New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<h2>Spark NZ</h2>
1H20&nbsp;— Steady and Reliable
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127
OUTPERFORM&nbsp;
Spark (SPK) delivered another very sound performance. Operating trends remain broadly consistent, and there was not any material new information in the result. Positive growth in mobile revenue underpins SPK's strong position in a healthy and rational market. A robust performance from CCL, SPK's IT services/cloud business, is reassuring after slower growth in 2H19.&nbsp; And the headwind from the decline in legacy voice is moderating as its base declines. In a world hungry for yield, we expect investors will continue see appeal in SPK's consistent delivery, solid market positions, A- rated balance sheet, and attractive dividend yield. Maintain OUTPERFORM.&nbsp;&nbsp;
<table class="table table-striped"><colgroup><col span="12"></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">SPK</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$4.78</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 48pt;">409.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">402.9</td>
<td style="text-align: left; width: 48pt;">417.5</td>
<td style="text-align: left; width: 48pt;">430.7&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 48pt;">9.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">9.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.9</td>
<td style="text-align: left; width: 48pt;">8.8&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target Price</td>
<td style="width: 48pt;">NZ$4.80</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 48pt;">22.3</td>
<td style="text-align: left; width: 48pt;">21.9</td>
<td style="text-align: left; width: 48pt;">22.7</td>
<td style="text-align: left; width: 48pt;">23.5</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 48pt;">16.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">15.8</td>
<td style="text-align: left; width: 48pt;">15.5</td>
<td style="text-align: left; width: 48pt;">15.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Medium</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 48pt;">2.2</td>
<td style="text-align: left; width: 48pt;">-1.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">3.6</td>
<td style="text-align: left; width: 48pt;">3.2</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 48pt;">21.5</td>
<td style="text-align: left; width: 48pt;">21.8</td>
<td style="text-align: left; width: 48pt;">21.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">20.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">1836.2m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 48pt;">18.4</td>
<td style="text-align: left; width: 48pt;">19.7</td>
<td style="text-align: left; width: 48pt;">23.1</td>
<td style="text-align: left; width: 48pt;">23.7</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$8,777m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 48pt;">75</td>
<td style="text-align: left; width: 48pt;">82</td>
<td style="text-align: left; width: 48pt;">99</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 48pt;">5.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">3,448k (NZ$13,895k)</td>
<td colspan="3" style="width: 144pt;">*Based on normalised profits</td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 48pt;">6.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">6.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.3&nbsp;</td>
</tr>
</tbody>
</table>
Business as usual
SPK&nbsp;delivered a solid&nbsp;+2% lift in&nbsp;EBITDA, which, coupled with lower depreciation&nbsp;and amortisation,&nbsp;leveraged through to a +9% lift in&nbsp;NPAT.&nbsp;The main features&nbsp;of the period were:
<ol start="1" type="1">
<li>Strong growth in mobile gross margin (GM), up +8%/+NZ$29m benefiting from prepaid to&nbsp;postpaid&nbsp;transition, and customers trading up to higher tier plans;&nbsp;offsetting:</li>
<li>Continued declines in legacy voice, GM down&nbsp;-13%/-NZ$19m. The headwind has moderated (1) following&nbsp;Vodafone's&nbsp;migration off&nbsp;SPK's&nbsp;PSTN, and (2) the lower base effect&nbsp;— voice now represents 12% of&nbsp;SPK's&nbsp;total GM vs. 22% only 3 years ago.</li>
<li>A -NZ$10m reduction in "other" GM which includes (we presume a loss) from Spark Sport and other new ventures.&nbsp;</li>
<li>An underlying reduction in labour costs, but&nbsp;a&nbsp;headline uplift of&nbsp;+NZ$17m, including (1) -NZ$21m less labour capitalised (consistent with&nbsp;SPK's&nbsp;previous guidance of a&nbsp;drop in&nbsp;capex), and (2) a c.+NZ$10m increase in Cloud staff costs.&nbsp; &nbsp;</li>
</ol>
Elsewhere the business's performance was broadly stable. Broadband GM expanded +4%/+NZ$7m from copper price increases and fixed wireless additions through FY19, despite connections easing. Cloud et al revenue grew +12%, although the associated costs (largely labour), means the lift in contribution margin is a modest +NZ$3m. Free cash flow (FCF) was muted in the period by capex phasing and timing of tax payments. SPK expects normalisation of FCF and net debt to decline in the 2H.&nbsp;
Steady and reliable is good
SPK&nbsp;maintained guidance of modest&nbsp;EBITDA&nbsp;growth to NZ$1,100–1,120m, and a flat dividend. We have made no material change to earnings forecasts.
In a world hungry for yield SPK offers an attractive income relative to other defensive NZ stocks, global telco peers, and fixed income. Additionally, valuation metrics are robust, we believe SPK can maintain earnings growth led by mobile, cloud, and cost savings, and the company has a strong track record on execution, consistently outperforming market expectation. SPK’s defensive appeal is supported by its strong, A- rated balance sheet.

Spark NZ
1H20&nbsp;— Steady and Reliable
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127
OUTPERFORM&nbsp;
Spark (SPK) delivered another very sound performance. Operating trends remain broadly consistent, and there was not any material new information in the result. Positive growth in mobile revenue underpins SPK's strong position in a healthy and rational market. A robust performance from CCL, SPK's IT services/cloud business, is reassuring after slower growth in 2H19.&nbsp; And the headwind from the decline in legacy voice is moderating as its base declines. In a world hungry for yield, we expect investors will continue see appeal in SPK's consistent delivery, solid market positions, A- rated balance sheet, and attractive dividend yield. Maintain OUTPERFORM.&nbsp;&nbsp;



NZX Code
SPK
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$4.78
NPAT* (NZ$m)
409.0&nbsp;
402.9
417.5
430.7&nbsp;
EV/EBITDA
9.1&nbsp;
9.0&nbsp;
8.9
8.8&nbsp;


Target Price
NZ$4.80
EPS* (NZc)
22.3
21.9
22.7
23.5
EV/EBIT
16.1&nbsp;
15.8
15.5
15.1&nbsp;


Risk rating
Medium
EPS growth* (%)
2.2
-1.5&nbsp;
3.6
3.2
PE
21.5
21.8
21.0&nbsp;
20.4&nbsp;


Issued shares
1836.2m
DPS (NZc)
25.0&nbsp;
25.0&nbsp;
25.0&nbsp;
25.0&nbsp;
Price/NTA
18.4
19.7
23.1
23.7


Market cap
NZ$8,777m
Imputation (%)
75
82
99
100
Cash div yld (%)
5.2&nbsp;
5.2&nbsp;
5.2&nbsp;
5.2&nbsp;


Avg daily turnover
3,448k (NZ$13,895k)
*Based on normalised profits


Gross div yld (%)
6.8&nbsp;
6.9&nbsp;
7.3&nbsp;
7.3&nbsp;



Business as usual
SPK&nbsp;delivered a solid&nbsp;+2% lift in&nbsp;EBITDA, which, coupled with lower depreciation&nbsp;and amortisation,&nbsp;leveraged through to a +9% lift in&nbsp;NPAT.&nbsp;The main features&nbsp;of the period were:

Strong growth in mobile gross margin (GM), up +8%/+NZ$29m benefiting from prepaid to&nbsp;postpaid&nbsp;transition, and customers trading up to higher tier plans;&nbsp;offsetting:
Continued declines in legacy voice, GM down&nbsp;-13%/-NZ$19m. The headwind has moderated (1) following&nbsp;Vodafone's&nbsp;migration off&nbsp;SPK's&nbsp;PSTN, and (2) the lower base effect&nbsp;— voice now represents 12% of&nbsp;SPK's&nbsp;total GM vs. 22% only 3 years ago.
A -NZ$10m reduction in "other" GM which includes (we presume a loss) from Spark Sport and other new ventures.&nbsp;
An underlying reduction in labour costs, but&nbsp;a&nbsp;headline uplift of&nbsp;+NZ$17m, including (1) -NZ$21m less labour capitalised (consistent with&nbsp;SPK's&nbsp;previous guidance of a&nbsp;drop in&nbsp;capex), and (2) a c.+NZ$10m increase in Cloud staff costs.&nbsp; &nbsp;

Elsewhere the business's performance was broadly stable. Broadband GM expanded +4%/+NZ$7m from copper price increases and fixed wireless additions through FY19, despite connections easing. Cloud et al revenue grew +12%, although the associated costs (largely labour), means the lift in contribution margin is a modest +NZ$3m. Free cash flow (FCF) was muted in the period by capex phasing and timing of tax payments. SPK expects normalisation of FCF and net debt to decline in the 2H.&nbsp;
Steady and reliable is good
SPK&nbsp;maintained guidance of modest&nbsp;EBITDA&nbsp;growth to NZ$1,100–1,120m, and a flat dividend. We have made no material change to earnings forecasts.
In a world hungry for yield SPK offers an attractive income relative to other defensive NZ stocks, global telco peers, and fixed income. Additionally, valuation metrics are robust, we believe SPK can maintain earnings growth led by mobile, cloud, and cost savings, and the company has a strong track record on execution, consistently outperforming market expectation. SPK’s defensive appeal is supported by its strong, A- rated balance sheet.

<h2>Spark NZ</h2>
1H20 Preview — Steady Performer
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127&nbsp;
OUTPERFORM
Spark (SPK) reports its 1H20 result on 19 February — there should be no material surprises after November’s reiteration of guidance. We are forecasting a +3.7% lift in&nbsp;EBITDA, and expect no material change in key operating trends&nbsp;—&nbsp;growth in mobile and cloud/security, plus labour savings, to outpace the ongoing decline in legacy voice. Any insight into the net cost of the Rugby World Cup, and Spark Sport economics will be of interest.
<table class="table table-striped"><colgroup><col span="12"></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">SPK</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$4.76</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 48pt;">409.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">413.6</td>
<td style="text-align: left; width: 48pt;">414.9</td>
<td style="text-align: left; width: 48pt;">423.9</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 48pt;">9.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.9</td>
<td style="text-align: left; width: 48pt;">8.9</td>
<td style="text-align: left; width: 48pt;">8.9&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target Price</td>
<td style="width: 48pt;">NZ$4.55</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 48pt;">22.3</td>
<td style="text-align: left; width: 48pt;">22.5</td>
<td style="text-align: left; width: 48pt;">22.6</td>
<td style="text-align: left; width: 48pt;">23.1</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 48pt;">16.1</td>
<td style="text-align: left; width: 48pt;">15.8</td>
<td style="text-align: left; width: 48pt;">15.8</td>
<td style="text-align: left; width: 48pt;">15.6&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Medium</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 48pt;">2.2</td>
<td style="text-align: left; width: 48pt;">1.1</td>
<td style="text-align: left; width: 48pt;">0.3</td>
<td style="text-align: left; width: 48pt;">2.2</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 48pt;">21.4</td>
<td style="text-align: left; width: 48pt;">21.2</td>
<td style="text-align: left; width: 48pt;">21.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">20.6&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">1836.2m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 48pt;">18.3</td>
<td style="text-align: left; width: 48pt;">18.5</td>
<td style="text-align: left; width: 48pt;">20.7</td>
<td style="text-align: left; width: 48pt;">20.7</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$8,749m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 48pt;">75</td>
<td style="text-align: left; width: 48pt;">83</td>
<td style="text-align: left; width: 48pt;">99</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 48pt;">5.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.2</td>
<td style="text-align: left; width: 48pt;">5.2</td>
<td style="text-align: left; width: 48pt;">5.2</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">3,456k (NZ$13,920k)</td>
<td colspan="3" style="width: 144pt;">*Based on normalised profits</td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 48pt;">6.8</td>
<td style="text-align: left; width: 48pt;">6.9</td>
<td style="text-align: left; width: 48pt;">7.3</td>
<td style="text-align: left; width: 48pt;">7.3</td>
</tr>
</tbody>
</table>
Key issues to watch for
<ul type="disc">
<li>Modest earnings growth: We expect EBITDA growth through: (1) mobile (prepaid to postpaid transition, prepaid data growth, customers trading up to higher tier plans, lower handset subsidies) and IT services growth, and (2) labour cost reductions (with sharp reductions in 2H19 providing a strong run-rate entering FY20), offsetting (3) continued declines in high-margin legacy voice and managed data. Given stable competition and pricing in both mobile and fixed line, we see limited scope for material surprises in these businesses.&nbsp;&nbsp;</li>
<li>A look inside the IT Services black box is always of interest: Insight into SPK's IT services business CCL is always helpful given the contrasting pressures of growth in cloud migration, cyber security and IT outsourcing vs. price pressures from commoditisation/competition. There is an inherently higher margin of error in any CCL forecast — SPK has guided to FY20 revenue up +8–10%.</li>
<li>Any insight into&nbsp;SPK's&nbsp;media commitments: We're interested in any insight into (1) the net cost of Spark Sport through the Rugby World Cup, (2) the ongoing economics of Spark Sport including SPK's acquisition of NZ Cricket rights from next summer, and (3) SPK's ongoing commitment to Lightbox following its sale to Sky TV.&nbsp;</li>
</ul>
Investor briefing
Conference call: 10:00am (NZ time), NZ 083035, AU 1800 007 094,&nbsp;USA&nbsp;1800 6518 618. &nbsp;Passcode:&nbsp; 3366408.

Spark NZ
1H20 Preview — Steady Performer
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127&nbsp;
OUTPERFORM
Spark (SPK) reports its 1H20 result on 19 February — there should be no material surprises after November’s reiteration of guidance. We are forecasting a +3.7% lift in&nbsp;EBITDA, and expect no material change in key operating trends&nbsp;—&nbsp;growth in mobile and cloud/security, plus labour savings, to outpace the ongoing decline in legacy voice. Any insight into the net cost of the Rugby World Cup, and Spark Sport economics will be of interest.



NZX Code
SPK
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$4.76
NPAT* (NZ$m)
409.0&nbsp;
413.6
414.9
423.9
EV/EBITDA
9.0&nbsp;
8.9
8.9
8.9&nbsp;


Target Price
NZ$4.55
EPS* (NZc)
22.3
22.5
22.6
23.1
EV/EBIT
16.1
15.8
15.8
15.6&nbsp;


Risk rating
Medium
EPS growth* (%)
2.2
1.1
0.3
2.2
PE
21.4
21.2
21.1&nbsp;
20.6&nbsp;


Issued shares
1836.2m
DPS (NZc)
25.0&nbsp;
25.0&nbsp;
25.0&nbsp;
25.0&nbsp;
Price/NTA
18.3
18.5
20.7
20.7


Market cap
NZ$8,749m
Imputation (%)
75
83
99
100
Cash div yld (%)
5.2&nbsp;
5.2
5.2
5.2


Avg daily turnover
3,456k (NZ$13,920k)
*Based on normalised profits


Gross div yld (%)
6.8
6.9
7.3
7.3



Key issues to watch for

Modest earnings growth: We expect EBITDA growth through: (1) mobile (prepaid to postpaid transition, prepaid data growth, customers trading up to higher tier plans, lower handset subsidies) and IT services growth, and (2) labour cost reductions (with sharp reductions in 2H19 providing a strong run-rate entering FY20), offsetting (3) continued declines in high-margin legacy voice and managed data. Given stable competition and pricing in both mobile and fixed line, we see limited scope for material surprises in these businesses.&nbsp;&nbsp;
A look inside the IT Services black box is always of interest: Insight into SPK's IT services business CCL is always helpful given the contrasting pressures of growth in cloud migration, cyber security and IT outsourcing vs. price pressures from commoditisation/competition. There is an inherently higher margin of error in any CCL forecast — SPK has guided to FY20 revenue up +8–10%.
Any insight into&nbsp;SPK's&nbsp;media commitments: We're interested in any insight into (1) the net cost of Spark Sport through the Rugby World Cup, (2) the ongoing economics of Spark Sport including SPK's acquisition of NZ Cricket rights from next summer, and (3) SPK's ongoing commitment to Lightbox following its sale to Sky TV.&nbsp;

Investor briefing
Conference call: 10:00am (NZ time), NZ 083035, AU 1800 007 094,&nbsp;USA&nbsp;1800 6518 618. &nbsp;Passcode:&nbsp; 3366408.

Spark NZ: 1H20 Preview — Steady Performer

<h2>Spark / Sky TV</h2>
Sky to acquire Lightbox — likely positive for Spark, less clear for Sky
Sky TV (SKT) has conditionally agreed to acquire Spark’s (SPK) entertainment streaming service Lightbox, which it plans to merge with its own Neon service.
In our view, the transaction makes strategic sense for both parties, albeit no financial details on the transaction or ongoing commercial relationship have been provided.&nbsp;
Entertainment SVOD (subscriber video on demand) is a highly competitive market, dominated by global scale players. Netflix is already NZ’s largest pay TV provider. Other international players include Disney+, Apple TV (both launched in NZ last month), Amazon Prime and YouTube Premium. At best, there is room for only one domestic SVOD in the country. Lightbox has an established number two position today with c.350k subscribers vs. Neon &lt;100k. Consolidation of Lightbox and Neon should provide benefits though a combined technology platform and a stronger negotiating position with content providers.
Although no financial details have been provided, it is difficult to see that the transaction is not positive for SPK (albeit likely not material). SPK has used Lightbox as a subscriber acquisition/retention tool, we estimate at a cost of c.NZ$15-20m pa. The risk for SPK was that its value as a retention tool diminished as the streaming market became more crowded. We presume, at worst, the transaction will be cost neutral for SPK. Some cost savings are possible. (Dependent on the terms of the ongoing commercial relationship) it may provide SPK with greater flexibility around future bundling options, i.e. (1) Lightbox shifts from fixed cost to variable, which (2) will provide SPK greater flexibility around when and how it bundles Lightbox (SPK already has bundling offers with Netflix and Spotify).&nbsp;
For SKT, we believe combining its Neon service with Lightbox (resulting in increased subscribers and a broader content offering) enhances the likelihood of it establishing a viable entertainment SVOD service long-term. That said, this will still be far from easy in a market dominated by global tech and media giants. The lack of any financial detail – price paid, ongoing commercial arrangement with SPK – means it is not possible to comment on the risk-reward SKT is assuming from the acquisition. It adds to what is already an extreme level of uncertainty around the&nbsp;near and long-term outlook for SKT.&nbsp;
We do not believe you can conclude that the Lightbox agreement means that an amicable arrangement on sports between SPK and SKT is more likely. Entertainment is a global market, sport remains more localised meaning there is less competition and SPK has fewer partnership opportunities. SPK’s recent contract with NZ Cricket extends to 2026 highlighting its long-term focus. We believe there could be competition/regulatory barriers to combining Sky with Spark Sport. &nbsp;
Matt Henry &nbsp;CFA Head of Wealth Management Research Forsyth Barr Limited
P:+64 9 368 0115 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland

Spark / Sky TV
Sky to acquire Lightbox — likely positive for Spark, less clear for Sky
Sky TV (SKT) has conditionally agreed to acquire Spark’s (SPK) entertainment streaming service Lightbox, which it plans to merge with its own Neon service.
In our view, the transaction makes strategic sense for both parties, albeit no financial details on the transaction or ongoing commercial relationship have been provided.&nbsp;
Entertainment SVOD (subscriber video on demand) is a highly competitive market, dominated by global scale players. Netflix is already NZ’s largest pay TV provider. Other international players include Disney+, Apple TV (both launched in NZ last month), Amazon Prime and YouTube Premium. At best, there is room for only one domestic SVOD in the country. Lightbox has an established number two position today with c.350k subscribers vs. Neon &lt;100k. Consolidation of Lightbox and Neon should provide benefits though a combined technology platform and a stronger negotiating position with content providers.
Although no financial details have been provided, it is difficult to see that the transaction is not positive for SPK (albeit likely not material). SPK has used Lightbox as a subscriber acquisition/retention tool, we estimate at a cost of c.NZ$15-20m pa. The risk for SPK was that its value as a retention tool diminished as the streaming market became more crowded. We presume, at worst, the transaction will be cost neutral for SPK. Some cost savings are possible. (Dependent on the terms of the ongoing commercial relationship) it may provide SPK with greater flexibility around future bundling options, i.e. (1) Lightbox shifts from fixed cost to variable, which (2) will provide SPK greater flexibility around when and how it bundles Lightbox (SPK already has bundling offers with Netflix and Spotify).&nbsp;
For SKT, we believe combining its Neon service with Lightbox (resulting in increased subscribers and a broader content offering) enhances the likelihood of it establishing a viable entertainment SVOD service long-term. That said, this will still be far from easy in a market dominated by global tech and media giants. The lack of any financial detail – price paid, ongoing commercial arrangement with SPK – means it is not possible to comment on the risk-reward SKT is assuming from the acquisition. It adds to what is already an extreme level of uncertainty around the&nbsp;near and long-term outlook for SKT.&nbsp;
We do not believe you can conclude that the Lightbox agreement means that an amicable arrangement on sports between SPK and SKT is more likely. Entertainment is a global market, sport remains more localised meaning there is less competition and SPK has fewer partnership opportunities. SPK’s recent contract with NZ Cricket extends to 2026 highlighting its long-term focus. We believe there could be competition/regulatory barriers to combining Sky with Spark Sport. &nbsp;
Matt Henry &nbsp;CFA Head of Wealth Management Research Forsyth Barr Limited
P:+64 9 368 0115 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland

Spark / Sky TV: Sky to Acquire Lightbox — Likely Positive for Spark, Less Clear for Sky

<h2>Spark / Sky TV</h2>
Game on – NZ Cricket switches to Spark Sport
Yesterday Spark (SPK), in conjunction with TVNZ, announced it secured the rights to NZ Cricket for six years from April 2020.&nbsp;These rights include NZ-located matches for NZ men’s and women’s teams, as well as the domestic T20 competition and the Ford Trophy (one-day) final. They do not include international tours where the rights are owned by the host country.
Our&nbsp;(belated, apologies)&nbsp;takeaways/thoughts are:
<ul>
<li>Spark Sport is not going quietly into the night: A bull case on Sky TV (SKT) was that SPK and SKT reached an amicable agreement in which SPK wholesaled Sky Sport and did not compete for top tier sporting content. SPK’s challenges in delivering the Rugby World Cup likely strengthened this view. SPK’s contract with NZ Cricket until 2026 highlights it remains committed to Spark Sport.&nbsp;Going forward, securing sports rights will be genuinely competitive processes. In the past they were not.</li>
<li>Spark Sport is still a modest investment for SPK: We (1) believe NZ Cricket’s contract with SKT is worth c.NZ$10m pa (net of production costs), (2) have heard speculation this has lifted to c.NZ$15-20m under the new contract, and (3) estimate Spark Sport may make a pre-tax loss of c.NZ$10-15m this year including the cost of the Rugby World Cup (this is speculative; SPK has provided no detail on revenue, subscribers, or cost). Additionally, SPK will seek to use Spark Sport as an acquisition and retention tool across its broader product suite. This investment remains immaterial at 2-3% of our SPK FY20E NZ$587m pre-tax profit.</li>
<li>Spark Sport will improve: SPK’s challenges delivering the Rugby World Cup have been well documented. We expect the service will only improve with experience (both SPK’s and users’), consumers’ increasing comfort with streaming (c.57% of NZ households now subscribe to Netflix, and NZ has the second highest smart TV penetration in the world only behind South Korea), and the rollout of the ultra-fast broadband (UFB) fibre-to-the-home (FTTH) network and other broadband initiatives (by 2022 87% of NZers will be able to access FTTH, and other government initiatives aim for 99% of NZers able to access peak download speeds of &gt;50Mbps by 2025).</li>
<li>Cricket is a significant loss for SKT: Cricket is the marque summer sporting content in NZ, and leaves a considerable hole in SKT’s sporting calendar. It reduces the value of SKT’s product to customers and provides a reason for churn, bundle trimming, or switching to the lower priced Sky Sport Now streaming service (where switching the service on and off is even easier). We expect the loss will only add to the considerable pressures on SKT’s subscriber numbers and ARPU (average revenue per user).</li>
<li>Showcasing to a broad&nbsp;audience is important for sporting bodies:&nbsp;In a world awash with media content competing for audiences’ time, most traditional sports are grappling with declining participation and fan engagement. Cricket is facing those challenges. Whilst we understand it is still the second most watched sport in NZ, participation in secondary schools has nearly halved since 2000. Being locked behind paywall is far from the only issue, but it is not helpful in promoting sports to the widest possible audience.</li>
</ul>
We believe televising some games on TVNZ, NZ’s dominant free-to-air platform, will strongly appeal to NZ Cricket. The most watched cricket match in NZ over the past decade, attracting &gt;1m viewers, was the T20 “Black Clash” screened on TVNZ between current and former rugby and cricket players, out-rating the last two ODI World Cups screened on SKT where NZ reached the final on both occasions. Whilst Sky TV does have its own free-to-air platform in Prime,&nbsp;not all free-to-air platforms are created equal. TVNZ’s substantially higher viewership naturally attracts a greater audience for any event it screens. &nbsp;
<ul>
<li>Rugby is likely beyond SPK’s reach (for now):&nbsp;The three most important media sports rights in NZ are NZ cricket, NZ/SAANZAR rugby, and the NRL rugby league. The current SAANZAR contract expires at the end of 2020, and we understand NZ Rugby is looking to contract its next broadcasting deal before the end of this year. The current NRL contract with SKT extends until the end of 2021. We believe the cost of these current contracts are c.NZ$65-70m and c.NZ$30m pa respectively (net of production costs).</li>
</ul>
We do not think it is overly dramatic to say securing the SAANZAR contract is a matter of survival for SKT. Media has reported that it has already offered NZ Rugby NZ$80m pa for five years from 2021. We believe it is unlikely SPK would be willing to commit to this level of expenditure given the revenue uncertainty. One possible solution (dependent on NZ Rugby’s risk appetite) could be a lower fixed cost commitment with NZ Rugby taking revenue risk. Medium-term, we expect SPK will look to expand its winter content – bidding for NRL rights could be intense.
<ul>
<li>Extreme uncertainty for SKT: The market was already well aware of the substantial uncertainty of SKT’s near and long-term earnings given the pressures on both revenue and content costs. This uncertainty has only now become even more extreme.&nbsp; &nbsp;&nbsp;</li>
</ul>
Matt Henry&nbsp;&nbsp;CFA
Head of Wealth Management Research&nbsp;
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Spark / Sky TV
Game on – NZ Cricket switches to Spark Sport
Yesterday Spark (SPK), in conjunction with TVNZ, announced it secured the rights to NZ Cricket for six years from April 2020.&nbsp;These rights include NZ-located matches for NZ men’s and women’s teams, as well as the domestic T20 competition and the Ford Trophy (one-day) final. They do not include international tours where the rights are owned by the host country.
Our&nbsp;(belated, apologies)&nbsp;takeaways/thoughts are:

Spark Sport is not going quietly into the night: A bull case on Sky TV (SKT) was that SPK and SKT reached an amicable agreement in which SPK wholesaled Sky Sport and did not compete for top tier sporting content. SPK’s challenges in delivering the Rugby World Cup likely strengthened this view. SPK’s contract with NZ Cricket until 2026 highlights it remains committed to Spark Sport.&nbsp;Going forward, securing sports rights will be genuinely competitive processes. In the past they were not.
Spark Sport is still a modest investment for SPK: We (1) believe NZ Cricket’s contract with SKT is worth c.NZ$10m pa (net of production costs), (2) have heard speculation this has lifted to c.NZ$15-20m under the new contract, and (3) estimate Spark Sport may make a pre-tax loss of c.NZ$10-15m this year including the cost of the Rugby World Cup (this is speculative; SPK has provided no detail on revenue, subscribers, or cost). Additionally, SPK will seek to use Spark Sport as an acquisition and retention tool across its broader product suite. This investment remains immaterial at 2-3% of our SPK FY20E NZ$587m pre-tax profit.
Spark Sport will improve: SPK’s challenges delivering the Rugby World Cup have been well documented. We expect the service will only improve with experience (both SPK’s and users’), consumers’ increasing comfort with streaming (c.57% of NZ households now subscribe to Netflix, and NZ has the second highest smart TV penetration in the world only behind South Korea), and the rollout of the ultra-fast broadband (UFB) fibre-to-the-home (FTTH) network and other broadband initiatives (by 2022 87% of NZers will be able to access FTTH, and other government initiatives aim for 99% of NZers able to access peak download speeds of &gt;50Mbps by 2025).
Cricket is a significant loss for SKT: Cricket is the marque summer sporting content in NZ, and leaves a considerable hole in SKT’s sporting calendar. It reduces the value of SKT’s product to customers and provides a reason for churn, bundle trimming, or switching to the lower priced Sky Sport Now streaming service (where switching the service on and off is even easier). We expect the loss will only add to the considerable pressures on SKT’s subscriber numbers and ARPU (average revenue per user).
Showcasing to a broad&nbsp;audience is important for sporting bodies:&nbsp;In a world awash with media content competing for audiences’ time, most traditional sports are grappling with declining participation and fan engagement. Cricket is facing those challenges. Whilst we understand it is still the second most watched sport in NZ, participation in secondary schools has nearly halved since 2000. Being locked behind paywall is far from the only issue, but it is not helpful in promoting sports to the widest possible audience.

We believe televising some games on TVNZ, NZ’s dominant free-to-air platform, will strongly appeal to NZ Cricket. The most watched cricket match in NZ over the past decade, attracting &gt;1m viewers, was the T20 “Black Clash” screened on TVNZ between current and former rugby and cricket players, out-rating the last two ODI World Cups screened on SKT where NZ reached the final on both occasions. Whilst Sky TV does have its own free-to-air platform in Prime,&nbsp;not all free-to-air platforms are created equal. TVNZ’s substantially higher viewership naturally attracts a greater audience for any event it screens. &nbsp;

Rugby is likely beyond SPK’s reach (for now):&nbsp;The three most important media sports rights in NZ are NZ cricket, NZ/SAANZAR rugby, and the NRL rugby league. The current SAANZAR contract expires at the end of 2020, and we understand NZ Rugby is looking to contract its next broadcasting deal before the end of this year. The current NRL contract with SKT extends until the end of 2021. We believe the cost of these current contracts are c.NZ$65-70m and c.NZ$30m pa respectively (net of production costs).

We do not think it is overly dramatic to say securing the SAANZAR contract is a matter of survival for SKT. Media has reported that it has already offered NZ Rugby NZ$80m pa for five years from 2021. We believe it is unlikely SPK would be willing to commit to this level of expenditure given the revenue uncertainty. One possible solution (dependent on NZ Rugby’s risk appetite) could be a lower fixed cost commitment with NZ Rugby taking revenue risk. Medium-term, we expect SPK will look to expand its winter content – bidding for NRL rights could be intense.

Extreme uncertainty for SKT: The market was already well aware of the substantial uncertainty of SKT’s near and long-term earnings given the pressures on both revenue and content costs. This uncertainty has only now become even more extreme.&nbsp; &nbsp;&nbsp;

Matt Henry&nbsp;&nbsp;CFA
Head of Wealth Management Research&nbsp;




T:&nbsp;


+64 9 368 0115




TF:&nbsp;


0800 367 227




F:&nbsp;


+64 9 368 0092




P:&nbsp;


PO Box 97, Auckland 1140




&nbsp;


&nbsp;




W:&nbsp;


www.forsythbarr.co.nz



Twitter:

@forsythbarr





Spark / Sky TV Game on – NZ Cricket Switches to Spark Sport

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul>
<li>
Reporting season has been relatively disappointing with only 45% of stocks able to either meet or beat FY19 expectations. Analyst expectations in FY20 still look too optimistic with 8.3% EPS growth expected down from 9.8% at the start of reporting season.  </li>
<li>
Trade tensions between the US and China have provided a relatively sombre backdrop, with the ASX 200 4% below its peak just before reporting season kicked off. Materials have been the key underperforming sector, with both BHP and RIO trading lower on the back of weaker iron ore prices and global growth concerns.  The RIO result was broadly in line with expectations, while the BHP result was a little weaker.  The result of the other market heavy-weight, CBA, was a little disappointing mainly because cash from the CFSGAM business sale remains on the balance sheet, but industry structural headwinds relating to remediation costs, low short rates and weak credit growth remain.</li>
<li>
Capital management has been a key area of focus. SUN, ABP and SCG announced buybacks after selling assets, while CCL preferred to hand the cashback as a special dividend after its SPC  QAN and CPU also announced buybacks, while WHC, SPK and ASX announced special dividends.  Several Miners including EVN and SAR announced changes to payout policy, while AMC decided to pay shareholders dividends on a quarterly basis.</li>
<li>
Some management teams (SUL, JBH, MGR, DHG, REA and CAR) in industries with headwinds such as housing and consumer spending are clearly taking up the challenge. CGF and MFG are taking up the fight in financial services and NEC is successfully repositioning itself away from broadcasting.  GFG is exposed to global trade issues like AMC and BXB, but management remains cautiously optimistic about the outlook.  BXB is facing structural headwinds from online retailing, but recessionary forces in Europe are a more immediate threat.  AMC is combating global weakness by focusing on integrating the Bemis acquisition.  Similarly, TCL is benefiting from the integration of its new asset (M4 East Tunnel).  Natural disasters were a dampener on the insurance results, while weakness in the High-roller market is again a clear negative for SKC and CWN. </li>
<li>
Green shoots are appearing in turnaround stories such as CCL, LLC and COL, but the market thinks it’s too early to add stocks such as VOC, CTD, PGH, BKL and CGC to that list. JHX could also be added as lower mortgage rates in both Australia and the US gain traction to support better industry conditions.</li>
<li>
CSL and COH were both standout positive results because their longer-term growth models are payoff and they are sticking to the winning strategy going forward. We thought A2M was dealt with a little harshly, but TWE seemed to silence some of its critics.</li>
<li>
We will update our model portfolio in a few weeks, but at this stage, we are likely to pull back our resources exposure after we receive the benefit of dividends. Clearly, the iron ore price cycle has turned, but we expect gold will remain well bid and would look to taking up positions in these stocks.  We think it’s too early to go fully defensive, but de-risking the portfolio more seems prudent.  Even lower global interest rates will make it difficult to be positive on Banks and some financials, but market volatility could create some opportunities.</li>
</ul>



Reporting season has been relatively disappointing with only 45% of stocks able to either meet or beat FY19 expectations. Analyst expectations in FY20 still look too optimistic with 8.3% EPS growth expected down from 9.8% at the start of reporting season.  

Trade tensions between the US and China have provided a relatively sombre backdrop, with the ASX 200 4% below its peak just before reporting season kicked off. Materials have been the key underperforming sector, with both BHP and RIO trading lower on the back of weaker iron ore prices and global growth concerns.  The RIO result was broadly in line with expectations, while the BHP result was a little weaker.  The result of the other market heavy-weight, CBA, was a little disappointing mainly because cash from the CFSGAM business sale remains on the balance sheet, but industry structural headwinds relating to remediation costs, low short rates and weak credit growth remain.

Capital management has been a key area of focus. SUN, ABP and SCG announced buybacks after selling assets, while CCL preferred to hand the cashback as a special dividend after its SPC  QAN and CPU also announced buybacks, while WHC, SPK and ASX announced special dividends.  Several Miners including EVN and SAR announced changes to payout policy, while AMC decided to pay shareholders dividends on a quarterly basis.

Some management teams (SUL, JBH, MGR, DHG, REA and CAR) in industries with headwinds such as housing and consumer spending are clearly taking up the challenge. CGF and MFG are taking up the fight in financial services and NEC is successfully repositioning itself away from broadcasting.  GFG is exposed to global trade issues like AMC and BXB, but management remains cautiously optimistic about the outlook.  BXB is facing structural headwinds from online retailing, but recessionary forces in Europe are a more immediate threat.  AMC is combating global weakness by focusing on integrating the Bemis acquisition.  Similarly, TCL is benefiting from the integration of its new asset (M4 East Tunnel).  Natural disasters were a dampener on the insurance results, while weakness in the High-roller market is again a clear negative for SKC and CWN. 

Green shoots are appearing in turnaround stories such as CCL, LLC and COL, but the market thinks it’s too early to add stocks such as VOC, CTD, PGH, BKL and CGC to that list. JHX could also be added as lower mortgage rates in both Australia and the US gain traction to support better industry conditions.

CSL and COH were both standout positive results because their longer-term growth models are payoff and they are sticking to the winning strategy going forward. We thought A2M was dealt with a little harshly, but TWE seemed to silence some of its critics.

We will update our model portfolio in a few weeks, but at this stage, we are likely to pull back our resources exposure after we receive the benefit of dividends. Clearly, the iron ore price cycle has turned, but we expect gold will remain well bid and would look to taking up positions in these stocks.  We think it’s too early to go fully defensive, but de-risking the portfolio more seems prudent.  Even lower global interest rates will make it difficult to be positive on Banks and some financials, but market volatility could create some opportunities.


ASX Reporting Season Update: Misses and Downgrades Amongst Bright Spots

New Zealand

Spark New Zealand Limited (formerly Telecom Corporation of New Zealand Limited) provides digital communications, entertainment and IT services over its networks and the Cloud to New Zealanders and businesses. The Company's strategy is focused on mobility, data and effortless service, and cost.

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Spark New Zealand (SPK NZ)

Spark NZ: 1H20 — Steady and Reliable

Spark NZ 1H20 — Steady and Reliable Matt Henry [email protected]+64 9 368 0115 Ashton [email protected]+64 9 368...

Forsyth Barr

Spark NZ: 1H20 Preview — Steady Performer

Spark NZ 1H20 Preview — Steady Performer Matt Henry [email protected]+64 9 368 0115 Ashton [email protected]+64 9...

Forsyth Barr

Spark / Sky TV Game on – NZ Cricket Switches to Spark Sport

Spark / Sky TV Game on – NZ Cricket switches to Spark Sport Yesterday Spark (SPK), in conjunction with TVNZ, announced it secured the rights to NZ...

Forsyth Barr

ASX Reporting Season Update: Misses and Downgrades Amongst Bright Spots

Reporting season has been relatively disappointing with only 45% of stocks able to either meet or beat FY19 expectations. Analyst expectations in...

Shane Lee

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Spark NZ: 1H20 — Steady and Reliable

Spark NZ 1H20 — Steady and Reliable Matt Henry [email protected]+64 9 368 0115 Ashton [email protected]+64 9 368...

Forsyth Barr

Spark NZ: 1H20 Preview — Steady Performer

Spark NZ 1H20 Preview — Steady Performer Matt Henry [email protected]+64 9 368 0115 Ashton [email protected]+64 9...

Forsyth Barr

Spark / Sky TV: Sky to Acquire Lightbox — Likely Positive for Spark, Less Clear for Sky

Spark / Sky TV Sky to acquire Lightbox — likely positive for Spark, less clear for Sky Sky TV (SKT) has conditionally agreed to acquire Spark’s...

Forsyth Barr

Spark / Sky TV Game on – NZ Cricket Switches to Spark Sport

Spark / Sky TV Game on – NZ Cricket switches to Spark Sport Yesterday Spark (SPK), in conjunction with TVNZ, announced it secured the rights to NZ...

Forsyth Barr

ASX Reporting Season Update: Misses and Downgrades Amongst Bright Spots

Reporting season has been relatively disappointing with only 45% of stocks able to either meet or beat FY19 expectations. Analyst expectations in...

Shane Lee