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<br>1H21&nbsp;— Paddling Hard Below the Surface</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Spark (SPK) delivered another very sound performance, navigating COVID border closures and intensifying competition in broadband to deliver stable operating earnings. Key positives remain (1) a resilient contribution from mobile, with underlying growth offsetting the loss of international roaming, and (2) SPK's ability to find cost efficiencies. We continue to see appeal in SPK's consistent delivery, solid market position (particularly mobile), A- rated balance sheet, and attractive dividend yield. Maintain OUTPERFORM.&nbsp;&nbsp;​​​​​​​</p>
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<h3>Resilient result a creditable outcome</h3>
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<p>SPK&nbsp;delivered stable EBITDA&nbsp;with mobile growth and cost savings offsetting impacts from COVID&nbsp;border closures and competitive pressures on broadband margins.&nbsp;The result includes a one-off NZ$17m provision (within Voice) to “refund historical wire maintenance charges” (copper charges that continued when customers transitioned to fibre). Excluding this impact, SPK’s underlying EBITDA was ahead of our expectation.</p>
<p>Mobile remains&nbsp;the principal&nbsp;good news story, with a gross margin flat despite a&nbsp;NZ$26m revenue impact from lost&nbsp;high-margin roaming. Mobile&nbsp;services revenue, up +4% excl.&nbsp;roaming, continues to benefit from&nbsp;customers trading up: prepaid to&nbsp;postpaid, higher tier plans, and more data. Conversely, the most notable operating trend change&nbsp;was the intensification of broadband competition (gross margin down -5%/-NZ$9m), which SPK attributed, in part, to slower market growth with borders closed to migrants. SPK expects continued pressure as it protects market share. Greater success in adding fixed wireless customers (9k added in 1H lagged its FY21 40k&nbsp;target) would provide some offset. Outside mobile and broadband&nbsp;operating trends remain largely unchanged.​​​​​​​​​​​</p>
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<h3>Dividend maintained</h3>
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<p>SPK has tweaked FY21 guidance, narrowing&nbsp;EBITDA to NZ$1,100–1,130m (from NZ$1,090–1,130m). This includes a c.NZ$50m impact from COVID, mostly roaming. The eventual opening of borders,&nbsp;plus the&nbsp;non-recurring provision, represents c.NZ$70m that should return to&nbsp;SPK's&nbsp;EBITDA in years ahead. Importantly (given the yield focus of&nbsp;SPK's&nbsp;shareholder base), SPK&nbsp;affirmed the&nbsp;dividend will be retained at NZ25cps (vs. prior&nbsp;NZ23–25cps guidance). Changes to our operating earnings have been minor, with a delay in a return in roaming from 2Q CY22, and broadband margin pressures offset by cost out: EBITDA FY21/22/23E -1%/-2%/flat.</p>
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<h3>Review of infrastructure assets</h3>
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<p>SPK is undertaking a review of its infrastructure asset portfolio, with divestments possible. We view this as sensible given (1) the high valuation being placed on these types of assets globally, and (2) the entry of new players into the NZ market, reducing SPK's strategic rationale for owning. Datacentres, exchanges, and sub-sea cables are assets where there may be a higher value owner. We suspect a sale of mobile assets is unlikely given SPK (and Vodafone's) network advantage, and the barrier to entry they provide.</p>
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<div><strong>Matt Henry CFA</strong></div>
<div><a href="mailto:matthew.henry@forsythbarr.co.nz" target="_blank" rel="noopener">matthew.henry@forsythbarr.co.<wbr>nz</a></div>
<div>+64 9 368 0115</div>
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Spark NZ 1H21&nbsp;— Paddling Hard Below the Surface

NEUTRAL
Spark (SPK) delivered another very sound performance, navigating COVID border closures and intensifying competition in broadband to deliver stable operating earnings. Key positives remain (1) a resilient contribution from mobile, with underlying growth offsetting the loss of international roaming, and (2) SPK's ability to find cost efficiencies. We continue to see appeal in SPK's consistent delivery, solid market position (particularly mobile), A- rated balance sheet, and attractive dividend yield. Maintain OUTPERFORM.&nbsp;&nbsp;​​​​​​​


Resilient result a creditable outcome


SPK&nbsp;delivered stable EBITDA&nbsp;with mobile growth and cost savings offsetting impacts from COVID&nbsp;border closures and competitive pressures on broadband margins.&nbsp;The result includes a one-off NZ$17m provision (within Voice) to “refund historical wire maintenance charges” (copper charges that continued when customers transitioned to fibre). Excluding this impact, SPK’s underlying EBITDA was ahead of our expectation.
Mobile remains&nbsp;the principal&nbsp;good news story, with a gross margin flat despite a&nbsp;NZ$26m revenue impact from lost&nbsp;high-margin roaming. Mobile&nbsp;services revenue, up +4% excl.&nbsp;roaming, continues to benefit from&nbsp;customers trading up: prepaid to&nbsp;postpaid, higher tier plans, and more data. Conversely, the most notable operating trend change&nbsp;was the intensification of broadband competition (gross margin down -5%/-NZ$9m), which SPK attributed, in part, to slower market growth with borders closed to migrants. SPK expects continued pressure as it protects market share. Greater success in adding fixed wireless customers (9k added in 1H lagged its FY21 40k&nbsp;target) would provide some offset. Outside mobile and broadband&nbsp;operating trends remain largely unchanged.​​​​​​​​​​​


Dividend maintained


SPK has tweaked FY21 guidance, narrowing&nbsp;EBITDA to NZ$1,100–1,130m (from NZ$1,090–1,130m). This includes a c.NZ$50m impact from COVID, mostly roaming. The eventual opening of borders,&nbsp;plus the&nbsp;non-recurring provision, represents c.NZ$70m that should return to&nbsp;SPK's&nbsp;EBITDA in years ahead. Importantly (given the yield focus of&nbsp;SPK's&nbsp;shareholder base), SPK&nbsp;affirmed the&nbsp;dividend will be retained at NZ25cps (vs. prior&nbsp;NZ23–25cps guidance). Changes to our operating earnings have been minor, with a delay in a return in roaming from 2Q CY22, and broadband margin pressures offset by cost out: EBITDA FY21/22/23E -1%/-2%/flat.


Review of infrastructure assets


SPK is undertaking a review of its infrastructure asset portfolio, with divestments possible. We view this as sensible given (1) the high valuation being placed on these types of assets globally, and (2) the entry of new players into the NZ market, reducing SPK's strategic rationale for owning. Datacentres, exchanges, and sub-sea cables are assets where there may be a higher value owner. We suspect a sale of mobile assets is unlikely given SPK (and Vodafone's) network advantage, and the barrier to entry they provide.




Matt Henry CFA
matthew.henry@forsythbarr.co.nz
+64 9 368 0115




Spark NZ: 1H21 — Paddling Hard Below the Surface

Spark New Zealand

Spark NZ: 1H21 — Paddling Hard Below the Surface