850man]

I think a lot comes down to whether you see "fibre" or "wireless" as the future.
I have a "wireless" connection,and am in the "wireless" camp.
I own SPK shares, while the trust I am a trustee of holds CNU and SPK.,

From a technology perspective, fibre is the only service where you can be guaranteed uncontended bandwidth, you buy 100Mb you get 100Mb (soon to be 300Mb at no extra cost). Wireless, even 5G, is a shared spectrum so the endpoint shares available bandwidth with all others using the cell site. Even now it's evident that the shared nature of fixed wireless impacts streaming services. This is less evident in areas where fewer people are on a cellsite but in city areas, where the bandwidth may be shared by tens to hundreds of users especially if more subscribe to fixed wireless, it's going to become an issue.

You can of course take you fixed wireless box to your bach or on holiday with you, not that Spark allows that.

[Snoopy]

I think a lot comes down to whether you see "fibre" or "wireless" as the future.
I have a "wireless" connection,and am in the "wireless" camp.
I own SPK shares, while the trust I am a trustee of holds CNU and SPK.,

I am in the 'wireless camp' too Percy. In the three years or so I have been on it everything has gone faultlessly. Mind you I have never been a 'gamer', nor am I a large consumer of high res video. I thought, perhaps I am in a 'shrinking dinosaur group'. But then my cousin, who has two teenage boys (actually one is in his 20s but teenagers seem to go up to 25 these days) moved into an 'interim house' that had a wireless connection (Spark). Those two young guys gave that wireless network a real gaming workout (both on separate gaming channels at the same time). There was a family imposed 8pm gaming curfew, when internet use switched to streaming video for the family. Eventually they got the message from Spark that their usage had gone over a somewhat nebulous 'fair data cap' and they switched to fibre. But neither of the boys had any problem -technically- with the wireless set up. The wireless set up was via a 4G connection. Once 5G gets established, the wireless network performance should get even better. Spark's goal is to get a minimum of 30% of their customer base on 'fixed wireless broadband'. If they succeed in that goal, then there isn't much growth left for Chorus in supplying more fibre to the Spark customer base.

There is other 'fixed wireless broadband' from Vodafone and 2 degrees. But anecdotally I have heard stories of very poor service from Vodafone, and 2 degrees are really only just getting started. So I think I am in the right camp with Spark, both from a customer and shareholder perspective.

SNOOPY

[Snoopy]

We should however not forget that Sparks WiFi transceivers need (and use and presumably pay for) as well CNU's glass fibre network to stay in operation - the WiFi over the air part are only the last handful of hundred meters - the reminder is CNU's glass fibre ...

I used to think that. But I am not sure if it is true Blackpeter. Look at p8 of AR2021. There you will see a nice pattern of purple lines representing 1200km of backhaul 'Fibre Transport Network' owned and operated by Spark. Sure there are a few areas of the country that don't connect, but it does look remarkably complete between major population centres. I am thinking the actual backhaul work performed by Chorus for Spark, on a nationwide basis, may not be so large?

SNOOPY