SPK- Spark NZ (TELCO)

[mcdongle]

Skinny upping their prices.

https://www.skinny.co.nz/17-plan - $16 becomes $17 - 1.25GB to 1.5GB

https://www.skinny.co.nz/27-plan - $26 becomes $27 - Stays the same

https://www.skinny.co.nz/40-plan - $36 becomes $40 - 4.5GB to 5GB

https://www.skinny.co.nz/50-plan - $46 becomes $50 - 12GB to 15GB

[Sideshow Bob]

https://www.nzx.com/announcements/408876

Gotta love (not) the HR corporate speak - and their Leadership "Squad"

[winner69]

https://www.nzx.com/announcements/408876

Gotta love (not) the HR corporate speak - and their Leadership "Squad"

Better than Synlait’s Director of this and Vice Presidents of that

[airedale]

Squad? the slang term for a foot soldier is "squaddie".

[Snoopy]

FY2021 results are out. So time to try and find how the exciting new growth divisions are shaping up.

P68 of AR2021 is where the true calculation of profitability starts:

	Operating Revenues	less Product Costs	less Labour Costs (1)	less Other Operating Expenses (1)	equals EBITDA
'Other Operating Revenues'	$137m	$67m	$19m	$15m	$36m

Notes

1/ 'Labour Costs' and 'Other Operating Expenses' are estimated in fractional proportion (f) to the percentage of revenue turned over by the 'Other Operating Revenues' business unit.

f= 137/3565 = 3.843%; Labour Cost = 0.03843 x $491m = $19m, 'Other Operating Expenses' = 0.03843 x $385m = $15m

-------------------


EBITDA is a good proxy for cashflow. But barring some trunk transmission assets, most of the equipment at Spark is not long lived. Indeed there is significant investment now replacing the old PSTN telephone system and continuing the 5G mobile roll out. In my assessment, this means EBIT is the more important measure.

Depreciation & Amortisation ('Other Revenue') = 0.03843 x $523m = $20m

EBIT= EBITDA - DA = $36m - $20m = $16m

The interest charge against 'Other Revenue' = 0.03843 x [$34m - $81m] = -$2m.

NPAT = 0.72(EBIT - I) = 0.72($16m-$2m) = $10m

On page 68 of AR2021 we learn "Other operating revenues include revenue from Qrious, Internet of Things, Spark Sport, and exchange building sharing arrangements." I had previously assumed this category included 'Spark Health' as well. But it could be the Spark Health referred to as a promising potential future revenue business unit has yet to start from a zero base.

Whatever, the NPAT estimate for all those promising future growth initiatives looks to have turned the corner from loss making, and is now a small positive number. Albeit in overall terms, that profit is not significant.

When the FY2022 results came out, 'Spark Sport' was very much 'still in the picture' as part of the 'exciting growth story' (at HY2023, Spark exited Spark Sport for a one off write off of $52m). So how did the total of the exciting new growth divisions -at the time- shape up?

P87 of AR2022 is where the true calculation of profitability starts:

	Operating Revenues	less Product Costs	less Labour Costs (1)	less Other Operating Expenses (1)	equals EBITDA
'Other Operating Revenues'	$152m	$72m	$20m	$16m	$44m

Notes

1/ 'Labour Costs' and 'Other Operating Expenses' are estimated in fractional proportion (f) to the percentage of revenue turned over by the 'Other Operating Revenues' business unit.

f= 152/3694 = 4.114%; Labour Cost = 0.04114 x $495m = $20m, 'Other Operating Expenses' = 0.04114 x $381m = $16m

-------------------


EBITDA is a good proxy for cashflow. But barring some trunk transmission assets, most of the equipment at Spark is not long lived. Indeed there is significant investment now replacing the old PSTN telephone system and continuing the 5G mobile roll out. In my assessment, this means EBIT is the more important measure.

Depreciation & Amortisation ('Other Revenue') = 0.04114 x $520m = $21m

EBIT= EBITDA - DA = $44m - $21m = $23m

The interest charge against 'Other Revenue' = 0.04114 x [$26m - $74m] = -$2m. So underlying Net Profit After Tax is:

NPAT = 0.72(EBIT - I)= 0.72($23m-$2m)= $15m

On page 89 of AR2022 we learn "Included in 'Other operating revenues' is revenue from Qrious (Artificial Intelligence, data and analytics), Internet of Things, Spark Sport, Connect 8 (the construction contractor, now fully brought back in house by buying out the Electra shareholding) and exchange building sharing arrangements." I had previously assumed this category included 'Spark Health' as well. But it could be the Spark Health referred to as a promising potential future revenue business unit has yet to start from a zero base.

Whatever, the NPAT estimate for all those promising future growth initiatives looks to have improved by 50%, even if the overall contribution to Spark profit remains small.

SNOOPY

[Snoopy]

This is a little exercise I like to run on all my companies just to check they are not overloaded with debt. MDRT is the answer to the question:

"How many years would it take to repay your borrowing debt if you decided to repay that debt by pouring all this years net profit into debt repayment, and continued to do the same in subsequent years?"

In other calculations I have been concerned with 'normalised profit', as I am concerned with sustainable earnings trends. However in this case I need the recognised profit from all sources, as determined by current accounting standards. For FY2021 that was $384m.

The total long and short term debt at Spark at EOFY2021 balance date was $1,403m (p89 AR2021). From that figure I like to take off the balance sheet cash balance of $72m. So at EOFY2021, for Spark:

MDRT = ($1,403m-$72m) / $384m = 3.47

My 'rule of thumb' is that any MDRT between 2 and 5 represents a 'medium level' of debt. 3.47 is right in the middle of that range. Whether that is a good result depends on the kind of company being assessed. Generally if you have a stable cashflows that are not affected too much by business cycles, it becomes more 'capital efficient' for shareholders if you crank the debt up a bit This is exactly the situation that I see Spark in. That means I am quite happy with Sparks debt position.

Conclusion: Pass Debt Test

This is a little exercise I like to run on all my companies just to check they are not overloaded with debt. MDRT is the answer to the question:

"How many years would it take to repay your borrowing debt if you decided to repay that debt by pouring all this years net profit into debt repayment, and continued to do the same in subsequent years?"

In other calculations I have been concerned with 'normalised profit', as I am concerned with sustainable earnings trends. However in this case I need the recognised profit from all sources, as determined by current accounting standards. For FY2022 that was $410m.

The total long and short term debt at Spark at EOFY2022 balance date was $1,526m (p108 AR2022). From that figure I like to take off the balance sheet cash balance of $71m. So at EOFY2022, for Spark:

MDRT = ($1,526m-$71m) / $410m = 3.55

My 'rule of thumb' is that any MDRT between 2 and 5 represents a 'medium level' of debt. 3.55 is right in the middle of that range. Whether that is a good result depends on the kind of company being assessed. Generally if you have a stable cashflows that are not affected too much by business cycles, it becomes more 'capital efficient' for shareholders if you crank the debt up a bit This is exactly the situation that I see Spark in. That means I am quite happy with Sparks debt position.

Conclusion: Pass Debt Test

SNOOPY

[Snoopy]

First, an apology. It looks like I wrote the equivalent of a short story about Spark over 2021 and never penned the final chapter! This post is the missing 'summary post' for my previous posts 1806, 1807, 1609 and 1810 on this thread. With my forum settings, I have to go back 17 pages to find these posts.

Spark fails the Buffett test, because earnings per share were largely flat over the five year period test period (no eps growth). Meanwhile, net profit margin was showing a declining trend, except for a one off 'profit bump' between between FY2018 and FY2019. This was principally due to falling labour costs, the result of both standardization of processes and automation. But it becomes hard to continue such savings year after year.

Failing the Buffett test does not necessarily mean that Spark is a poor investment though. It just means that we need to look at the investment under different valuation models. If we assume that Spark is a 'no growth' business over the business cycle, then we can look at 'capitalised dividend valuation' as an investment yardstick. Post 1819 summarizes this, based on a gross yield of 6%. I should add this 'capitalised dividend analysis' was done on 24th August 2021, before the dream of interest rates dropping to a permanently lower notch for the foreseeable future was shattered. The Spark share price was $4.84 on that day. That looked favourable against a $5.58 capitalised dividend valuation.

In the last few days (post 1068) I have redone my 'capitalised dividend valuation' for FY2023 using a gross interest rate of 6.5%. If I had known then what I do now, I would not have dropped my acceptable gross yield down to 6% back in August 2021. Reworking my historical gross yield calculation from post 1819 using today's 6.5% gross yield expectation gives me a revised fair historical 'capitalised dividend value' of:

33.46c/0.065 = $5.15 (on 24-08-2021)

So back on 24th August, that $4.84 market value was still below my 'with hindsight' 'capitalised dividend value' of $5.15. But much of the earlier 'margin of safety' from my post 1819 former valuation of $5.53 was gone. This is a good reason why I would never buy a share at what I deem 'fair value'. I always buy for a purchase price 'below fair value' (10% discount minimum), that will allow for any overoptimism I put into my 'fair value' calculations.

A great advantage of using "capitalised dividend valuation" is that. being a 'zero growth' model, any real growth that does occur, we as investors get 'for free'. This brings me to my post 1811 where I look at the contribution of the growth side of the Spark business: Qrious (data processing and AI) , Internet of Things and Spark Sport. That shows me that for FY2021 these 'growth businesses' delivered $10m to the bottom line from normalised profits of $375m. That works out as 2.66% of profits, which I see as margin of error stuff. (The recent closure of 'Spark Sport' puts a further cloud over Spark's growth ambitions. But this is judging historical growth plans with the benefit of hindsight that was not available 'back in the day'). With the growth engine at Spark not really firing, I would say using a 'capitalised dividend revaluation model' for valuing the Spark share is reasonable.

Despite the failure of Spark to jump all the Buffett test hurdles using a FY2021 perspective, I would say the on market trading price of $4.84 'back in the day' offering a 6% discount on my revised $5.15 'capitalised value' was a fair price. The Spark share back in August 2021 was not a compelling buy. But it was certainly not something a portfolio investor looking for income should be looking to sell either.

SNOOPY

[Ricky-bobby]

First, an apology. It looks like I wrote the equivalent of a short story about Spark over 2021 and never penned the final chapter! This post is the missing 'summary post' for my previous posts 1806, 1807, 1609 and 1810 on this thread. With my forum settings, I have to go back 17 pages to find these posts.

Spark fails the Buffett test, because earnings per share were largely flat over the five year period test period (no eps growth). Meanwhile, net profit margin was showing a declining trend, except for a one off 'profit bump' between between FY2018 and FY2019. This was principally due to falling labour costs, the result of both standardization of processes and automation. But it becomes hard to continue such savings year after year.

Failing the Buffett test does not necessarily mean that Spark is a poor investment though. It just means that we need to look at the investment under different valuation models. If we assume that Spark is a 'no growth' business over the business cycle, then we can look at 'capitalised dividend valuation' as an investment yardstick. Post 1819 summarizes this, based on a gross yield of 6%. I should add this 'capitalised dividend analysis' was done on 24th August 2021, before the dream of interest rates dropping to a permanently lower notch for the foreseeable future was shattered. The Spark share price was $4.84 on that day. That looked favourable against a $5.58 capitalised dividend valuation.

In the last few days (post 1068) I have redone my 'capitalised dividend valuation' for FY2023 using a gross interest rate of 6.5%. If I had known then what I do now, I would not have dropped my acceptable gross yield down to 6% back in August 2021. Reworking my historical gross yield calculation from post 1819 using today's 6.5% gross yield expectation gives me a revised fair historical 'capitalised dividend value' of:

33.46c/0.065 = $5.15 (on 24-08-2021)

So back on 24th August, that $4.84 market value was still below my 'with hindsight' 'capitalised dividend value' of $5.15. But much of the earlier 'margin of safety' from my post 1819 former valuation of $5.53 was gone. This is a good reason why I would never buy a share at what I deem 'fair value'. I always buy for a purchase price 'below fair value' (10% discount minimum), that will allow for any overoptimism I put into my 'fair value' calculations.

A great advantage of using "capitalised dividend valuation" is that. being a 'zero growth' model, any real growth that does occur, we as investors get 'for free'. This brings me to my post 1811 where I look at the contribution of the growth side of the Spark business: Qrious (data processing and AI) , Internet of Things and Spark Sport. That shows me that for FY2021 these 'growth businesses' delivered $10m to the bottom line from normalised profits of $375m. That works out as 2.66% of profits, which I see as margin of error stuff. (The recent closure of 'Spark Sport' puts a further cloud over Spark's growth ambitions. But this is judging historical growth plans with the benefit of hindsight that was not available 'back in the day'). With the growth engine at Spark not really firing, I would say using a 'capitalised dividend revaluation model' for valuing the Spark share is reasonable.

Despite the failure of Spark to jump all the Buffett test hurdles using a FY2021 perspective, I would say the on market trading price of $4.84 'back in the day' offering a 6% discount on my revised $5.15 'capitalised value' was a fair price. The Spark share back in August 2021 was not a compelling buy. But it was certainly not something a portfolio investor looking for income should be looking to sell either.

SNOOPY

Haha Snoopy ya fence sitter! I bought a small amount a while back… not too sure what I’m going to do with them… I mainly invested for the liquidity/Div yield and shallow swing in price… it’s never really going to be a money maker or is it?..

[Snoopy]

Haha Snoopy ya fence sitter! I bought a small amount a while back… not too sure what I’m going to do with them… I mainly invested for the liquidity/Div yield and shallow swing in price… it’s never really going to be a money maker or is it?..

Fence sitting? Not really. It should not be a surprise that a well and widely researched share like Spark should trade around fair value. That is what happens in a well informed market. FWIW I think your approach sounds very sensible. Buy on the dips and hang in there for the dividends. That is basically what I have done. The liquidity gives you a ready exit should you require it. Personally I have never sold any SPK, even at what I feel might be cyclical highs. Because I am having trouble finding alternative investments that I understand that are selling at a discount to fair value.

As for 'never really going to be a money maker', well that depends on your time-frame and outlook. If I can round up a few Spark shares and get a 6.5% (or a bit better) gross yield, then I am very happy with that. I can't see any real evidence that Spark will give you an 'investment home run' in the foreseeable future. But 'stealing a base' here and there for a more modest (and less liable to be struck out) return I can cope with, and appreciate. For me an investment in Spark is almost a bond proxy. I haven't invested in bonds for quite a few years now as I prefer investments like this to be part of my 'insurance policy' against portfolio volatility. A return that gives a good premium to bank interest rates without too much risk.

There was once an investor on this forum called Craic who made quite a nice supplementary retirement income trading SPK shares, and SPK shares alone. He more or less did trade the swings on the Spark share price and made quite good money from doing so. Not what you call 'hit it out of the ball park' money. But good enough to enjoy a comfortable retirement. I wouldn't have followed his example myself, because it is not my style (I am not a trader). But I just mention it, because there is more than one way to skin a cat in this investment game. With SPK you can choose your investment style and make your moves to suit.

SNOOPY

[mshierlaw]

There was once an investor on this forum called Craic who made quite a nice supplementary retirement income trading SPK shares, and SPK shares alone. He more or less did trade the swings on the Spark share price and made quite good money from doing so. Not what you call 'hit it out of the ball park' money. But good enough to enjoy a comfortable retirement. I wouldn't have followed his example myself, because it is not my style (I am not a trader). But I just mention it, because there is more than one way to skin a cat in this investment game. With SPK you can choose your investment style and make your moves to suit.

SNOOPY

Quite easy to see how Craic could have & could still do this, lots of swings & a modest upward trend. Happy retirement Craic.

SPK Share Graph.JPG