SPK- Spark NZ (TELCO)

[Snoopy]

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.

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.

Now that I have found this 'admission of guilt' by Spark in 2020, my sniffer has gone into overdrive, hunting down those subsequently increased imputation credits earned. The first half of FY2020 was the beginning of the Covid-19 pandemic. Revenue for the whole FY2020 year ($3,623m) was up over FY2019 ($3,533m). But certain - unspecified - costs were down. The following notes are the results of my sniffing, seeking out where those additional operational profits might have come from.

What has changed from 'FY2019 to FY2020' and 'FY2019 to FY2021'?

1/ From AR2020 p60.
"As a result of Covid-19, Spark received a number of rent concessions....accounted for directly in the statement of profit and loss."

I see accommodation costs went up by $4m to $67m in the subsequent year (FY2021), while they fell $4m from FY2019 to FY2020 . Could that be a hint that there was $4m in rent relief in 2HY2020, when Covid-19 hit?

2/ I noticed that broadband costs reduced from $341m to $339m over FY2020 (AR2020 page 61), for a saving of $2m. That could be a reflection of the push by Spark to steer customers away from fibre broadband and onto their own wireless broadband. Broadband costs dropped another $10m over FY2022 (that means a $12m drop over two years).

3/ FY2020 say the reintroduction of depreciation on commercial buildings. This resulted in an incremental $7m tax deduction expense for the year together with a one off $10m deduction charge (AR2020 p93). That reduced equivalent tax for the year by $17, and increased before tax profit by the same amount. However in 2021 there was no more 'one of adjustment' and the incremental tax deduction expense was just $4m.

Expenses like this 'saved' flow through to FY2020 profits after tax 'per share' like this:

1/ + 2/ + 3/ = 0.72 ($4m + $2m +$17m ) = $16.6m (NPAT incremental increase for FY2020)
$16.6m / 1,867m = 0.9cps (NPAT incremental profit on a per share basis FY2020).

Repeating the comparison with FY2019, now looking at FY2021:

1/ + 2/ + 3/ = 0.72 ($0m + $12m +$4m ) = $11.5m (NPAT incremental increase for FY2021)
$11.5m / 1,867m = 0.6cps (NPAT incremental profit on a per share basis FY2021).

The two 12.5c dividends paid during FY2020 were only 75% imputed whereas the two 12.5c dividends paid during FY2021 were 100% fully imputed. A 75% imputation rate means that 9.375c of the dividend is fully imputed and 3.125c is not imputed. So to make that 75% percent imputed dividend 100% imputed, we need an extra 3.125cps of fully imputed earnings to be booked every six months (12.5c dividends were paid twice per year). In fact the incremental earnings between FY2020 and FY2021 went down from 0.9c to 0.6c. So it looks like changes to earnings from regulatory review, substituting for Chorus services and Covid do not explain the extent of increased profitability of the company.

AP2021 announced the FY2021 dividend payments of 25cps (AP2021 slide 3) were fully imputed, supported by resilient free cashflow. That is an odd thing to say because fully imputed dividends must come from actual fully tax paid profits. 'Cashflow' does not guarantee that! Unless, that is, Spark are still using free cashflow to pump up the tax paid in advance to give the impression that the increase in taxable earnings is sustainable!

SNOOPY