New Zealand Professional Investment Services Firm

Forsyth Barr

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.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<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

Spark New Zealand

Spark NZ: 1H20 Preview — Steady Performer