SPK- Spark NZ (TELCO)

[Snoopy]

The following are notes I have taken from the 23 minute point into this podcast,the presentation of the FY2023 results.
https://investors.sparknz.co.nz/Form...ent_180823.mp3

Growth cost out of $40m-$60m for FY2024 - What are the details?

Simplification from the exit of legacy 3G and PSTN networks. more automation in network deployment, more customer interactions through digital channels, and driving ownership economics (transferring more of the broadband base onto Spark's own wireless broadband network). Savings will be reinvested into high growth areas, which will help maintain Spark margins (so no 'net' cost out). Growth component of reinvestment $100-$120m for FY2024, slightly more than it has been.

Growth in Mobile Income over FY2023

Of the 9% mobile revenue growth (round figures), 3.3% was in roaming reflecting more people flying into New Zealand by air (returning from near zero to 86% of the previous pre-Covid total) and 4.7% of underlying normal mobile distribution growth. So mobile revenue growth target for FY2024 of 5% is a solid 'steady as she goes' growth forecast for FY2024.

Cashflow Trends

Free cashflow is more weighted to the second half, as Spark sees more capex invested in the first half, and more advertising in handsets and promotions in the run up to Christmas. Hyper-scale investment of $250-$300m related to data-centres is based on 3-5 year trends of what Spark is observing globally. Spark has land available for further development but are also looking at other locations.

Connect8 (in house infrastructure construction unit) going forwards

Will revenues reduce at the end of the current 5G mobile build out plan? Connect8 also cover IT supply and distribution and other non-mobile infrastructure. Growth ahead for Connect8 is looking to be in the low single digit numbers for revenue growth , and EBITDA growth of around 20-30%. Connect8 has now been folded into Spark's 'Enteler Group' subsidiary.

Broadband margins going forwards

Broadband is a very competitive market place. Immigration returning is a tailwind, but CPI pressure is a headwind. Aim is to hold market share and use wireless broadband as the means to maintain Spark's margins. Aim is to grow wireless broadband from 30% to 35% of Spark's broadband base over three years (by FY2026). 5G will continue to help this with the extra capacity it brings to the network. Spark put its prices up by 6% on 1st August on its fibre plans. It is too early to say if this will drive some customers to 'fixed wireless'.

Fate of 'old' IT business, excluding procurement and the Takanini data centre expansion

70% of the IT business is government work, which is a really strong place to be. There will be price pressure ongoing from the likes of private cloud. Price pressure growth will be offset with volume growth. Launching new product into this market, a new hybrid cloud offering, and will be taking some decisive action on the cost base to avoid duplication and are moving more to a volume charging regime more aligned to changing margin profile of the customer base.

Churn in mobile customer base

NZ when looked at in a global context has an excess weighting towards the prepaid area of the market. Customers are 'moving up'. Connections have grown, both among the 'paid monthly' and prepaid base. No increase in customer churn in either area. A desire for more data usage is pushing people up into different plans. There is an underlying trend of people moving onto monthly plans and annual price increases have not affected that.

Data Centre Growth Forecast

9-10% profit growth once investments are at scale. Interim incremental return on the path will be less, as most of the investment must be made 'up front' first. Returns come on line as the capacity comes on line.

Tax Losses in Australia?

Can they be used? Connect8 transaction and Spark Sport have reduced the tax bill over FY2023. Adjust for those and tax normalises to about 29%. (Specific question on Australian tax recovery taken off line).

SNOOPY

[Ricky-bobby]

Thanks snoopy! so nothing ground breaking, just steady as she goes

[Snoopy]

Buffett Test 1 may be found in post 1806. Not enough has changed year to year to warrant me rewriting it. So we are straight into Buffett Test 2.

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

FY2018:	($365m - 0.72($10m) )/	1835m	= 19.5cps
FY2019:	($409m - 0.72($15m) )/	1836m	= 21.7cps
FY2020:	($427m - 0.72($35m-$2m) - $10m -$7m)/	1837m	= 21.0cps
FY2021:	($384m - 0.72($28m - $16m) ) /	1867m	= 20.1cps
FY2022:	($410m - 0.72($26m) ) /	1872m	= 20.9cps

Notes

1/ Figures for FY2018 are derived from the re-reported profit figures as presented in the December 4th 2018 Analysts Briefing, titled 'Updates to External Reporting'. These updates alter the financial reporting for the FY2018 year as though the subsequently applied new accounting standards NZ IFRS15 (on apportioning revenues and costs) and NZ IFRS16 (on the balance sheet representation of leases) were already in force over FY2018. Doing this means that all calculated results are compared under the same set of accounting standards.

2/ For FY2018, I have removed the $10m of profit resulting from a 50% sale of formerly 100% owned subsidiary 'Connect 8 Limited' (an infrastructure civil construction business).

3/ For FY2019 I have removed from profit $2m from the sale of a long term investment/business, $11m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations, making a grand total of $15m to be adjusted for.

4/ For FY2020 I have removed $35m of 'other gains' (that includes $5m from the sale of a long term investment or former subsidiary, $28m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations). I have offset this with $2m of rent concessions that would not have been granted outside of a Covid-19 environment. Furthermore I have removed a one off $10m downward adjustment to the tax bill that was a result of a law change reinstating the depreciation allowance on commercial buildings. Finally I have brought in a retrospective adjustment of $7m from FY2021. This adjustment relates to "reflect a reduction in net earnings of $7 million for the amortisation of reacquired rights that were previously regarded as indefinite life and therefore not amortised."

5/ For FY2021 I have removed $28m of 'other gains' (that includes $1m from the sale of a minority shareholding in long term investment 'Now New Zealand' (a boutique broadband retailer), $9m from the sale of Property Plant and Equipment (primarily mobile plant and equipment) and $18m from a gain on lease modifications and terminations). I have offset this against a one off refund of $16m of historic wire and maintenance charges that was charged to some fibre broadband customers.

6/ For FY2022 I have removed $26m of 'other gains' (that includes $10m from the sale of Property Plant and Equipment (primarily mobile plant and equipment) and $16m from a gain on lease modifications and terminations)

Conclusion: Average normalised earnings over the past five years was 20.6cps (the same as FY2021). The high of 21.7cps was 5% higher than average and the low of 19.5cps was 5% less than the average. This is just about as flat as corporate earnings get in the real world. Next a review on input costs.

Financial Year	Labour Expense	Finance Expense
2018	$513m	$77m
2019	$475m	$85m
2020	$511m	$94m
2021	$491m	$81m
2022	$495m	$74m

The table above shows labour expenses have been held down, and interest costs are at cyclical lows. But I would expect upward pressure on both these cost staples as we look to FY2023. Growth initiative research (post 1982) does not give any hint of a significant boost in top line revenue going forwards. Nevertheless mobile service revenue growth continues to exceed expectations, which largely covers the 'new class' growth initiatives and cloud services not performing to expectations

Looking at the trend in the last five years of earnings, as used in the 'Buffett Model', is meant to be the indicator of whether a company is able to continue positive 'eps' growth into the future. The spreadsheet part of the Buffett valuation model does not work unless this is the case. But it is clear there is no clear historical pattern of increasing earnings per share here.

Conclusion: Fail test.

Buffett Test 1 may be found in post 1806.
https://www.sharetrader.co.nz/showth...l=1#post901658

Not enough has changed year to year to warrant me rewriting it. So we are straight into Buffett Test 2.

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

FY2019:	($409m - 0.72($15m) )/	1836m	= 21.7cps
FY2020:	($427m - 0.72($35m-$2m) - $10m -$7m)/	1837m	= 21.0cps
FY2021:	($384m - 0.72($28m - $16m) ) /	1867m	= 20.1cps
FY2022:	($410m - 0.72($26m) ) /	1872m	= 20.9cps
FY2023:	( 0.72x($1152m-($583m-$54m)) - 0.72($33m) )/	1845m	= 23.0cps

Notes

1/ For FY2019 I have removed from profit $2m from the sale of a long term investment/business, $11m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations, making a grand total of $15m to be adjusted for.

2/ For FY2020 I have removed $35m of 'other gains' (that includes $5m from the sale of a long term investment or former subsidiary, $28m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations). I have offset this against $2m of rent concessions that would not have been granted outside of a Covid-19 environment. Furthermore I have removed a one off $10m downward adjustment to the tax bill that was a result of a law change reinstating the depreciation allowance on commercial buildings. Finally I have brought in a retrospective adjustment of $7m from FY2021. This adjustment relates to "reflect a reduction in net earnings of $7 million for the amortisation of reacquired rights that were previously regarded as indefinite life and therefore not amortised."

3/ For FY2021 I have removed $28m of 'other gains' (that includes $1m from the sale of a minority shareholding in long term investment 'Now New Zealand' (a boutique broadband retailer), $9m from the sale of Property Plant and Equipment (primarily mobile plant and equipment) and $18m from a gain on lease modifications and terminations). I have offset this against a one off refund of $16m of 'wire and maintenance' charges, that were wrongly charged to some fibre broadband and wireless customers.

4/ For FY2022 I have removed $26m of 'other gains' (that includes $10m from the sale of Property Plant and Equipment (primarily mobile plant and equipment)) and $16m from a gain on lease modifications and terminations.

5/ For FY2023 I have removed the one off gain from selling 'Towerco' (now Connexa) of $583m and the one off loss of shutting down Spark Sport of $54m. Furthermore the $20m gained from selling property plant and equipment (primarily mobile network equipment) and the $13m gained on lease modifications and terminations have been removed (for a sub-total of $33m) .

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The number of shares on issue during the year have reduced as a result of a share buyback, which commenced on 6th April 2023. The company is planning to spend up to $350m 'on market' buying back and cancelling its own shares. The money for the buyback is coming from the proceeds of the Towerco/Connexa sell down. If the average buyback price ends up being $5 per share (the buyback campaign continued after the balance date and continues today) then 70m shares will end up being bought back by the time the buyback runs out of purchasing authority. As at 30th June 2023, $146m had been spent on the buyback, a total from which we remove $4m, because of new shares issued under share schemes during the financial year. The net $142m worth of money spent on a net 27m of shares bought back represents an average purchase buyback share price over the 30th June 2023 financial year of: $142m/27m = $5.26.

Average normalised earnings over the past five years was 21.3cps. The 2023 result marked the first 'green shoot' of a possible uptrend. But in reality it is no more than the right hand tip of a U shaped profit picture. It will take until next year too see if our evolving picture will be seen in a 'better light' and paint a picture of consistent eps growth.

Financial Year	Labour Expense	Finance Expense
2019	$475m	$85m
2020	$511m	$94m
2021	$491m	$81m
2022	$495m	$74m
2023	$511m	$99m

The table above shows labour expenses are on the rise again , and interest costs are up sharply from their cyclical lows. The upward pressure on both I forecast from last year is here! Mobile service revenue growth continues to exceed expectations, rising an impressive $120m over the year and more than offsetting the aforementioned price increases. The growth in mobile revenue largely covers the 'new class' growth initiatives and cloud services not performing to expectations as well.

Looking at the trend in the last five years of earnings, as used in the 'Buffett Model', is meant to be the indicator of whether a company is able to continue positive 'eps' growth into the future. The spreadsheet part of the Buffett valuation model does not work unless there is a positive trend of 'eps' growth. But it is clear there is no clear historical pattern of increasing earnings per share here, yet.

Conclusion: Fail test.

SNOOPY

[Snoopy]

ROE= (Normalised earnings) / (Shareholder Equity EOFY)

FY2018: $358m / $1,483m = 24.1%
FY2019: $398m / $1,465m = 27.2%
FY2020: $386m / $1,493m = 25.9%
FY2021: $375m / $1,503m = 25.0%
FY2022: $397m / $1,475m = 26.9%

Conclusion: Pass Test

ROE= (Normalised earnings) / (Shareholder Equity EOFY)

FY2019: $398m / $1,465m = 27.2%
FY2020: $386m / $1,493m = 25.9%
FY2021: $375m / $1,503m = 25.0%
FY2022: $397m / $1,475m = 26.9%
FY2023: $425m / $1,940m(1) = 21.9%

Notes

1/ The sell down of Spark's 'Towerco' business was completed on 14th October 2022 for a gain of $583m. But some of this capital profit was eroded by a $54m write down from the closing of Spark Sport. The net $465m of new equity on the books over FY2023 can largely be attributed to these two large adjustments to the company capital base.

Conclusion: Pass Test

SNOOPY

[Snoopy]

Net Profit Margin = (Normalised Profit) / (Operating Revenue)

FY2018: $358m / ($3,533m - $10m)	= 10.2%
FY2019: $398m / $3,518m	= 11.3%
FY2020: $386m / $3,588m	= 10.8%
FY2021: $375m / $3,565m	= 10.5%
FY2022: $397m / $3,694m	= 10.7%

Notes

1/ Turnover across FY2018 has had revenue from asset sales removed from the revenue total.
2/ Turnover from asset sales is not included in the revenue that I have quoted for FY2019, FY2020, FY2021 and FY2022.

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How much do the level of interest rates affect normalised profit? I don't normalise for those! But I do note that while the interest payments on debt have decreased year on year ($81m -> $74m), the amount of capital borrowed has increased ($1,403m -> $1,526m) (see AR2022 p108)! And this in spite of Foreign Currency Medium Term currency borrowing going down on paper (in fact the FMTNs have not changed in their home currency - this is a snapshot NZD exchange rate effect.) The increase in debt is termed a 'temporary working capital impact' (PR2022, slide 22) .

One reason for the interest paid drop is the switch to new lower rate 'green bond (sustainability related)' funding ($365m dollars worth). This replaced the $160m of borrowings formerly taken out with the Hong Kong and Shanghai bank and Mitsubishi UFU Financial Group Bank. (I believe this $200m jump in overall debt will be reversed when a 'planned surplus' of $200m is banked from the TowerCo proceeds.)

Short term debt (due within 12 months), -mostly on variable interest rates-, represents $293m/ $1,526m = 19.2% of the total (down from 26.6% in the previous year). If short term debt rates rise an incremental 2 percentage points, this will increase the company interest bill by: 0.02 x $293m = $5.9m. That is back to where the interest bill was at EOFY2021, so not a massive deal. And I haven't adjusted that figure for the $200m reduction in debt, once the TowerCo surplus proceeds are absorbed.

Of course, all this excludes the effect of 'lease interest' due on the sale and leaseback of Spark's network cellphone towers to 'TowerCo'. I would regard such money as a 'network running expense', rather than a true finance cost.

In summary, you don't need a mathematicians eye to describe the profit margin history of this company. It is flat.

Conclusion: Fail test

Net Profit Margin = (Normalised Profit) / (Operating Revenue)

FY2019: $398m / $3,518m	= 11.3%
FY2020: $386m / $3,588m	= 10.8%
FY2021: $375m / $3,565m	= 10.5%
FY2022: $397m / $3,694m	= 10.7%
FY2023: $425m / $3,875m	= 11.0%

Notes

1/ / Turnover from asset sales is not included in the revenue that I have quoted for FY2019, FY2020, FY2021 FY2022 and FY2023 (See note 2.2 in the respective annual reports on operating revenues) .

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Round all the above numbers to 2 significant figures and the net profit margin has been stuck on 11% for the last five years. In the real world, this is about as consistent as results ever get! 11% is quote a good net profit margin, but where is the ability to grow that figure shown here? Answer: It isn't.

Conclusion: Fail test

SNOOPY

[Snoopy]

Gross Dividend Calculations

FY2019P1, 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: (this dividend not yet paid at time of posting)
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	32.30c
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
Total			170.15c

Now we come to selecting the capitalisation rate in this ultra low interest rate environment. I have selected a figure of 5% for Chorus (from a March2021 low interest rate perspective). But Chorus is a regulated monopoly. I think Spark shareholders need a greater implied return than that, to compensate for the risks of competition and technological change. I think a 6.5% gross interest return on your shares bought, in today's rising interest rate environment, would be fair. The five year historical average gross dividend received by shareholders [TD]FY2023[/TD][TD=align:right]12.5c + 13.5c[/TD][TD=align:right]17.36c + 18.75c[/TD][TD=align:right]36.11c[/TD]from Spark was:

170.15 / 5 = 34.03c

The capitalised dividend value of Spark (fair value) is therefore: 34.03c/0.065 = $5.24

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 $5.24 x 0.9 = $4.72.

discl: holder, but have not purchased recently.

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'?

SNOOPY

[Snoopy]

I am looking at this from another angle, starting with 'the facts we know'.

"Spark had an imputation credit balance of nil as at 30-06-2020" (AR2020 p94, confirmed in AR2021 p100)

A Nil imputation credit balance means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the two year period following EOFY2020, what fully imputed dividends were paid out?

Dividends Paid FY2021 & FY2022	Gross Dividend	Net Dividend	Imputation Credits
Second HY dividend FY2020	$319.4m	$230m	$89.4m
First HY dividend FY2021	$320.8m	$231m	$89.8m
Second HY dividend FY2021	$323.6m	$233m	$90.6m
First HY dividend FY2022	$325.0m	$234m	$91.0m
Total			$360.8m

Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend



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Now, how does that $360.8m imputation credit total paid out line up with the amount of tax paid up by the company over that same period? From the respective cashflow statements:

Income Tax paid over FY2021	$188m
Income Tax paid over FY2022	$160m
Imputation Credit Balance Owing EOFY2022	$16m	(See AR2022 p120)
Total	$364m

This means enough tax has been paid to cover those fully imputed dividends. Or perhaps more correctly, enough tax would have been paid, if Spark had got around to paying that outstanding tax debt of $16m of imputation credits owing! But as nztx pointed out in post 2004, the imputation credit balance isn't really owing (yet), because of the mismatch of the ending of the Spark reporting financial year, and the Spark tax financial year that ends 9 months later. That means the unpaid imputation credit balance of $16m is actually an accounting construct, caused by Spark choosing to put a line under their year at 30th June, while the same $16m is a bill 'not yet due' from an IRD perspective.

A summary of 'the facts we know'.

"Spark had an imputation credit balance of nil as at 30-06-2020" (AR2020 p94, confirmed in AR2021 p100)

A Nil imputation credit balance means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the three year period following EOFY2020, what fully imputed dividends were paid out?

Dividends Paid FY2021 & FY2022	Gross Dividend	Net Dividend	Imputation Credits
Second HY dividend FY2020	$319.4m	$230m	$89.4m
First HY dividend FY2021	$320.8m	$231m	$89.8m
Second HY dividend FY2021	$323.6m	$233m	$90.6m
First HY dividend FY2022	$325.0m	$234m	$91.0m
Second HY dividend FY2022	$325.0m	$234m	$91.0m
First HY dividend FY2023	$325.0m	$234m	$91.0m
Total			$542.8m

Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend



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Now, how does that $542.8m imputation credit total paid out line up with the amount of tax paid up by the company over that same period? From the respective cashflow statements:

Income Tax paid over FY2021	$188m
Income Tax paid over FY2022	$160m
Income Tax paid over FY2023	$190m
Imputation Credit Balance Owing EOFY2023	$32m	(See AR2023, p131)
Total	$570m

This means enough tax has been paid to cover those fully imputed dividends. Or perhaps more correctly, enough tax would have been paid, if Spark had got around to paying that outstanding tax debt of $32m of imputation credits owing! But the imputation credit balance isn't really owing (yet), because of the mismatch of the ending of the Spark reporting financial year (30th June) , and the Spark tax financial year that ends 9 months later (31st of March of the following year). That means the unpaid imputation credit balance of $32m is actually an accounting construct, caused by Spark choosing to put a line under their year at the end of 30th June, while the same $32m is a bill 'not yet due' from an IRD perspective.

There is a reported deficit on income tax credits, - which is odd in itself as I was under the impression that income tax credits could not be issued to shareholders until the underlying tax bill was paid (does this mean that the negative imputation credit balance as at 30th June was brought up to zero 'and then some' ($32m+$91m= $123m) before the payment of the final dividend in October, despite the negative imputation credit balance payment not being required to be paid by the IRD until 31st March the following year? - I guess it does!) So does all of this line up with the income tax payments expected to the IRD as reported to the half year ended 31st December 2022 (EOHY2023)? 'Kind of' - the half year cashflow statement shows income tax payments to the IRD of $120m over that period. That means the income tax payment by the final dividend payment date looks to have been $3m shy.

SNOOPY

[Snoopy]

So far so good. But what about the company earnings that were used to pay these dividends quoted in my 'post 2077'?

This is a post about:
i/ Underlying taxable earnings COMPARED WITH
ii/ Declared taxable earnings AND the ability to skirt around the difference using
iii/ The Company Balance Sheet

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i/ From the "Reconciliation of Income tax expense" AR section 6.1"

Underlying Taxable Earnings	Gross Earnings	Net Earnings	Imputation Credits	Reference
FY2021	$553m	$398m	$155m	AR2021 p100
FY2022	$581m	$418m	$163m	AR2022 p119
FY2023 (1)	($1152m-($583m(2)-$54m(2)+$5m(2)-$30m(4) ))	$433m	($323m-$168m(3) )	AR2023 p130
Total	$1,722m		$473m

Notes

1i/ $1,152m -($583m -$54m+$5m) -$30m = $588m,
1ii/ $323m-$168m= $155m.
1iii/ The number in red is calculated ('Gross earnings'-'Imputation Credits'). However, this calculated figure happens to agree with 'adjusted net earnings; figure printed on p103 in AR2023.
2/ Net gain on the sell down of Connexia ($583m profit) AND the loss on the closing of Spark Sport ($54m loss) AND the subsequent revaluation upwards of the stake in Connexa following the Connexa 2 degrees transaction ($5m profit) may be found in AR2023 on p103. These are 'one offs', not underlying earnings.
3/ Tax effect of Connexa sale, Spark Sport write down and the subsequent dilution effect from the 2 degrees towers being folded into Connexa, diluting the Connexa holding of Spark (AR2023 p103) but also modestly increasing the value of that stake.
4/ One off costs associated with the one off transactions mentioned in note 3 may be found in AR2023 p130 under sub note 1 (under 'income tax expense' header). These amount to a total of $30m:
"$26m for the costs associated with the assets disposed of in the sale of Connexa, $2m for the unwinding of a deferred tax asset associated with the Connexa transaction and $2m of current tax adjustment for the Spark Sport provision.

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Note that the implied rolling three year underlying tax rate average, as laid out in the above table, is $473m/$1,722m = 28%

Below is fundamentally the same information, but this time expressed in the form of declared earnings and actual tax paid.

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ii/ From the "Statement of profit or loss and other comprehensive income" in the respective AR

Declared Earnings	Gross Earnings	Net Earnings	Imputation Credits	Reference
FY2021	$553m	$384m	$169m	AR2021 p62
FY2022	$581m	$410m	$171m	AR2022 p79
FY2023	$1,152m	$1,135m	$17m	AR2023 p89
Total	$2,286m		$357m

The implied tax rate on disclosed earnings overall is $357m/$2,286m= 15.6%

This shows a lower tax rate than the company tax rate of 28%. Why is the declared tax so much less than than the underlying tax?

a/ A large proportion of 'declared earnings' from FY2023 are non-taxable net capital profits, the result of the mobile towers sale.
b/ At balance date, Spark had a negative imputation credit balance of $32m (Ar2023 p131). This $32m represents a 'timing of payments' issue, not a tax bill that has been escaped. The 30th June Spark reporting date creates a 'reporting reference point', where tax due on the following 31st March -must be recognised- on the Spark balance sheet as a 'tax bill', nine months prior to the IRD recognised due date on the following 31st March.
c/ The sale of mobile tower assets resulted in the concomitant creation of new 'lease liabilities' and 'right of use assets' on the Spark balance sheet. These balance sheet additions are the result of Spark entering into leaseback contracts with the new, now equity accounted, tower owning company Connexa. I confess that I do not fully understand the tax implications of this. But looking at the balance sheet, the company has gone from holding $108m of deferred tax liabilities to holding $55m of deferred tax assets, a turnaround of $163m in the deferred tax position between EOFY2022 and EOFY2023. I can cross reference that $163m figure against the disclosure notes on income tax expense (AR2023 p130), which I detail in the next paragraph.

From the disclosure notes, I can see deferred tax adjustments totalling $24m+$137m+$3m (a sum total of $164m, reducing the 'current year tax obligation' by $164m). Co-incidence (I am assuming the $1m difference between $163m and $164m is a rounding error)? If not a co-incidence, it looks to me as though the Connexa transaction of selling and leasing back what were your own company owned cell towers has given Spark a $164m reduction in their current operational tax bill for 2023. This doesn't seem 'right'. But I am sure that the Spark tax liabilities reported in AR2023 must be legal and truthful. I have no alternative explanation as to how $164m disappeared from Spark's income tax liability in 2023. Were those 'deferred tax assets' really paid out to shareholders as imputation credits? That seems extraordinary to me. But note 6.1 in AR2023 suggests that is exactly what happened.

Looking again at the 'big picture', to assess whether the imputation credits earned are sustainable, I would use 'underlying earnings'. Underlying earnings are not corrupted by tax paid in advance, nor refunds due to transactions outside of the FY2021 to FY2023 (inclusive) study period, nor deferred tax from other sources.

Compare the information in post 2077 and you will see the 'underlying earnings' income tax payable derived in this post of $473m (the underlying imputation credits that should have been generated) does not support the quoted imputation credits on the dividends actually paid over the period. ($473m<$542.8m). Furthermore, neither do the imputation credits deposited from the 'declared earnings' (also calculated in this post) cover the imputation credits attached to the dividend ($357m<$542.8m). I am therefore forced to conclude that to pay the fully imputed dividends they have done, Spark must have put some extra money into the IRD income tax pot, despite it not being due. This is the only way a company can pay fully imputed dividends from earnings that are less than the sum of those dividends. This extra money does not come from thin air though. It must have come from capital that is already on the company balance sheet. So what were the shareholder funds on the balance sheet of Spark at EOFY2020, EOFY2021, EOFY2022 and EOFY2023?

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iii/ From the "Statement of financial position" in the respective AR

Shareholder Funds		Reference
EOFY2020	$1,493m	AR2020 p55
EOFY2021	$1,503m	AR2021 p63
EOFY2022	$1,475m	AR2022 p90
EOFY2023	$1,940m	AR2023 p90
less One off capital adjustment	($534m)
equals adjusted EOFY2023	$1,406m

Shareholders funds have bounced around over a '3 end of year period'. The FY2023 'change in equity statement' (AR2023 p91) showed a net earnings injection of $1,135m. This figure of course includes "$583m -$54m+$5m=$534m" of a net one off equity injection from previously described asset re-organisations. This is why I have removed $534m from our change in capital picture. The underlying capital lost by SPK over the three year period ending 30-06-2023 was $1,493m-$1,406m= $87m.

If we add $87m as a 'tax advance' to the underlying earnings imputation credits, then that is not enough to cover the shortage of imputation credits from underlying earnings to cover the actual dividends paid. ($433m+$87m=$520m < $542.8m - refer post 2077). In this particular year it does not matter because of the Connexa asset sales providing access to fresh 'one off' capital. But to me, this is continuing evidence that the dividend payments currently being dished out by Spark to shareholders are not sustainable in the medium term.

SNOOPY

[winner69]

Snoops …from one of your earlier posts I’m surprised you only want a 0.5% equity risk oremium (over bonds)

Doesn’t seem much

[Ricky-bobby]

Approaching the trading zone?…