SPK- Spark NZ (TELCO)

[Snoopy]

I used to be a solid believer in dividend yields as a secure means of generating income. The last few years have shown numerous dividend traps generated in this market. I think bond proxy is now a thing of the past. Buyer beware

I was about to write a snarky reply. Something along the lines of:
"This is Spark mate. With a thirty year record of paying dividends. And everybody needs a phone."

That was until I remembered the gamesmanship that preceded the Chorus split, and the absolute shock on the face of then CEO TG as she realised the government had called her bluff and that her self admitted tactics of using confusion as a dollar maximizing marketing tool were coming to an end. IIRC at the time the then Telecom share price took a hiding from which it took years to recover. So good call 'mshierlaw'. Even the 'safest' shares can take a hit.

I guess the question is "can you stand the volatility" (not that bonds don't suffer from volatility as well of course). In my case the extra two percentage points of income (or more in this instance) is well worth the extra vacillations of share prices. But, of course, others may come to a different decision. The way to guard against 'bond proxy' (share) volatility IMV is to make sure you have a portfolio of bond proxies that are not well correlated in their respective market positions. That way if the black swan event happens, only one of your 'team' goes down.

SNOOPY

[percy]

https://www.rnz.co.nz/news/business/...newable-energy

[Snoopy]

Overall I don't think the margin of safety is there and the future is too difficult to predict, the big money is figuring out what wont change.

With something in the tech space, you have to have the right 'sailors' in place to navigate the stormy seas. If you want to see if Spark have the right people, there is no better thing to do than look at this analyst presentation given in FY2023. The important bit you need to watch is the analyst question time which starts at 1hr 38minutes into the presentation.

https://edge.media-server.com/mmc/p/mnjnxvwk

Most presentations of this sort are by the CEO accompanied by the CFO. But in this one CEO Jolie Hodson has (count 'em) eight of her trusted lieutenants on hand. That's right - eight. I don't think I have ever seen a company presentation with that many presenters on stage before. Then watch and see how Jolie Hodson handles it all.....

The thing that impressed me was that Hodson had the ability to break down broad questions into different sub-parts 'on the fly', and then have no trouble handing some of the sub questions straight over to the appropriate senior team member. Putting 'the team' on stage like that suggests that Jolie Hodson has supreme confidence in all of them. And while continuing to hold an overall watching CEOs brief, I get the feeling she would be quite happy for them to get on with their everyday jobs without checking up on them too often. This IMO is the kind of culture you want in a big company like Spark. I expect the respect is reciprocated by the lieutenants, and they are happy to go the extra mile for their CEO.

Although it is often the CEO that gets the limelight, the real skill of a CEO is to build a senior team around you with just the right skills to drive the business forward. I believe that with the team of eight on stage, Jolie Hodson has shown that she has done just that. And that in turn should give investors in Spark confidence that the good ship Spark does indeed have the capability to navigate those stormy telecommunication investment seas.

SNOOPY

[SailorRob]

With something in the tech space, you have to have the right 'sailors' in place to navigate the stormy seas. If you want to see if Spark have the right people, there is no better thing to do than look at this analyst presentation given in FY2023. The important bit you need to watch is the analyst question time which starts at 1hr 38minutes into the presentation.

https://edge.media-server.com/mmc/p/mnjnxvwk

Most presentations of this sort are by the CEO accompanied by the CFO. But in this one CEO Jolie Hodson has (count 'em) eight of her trusted lieutenants on hand. That's right - eight. I don't think I have ever seen a company presentation with that many presenters on stage before. Then watch and see how Jolie Hodson handles it all.....

The thing that impressed me was that Hodson had the ability to break down broad questions into different sub-parts 'on the fly', and then have no trouble handing some of the sub questions straight over to the appropriate senior team member. Putting 'the team' on stage like that suggests that Jolie Hodson has supreme confidence in all of them. And while continuing to hold an overall watching CEOs brief, I get the feeling she would be she is also quite happy for them to get on with their everyday jobs without checking up on them too often. This IMO is the kind of culture you want in a big company like Spark. No doubt the respect is reciprocated by the lieutenants and they are happy to go the extra mile for their CEO.

Although it is often the CEO that gets the limelight, the real skill of a CEO is to build a senior team around you with just the right skills to drive the business forward. I believe that with the team of eight on stage, Jolie Hodson has shown that she has done just that. And that in turn should give investors in Spark confidence that the good ship Spark does indeed have the capability to navigate those stormy investment seas.

SNOOPY

That is all wonderful and heartwarming.

However.

The greatest buggy whip company in the world did not fare well upon the arrival of the horseless carriage.

When a phenomenal management team combine with an average to poor business, it is always the reputation of the business that wins out.

We have no clue what the world of telecommunications looks like in 10 years or who will be playing the game.

Vaseline however will still sell in preference to petroleum jelly.

[kiora]

If I was an investor this would worry me or is it already baked into recent share price decline?

"MARKET RELEASE – MONDAY 6 MAY 2024
EMBARGOED UNTIL [DATE] [delete this row if not required]
Spark reduces FY24 EBITDAI guidance as tough trading conditions intensify
Spark New Zealand (Spark) today announced it is reducing FY24 EBITDAI guidance from
$1,215-$1,260 million to $1,170-$1,210 million, as challenging trading conditions intensified in some
parts of the business. There is no change to FY24 capital expenditure and dividend guidance."
https://stocknessmonster.com/announc...pk.nzx-430555/
https://stocknessmonster.com/charts/spk.nzx/

Compared to One NZ

"EBITDAF for the year was $600.1 million, up 13.7% from $527.8 million in the prior
year. This was a pleasing result against guidance of $580 million to $620 million.
FY2024 growth was driven through strong performance in Consumer Mobile and
Wholesale alongside prudent cost management"

One NZ.pdf

[Snoopy]

If I was an investor this would worry me or is it already baked into recent share price decline?

"MARKET RELEASE – MONDAY 6 MAY 2024
EMBARGOED UNTIL [DATE] [delete this row if not required]
Spark reduces FY24 EBITDAI guidance as tough trading conditions intensify
Spark New Zealand (Spark) today announced it is reducing FY24 EBITDAI guidance from
$1,215-$1,260 million to $1,170-$1,210 million, as challenging trading conditions intensified in some
parts of the business. There is no change to FY24 capital expenditure and dividend guidance."
https://stocknessmonster.com/announc...pk.nzx-430555/
https://stocknessmonster.com/charts/spk.nzx/

Compared to One NZ

"EBITDAF for the year was $600.1 million, up 13.7% from $527.8 million in the prior
year. This was a pleasing result against guidance of $580 million to $620 million.
FY2024 growth was driven through strong performance in Consumer Mobile and
Wholesale alongside prudent cost management"

One NZ.pdf

Kiora, the profit downgrade from Spark (in which the dividend was not downgraded) was largely from the cancellation, I would say postponement, of government department (and business) system upgrades under their IT umbrella. From your reference OneNZ is suffering from exactly the same thing.

"it provides fixed-line and ICT services to more than 110,000 corporate, government, and small-to-medium businesses."
"The Enterprise side of the business has been challenging with downward pressure on connections and revenue, as both public and private sector Enterprise customers downsize and look for cost savings in the current economic environment."

But this IT side of the OneNZ business is proportionately much smaller than Spark. OneNZ remains largely a mobile driven business.

The reporting dates for Spark and OneNZ seem nine months out of phase. OneNZ turned in a creditable result with mobile revenues up 6%. But Spark went one better with mobile revenues up 9% for their period.

I expect both OneNZ and Spark to keep doing well. But overall I expect Spark to do better as they offer a more complete service.

SNOOPY

[Snoopy]

That is all wonderful and heartwarming.

However.

The greatest buggy whip company in the world did not fare well upon the arrival of the horseless carriage.

When a phenomenal management team combine with an average to poor business, it is always the reputation of the business that wins out.

We have no clue what the world of telecommunications looks like in 10 years or who will be playing the game.

Vaseline however will still sell in preference to petroleum jelly.

Sailor, I know you are disciple of Buffett. And Buffett and tech tend not to go together (even if somehow Buffett managed to get into Apple). As Buffett would say, there is no need to swing at every pitch. So if you don't want to invest in Spark that is fine.

However just because you/Buffett cannot see where tech will be in ten years time, that does not mean that those in the industry can't. Even so, I expect there will be mis-steps from time to time. But as long as those are identified and minimised that is all I could ask for with Spark. As for calling Spark an 'average to poor business'? I did run the Buffett tests over it. (Spoiler alert: it failed).

https://www.sharetrader.co.nz/showth...=1#post1022531

Nevertheless I would not call it a 'average to poor business'. Spark has good ROE and margins, even if they are not increasing right now. As far as telecommunications businesses go, it is the best I have analysed. In fact, I believe Spark to be 'world class', even though the industry works against that class being filled with 'A' students.

Carry on in your horse and cart, (and I do mean that in a tech averse respectful way).

SNOOPY

[SailorRob]

Sailor, I know you are disciple of Buffett. And Buffett and tech tend not to go together (even if somehow Buffett managed to get into Apple). As Buffett would say, there is no need to swing at every pitch. So if you don't want to invest in Spark that is fine.

However just because you/Buffett cannot see where tech will be in ten years time, that does not mean that those in the industry can't. Even so, I expect there will be mis-steps from time to time. But as long as those are identified and minimised that is all I could ask for with Spark. As for calling Spark an 'average to poor business'? I did run the Buffett tests over it. (Spoiler alert: it failed).

https://www.sharetrader.co.nz/showth...=1#post1022531

Nevertheless I would not call it a 'average to poor business'. Spark has good ROE and margins, even if they are not increasing right now. As far as telecommunications businesses go, it is the best I have analysed. In fact, I believe Spark to be 'world class', even though the industry works against that class being filled with 'A' students.

Carry on in your horse and cart, (and I do mean that in a tech averse respectful way).

SNOOPY

Margins have nothing to do with a business being average, poor or exceptional. Some of the very best in the world have incredibly slim margins, think COSTCO.

I should have said an average to poor (to awful) investment. Looking at the ROE's and returns on capital over time from a data provider, Spark does look like it performs (very) well. To actually analyse it properly would take me a long time, but if the figures I am seeing are correct then they are pretty good.

However.

If indeed Spark can consistently return low 20's on equity and you are paying 5 times that equity value AND they cannot reinvest much equity at those returns, then your results are going to be god awful. If you can buy that equity for 100c on the $ then you will have made an exceptional investment.

Those in the industry are notoriously terrible for seeing where anything will be in 10 years time, and lets just think for a minute... If indeed Buffett was hopeless at it and others were good... Berkshire would just hire them. Like Ajit the best underwriter in the world who is far better than Buffett... Buffett hired him due to his skill.

The industry experts said that digital photography was a fad.

That txt messaging was a fad and would not be popular.

Steve Balmer worth over 100 billion dollars and the CEO of Microsoft at the time nearly wet himself laughing at the iPhone https://www.youtube.com/watch?v=nXq9NTjEdTo

Nobody has ever had a track record of seeing the future of telecommunications 10 years out, it's impossible.

If you can even tell me roughly whats going to happen with wireless vs copper vs fibre internet over the next decade I can make you 100 million dollars no problem at all.

[Snoopy]

Margins have nothing to do with a business being average, poor or exceptional. Some of the very best in the world have incredibly slim margins, think COSTCO.

I am using the word margin in the sense of 'net profit'/'revenue'. There are two strategies for raising net profit margin. One is to put a high mark up on what you are selling. The second is to operate on a much lower mark up but with greater stock turn. A simple example would be selling a single used car at a net $10,000 mark up verses selling ten used cars at a net $1,000 mark up each. From an accounting profit perspective there is no difference. Thus the likes of CostCo can make very good money with low mark ups on their goods providing their turnover keeps up.

Telecommunications companies are a little different in that, Spark retail shops aside, they tend to be selling a service rather than a product. But when I say they make a good margin, that statement encapsulates the total return on the funds invested and is not necessarily a statement on dollars earned as a result of any particular transaction or transactions.

Overall I don't think the margin of safety is there and the future is too difficult to predict, the big money is figuring out what wont change.

You have done your work and know your $hit however. At a certain price I could be interested.

I should have said an average to poor (to awful) investment. Looking at the ROE's and returns on capital over time from a data provider, Spark does look like it performs (very) well. To actually analyse it properly would take me a long time, but if the figures I am seeing are correct then they are pretty good.

However.

If indeed Spark can consistently return low 20's on equity and you are paying 5 times that equity value AND they cannot reinvest much equity at those returns, then your results are going to be god awful. If you can buy that equity for 100c on the $ then you will have made an exceptional investment.

Buy a share at $1. Get a consistent return of 20c per share as a dividend consistently. I agree that would be a dream. But I would suggest you 'dream on' if you think that, or the equivalent, is going to happen at Spark. There are people around who are prepared to pay a higher price than that 'dollar share face value' to get a 'not quite as high' and consistent return. One of those people is a bloke called 'Mr Market'. Based on the market price of SPK today, which means a gross yield of about 8.5%,, that Mr Market is prepared to pay 20/8.5 x $1 = $2.35 for the same share you claim is only worth $1 to you. So good luck with your market offer price of $1, and your denial that Mr Market exists.

The other point you miss is that although Spark is not able to reinvest the profits they generate at the high rate of return on equity they generate from their operations, that does not mean that you as the dividend recipient cannot. Once the Spark dividend is in your bank account you can do with it what you will. If you have identified a high return investment waiting in the wings like, -gulp- OCA, you could simply feed your Spark dividend into that every six months as part of a dollar cost averaging strategy if you wanted to do so.

Those in the industry are notoriously terrible for seeing where anything will be in 10 years time, and lets just think for a minute... If indeed Buffett was hopeless at it and others were good... Berkshire would just hire them. Like Ajit the best underwriter in the world who is far better than Buffett... Buffett hired him due to his skill.

The industry experts said that digital photography was a fad.

That txt messaging was a fad and would not be popular.

Steve Bulmer worth over 100 billion dollars and the CEO of Microsoft at the time nearly wet himself laughing at the iPhone https://www.youtube.com/watch?v=nXq9NTjEdTo

Nobody has ever had a track record of seeing the future of telecommunications 10 years out, it's impossible.

If you can even tell me roughly whats going to happen with wireless vs copper vs fibre internet over the next decade I can make you 100 million dollars no problem at all.

I get that everyone has a margin of safety they are prepared to tolerate. But Spark is not about guessing what tech is going to be most relevant going forwards. It is about providing the platform over which the really smart others can roll out their own tech. Spark are really 'piggy backers' rather than 'tech geniuses' in their own right. No-one is going to get super rich buying Spark shares. I accept that. But I would also guarantee that you will get a much steadier supply of dividends from Spark than a tech start up. Spark is just at a different point on the risk/reward curve compared to the kind of investment you, Sailor, would normally seek. Yet Spark share investors do get a flutter as well thrown in for free. That will pay off if start up within Spark 'MTTR' can snare a respectable share of the emerging global digital ID market, reputed to be worth $28billion.

SNOOPY

[Snoopy]

PGG Wrightsons seems far more compelling an opportunity at present, what do you think of the two compared side by side right now?

Now that is an interesting question, and very real for me because these two are right in front of me at the investment smorgasbord, currently being laid out at the NZX diner. I think the words 'right now' are a key phrase in your question, because 'right now' the market is rewarding cash, not the possibility of a whole lot more cash on a multi year deal down the track. That means the answer to your question is, if I have to choose, Spark. However, it is a fake question in that sitting in front of the investment smorgasbord, I don't have to choose. I can legitimately have a helping of both on my plate, and this is what I choose to do.

PGG Wrightson has for the last few years been my 'dividend champion', offering a significantly better yield than any of my other share investments. Now that yield has apparently dropped to zero. From a PGW share price high of over $5, riding the farming boom, down to $1.62 today, let's just say I have had plenty of opportunity to improve by skiing on that figurative ski slope. But unless I find that 'hindsight investment fund' that everyone on here keeps going on about, I can't capitalise on that now.

The question is looking forward through the next investment cycle, which will likely give me a better return: PGW or SPK? The answer to that question is PGW - no debate. I can see the price of PGW shares doubling in the next 2-3 years, should farm returns go back to even average earning levels. The only problem is, I cannot tell you exactly when that will happen. The further unknown is how patient the banks will be with our farmers (and farm suppliers) in the transition from trough to peak. I am not missing out on any divvies in the meantime. So my thoughts are that I will wait for the full year result announcement from PGW, probably at the end of August, and see what the banks make of PGWs progress. I am likely to 'miss the bottom' by doing that. But I will also de-risk my investment. It is certainly my intention to buy more PGW, but at a slightly different point on the risk return curve.

In the meantime, there are other tasty dishes ripe for sampling at the NZX smorgasbord investment diner.

SNOOPY