SPK- Spark NZ (TELCO)

[ronaldson]

Thanks BB. I have tended to overlook the significance of these announcements in the past, and I still don't entirely understand. But other more liquid shares I hold such as ARG, CEN, MCY, ARV and even less liquid such as SAN also experienced larger volumes than normal at market close today. So I will be alert in future.

[Sideshow Bob]

https://www.nzx.com/announcements/407104


• Reported revenue1, EBITDAI2, and NPAT all in growth, driven by one-off proceeds fromthe strategic divestment of a majority stake in Spark’s TowerCo business
• Up to $350 million to be returned to shareholders through an on-market share buy-backand an additional ~$90-$110 million to be invested in digital infrastructure and emergingtechnologies in the second half
• While adjusted revenue increased as a result of a standout performance in mobile, higherproduct costs and intensifying competition in broadband and cloud contributed to marginpressure in the half, with adjusted EBITDAI and NPAT declining
• H1 FY23 dividend of 13.5 cents per share declared, 100% imputed

[Sideshow Bob]

Buyback announced

https://www.nzx.com/announcements/407100

Spark New Zealand Limited (Spark) has announced today that it has allocated up to NZ$350 million to undertake an on-market share buy-back that will commence after the release of the new 3-year strategy on 5 April 2023.

As mentioned in Spark’s H2 FY22 results and market announcement on 24 August 2022, in July 2022 the Ontario Teachers’ Pension Plan agreed to acquire a 70% interest in Spark’s “TowerCo” business.

Spark received net cash proceeds of $911 million at completion of the TowerCo transaction, which occurred on 14 October 2022.
Spark has considered options for returning a portion of the proceeds from this transaction to shareholders and wishes to proceed with the on-market share buyback of up to $350 million. The shares will be acquired on the NZX and ASX, at prices that are in line with the prevailing market price from time to time during the period of the buy-back.

Spark will announce the commencement and further details of the buy-back in line with NZX Listing Rules requirements (including NZX Listing Rule 4.14.2) in due course.

Leading up to and throughout the period of the buy-back, Spark will continue to assess market conditions, its prevailing share price, available investment opportunities and all other relevant considerations. Spark reserves the right to vary, suspend without notice, or terminate the buy-back programme at any time.

[percy]

https://www.nzx.com/announcements/407104


• Reported revenue1, EBITDAI2, and NPAT all in growth, driven by one-off proceeds fromthe strategic divestment of a majority stake in Spark’s TowerCo business
• Up to $350 million to be returned to shareholders through an on-market share buy-backand an additional ~$90-$110 million to be invested in digital infrastructure and emergingtechnologies in the second half
• While adjusted revenue increased as a result of a standout performance in mobile, higherproduct costs and intensifying competition in broadband and cloud contributed to marginpressure in the half, with adjusted EBITDAI and NPAT declining
• H1 FY23 dividend of 13.5 cents per share declared, 100% imputed

I liked the result together with the increased divie and share buy back,however The Market did not..lol.

[676767]

I liked the result together with the increased divie and share buy back,however The Market did not..lol.

Doesn't look like the market likes a lot today..

[airedale]

Doesn't look like the market likes a lot today..

Increased dividend, and share buy-back, then the SP drops 6.9% The irrational Mr Market puts SPK up for sale.

[percy]

Increased dividend, and share buy-back, then the SP drops 6.9% The irrational Mr Market puts SPK up for sale.

Spark will also invest $350 million for growth, with ~$90-$110 million of incremental investment in digital infrastructure and emerging technologies in FY23

[Snoopy]

Spark certainly is one for the 'dividend hounds'. I haven't yet written the summary conclusion to my Buffett tests. But it is clear the background conditions to run the so called "Buffett Spreadsheet' to value Spark will not be fulfilled. This means we need to apply alternative valuation techniques. My standard 'go to' alternative method is 'capitalised dividend valuation'. This is capitalising the average dividend paid over the last five years.

To reprise, -because I haven't done this for a while- 'capitalising the dividend' is actually a fairly crude method of valuation. Implicit is the assumption that the company is 'no growth', and that the performance of the last five years will be reflective of company performance in the current year. Of special mention in this case is that Spark dividends have been consistently greater than underlying earnings. One way to think of this is that directors, who have more up to date and comprehensive knowledge of Spark than we shareholders do, are optimistic that underlying business will improve. IOW we shareholders are benefitting from director 'insider knowledge'. Another benefit of capitalised dividend valuation is that it does not require anyone to forecast any dividend payouts from the company. So there is no forecasting error. All the figures I use in the valuation are based on dividends actually paid

Gross Dividend Calculations

FY2017 P2:
11.0c (Ordinary, 100% imputed) + 1.5c (Special, 80.6% imputed):
= 11.0c (FI) + 1.209c (FI) + 0.291c (NI) = 11.0c/0.72 + 1.209c/0.72 +0.291c = 17.25c (gross dividend)

FY2018 P1:
11.0c (Ordinary, 100% imputed) + 1.5c (Special, 75% imputed):
= 11.0c (FI) + 1.125c (FI) + 0.375c (NI) = 11.0c/0.72 + 1.125c/0.72 + 0.375c = 17.22c (gross dividend)

FY2018 P2, FY2019 P1, FY2019 P2, and FY2020 P1 (All 75% imputed): 11.0c (ordinary) + 1.5c (ordinary) = 12.5c (total)
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)

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)

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2017	12.5c+12.5c	N/Ac + 17.25c	17.25c
FY2018	12.5c+12.5c	17.22c + 16.15c	33.37c
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 + ?c	17.36c + ?c	17.36c
Total			167.3c

Now we come to selecting the capitalisation rate in this ultra low interest rate environment. I have selected a figure of 5% for Chorus. 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% gross interest return on your shares bought would be fair. The five year historical average gross dividend received by shareholders from Spark was:

167.3 / 5 = 33.46c

The capitalised dividend value of Spark (fair value) is therefore: 33.46c/0.06 = $5.58

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 $5.58 x 0.9 = $5.02.

I have been buying SPK cum that 12.5c fully imputed dividend today!

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 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.

SNOOPY

discl: holder, but have not purchased recently.

[ziggy415]

Snoopy, I see Vodafone is rebranding and becoming a standalone entity, what discount do you envisage as spark shareholders free up cash to take up " ONE" (vodafone) impending listing

[Snoopy]

Snoopy, I see Vodafone is rebranding and becoming a standalone entity, what discount do you envisage as spark shareholders free up cash to take up " ONE" (Vodafone) impending listing

An excellent question. Actually Vodafone NZ has been a stand alone entity, divorced from the global Vodafone, for some time.

https://www.vodafone.com/news/techno...ne-new-zealand

"31 Jul 2019: Vodafone Group Plc (“Vodafone”) has completed the sale of 100% of Vodafone New Zealand Limited (“VFNZ”) to a consortium comprising Infratil Limited and Brookfield Asset Management Inc. for a cash consideration equivalent to an Enterprise Value of NZ$3.4bn (€2.1bn), implying an FY’19 multiple of 7.3x Adjusted EBITDA and 16.2x Adjusted OpFCF"

What you are seeing is a local company now adopting its own 'One NZ' branding, and ditching the 'brand usage fee' they are paying to global Vodafone.

Moving on to a probable 'market float' sell down at some point, a lot will depend on how 'Vodafone NZ' (I will keep calling it that for now) is 'dressed up ' for sale. By that I mean what debt levels a prospective floated entity is saddled with. I think we can take it as a given that 'Vodafone NZ' will be marketed as an 'asset stripped' package (the cellphone towers are already gone, with Brookfield and Infratil pocketing the profits).

Personally I have a Vodafone cellphone and am very happy with it. And I say that after migrating there from Telecom (as Spark was then) and more latterly Two Degrees. But I will try and not let personal satisfaction bias colour my investment decision making! I think Spark have sharpened up their cellphone offering in recent years.

Operating EBITDA at Spark over FY2021 was $1,150m. That equates to: $1.150m/1,872m = 61.4cps on an historical retrospective basis.

Line that up with yesterday's closing price of $5.025 and I get an historical EBITDA multiple of: 502.5/61.4 = 8.2. I would think Brookfield/Infratil would be looking to float at similar multiples to ensure themselves a nice profit. So I don't see too much fundamental room for the SPK share price to decline in a 'one on one' float stand off with 'Vodafone NZ'. Having said that a major new NZX float like that would induce 'reef fish' behaviour from fund managers, as they struggle to balance their telecommunications sector exposure. So I think we could see a 5% fall in the share price of Spark, which will put it neatly into my accumulation share price zone.

Therein I think will lie the real opportunity in any Vodafone NZ float. The opportunity to buy more Spark shares at bargain prices!

SNOOPY