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>1H22 Result&nbsp;— Time to Break the Quarter Buck</h2>
<div></div>
<p><strong>OUTPERFORM</strong></p>
<p>Last time Spark (SPK) increased its dividend&nbsp;Obama&nbsp;was president of the US and Ebola was the most talked about virus. We think FY23 will mark a return to growing dividends after seven straight years of paying NZ25cps. We believe a combination of (1) a return of high margin roaming revenues over the FY23/FY24 period, (2) some capital release from a potential sale of parts of its passive assets, and (3) current low gearing, supports a dividend of NZ26–27cps which we expect SPK will grow into over the next three years. Looking at the result we were encouraged by the strong trends within mobile with gross margins up +200bps&nbsp;YoY&nbsp;and revenue up +4%.&nbsp;SPK's&nbsp;IT services division continues to&nbsp;underperform&nbsp;our expectations with a decline of legacy businesses more than offsetting strong growth in future markets.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/259/065/original/image_61966660321645612841076.png?1645612842" class="editor-image img-responsive" data-smartkarma-image-id="259065"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_-5261597802910245626iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;Modest increases; FY22/23/24 EBITDA +1%/+1%/+2%. Key change is FY23/24 DPS up +2%/+4%</li>
<li><strong>Target price</strong>:&nbsp;Increased to NZ$5.40 (from NZ$5.05) given earnings changes and peers re-rating</li>
</ul>
</div>
<div>
<h3>SPK one of our "late eight" recovery stocks; roaming and IT services headwinds should turn positive</h3>
</div>
<div id="m_-5261597802910245626iw9r8">
<p>In our report, "The Motley Crews of NZ Inc" published 9 June 2021 we highlighted SPK as one of the "late eight" stocks where we saw the potential for an under appreciated late (COVID) cycle recovery. Since then Omicron and Delta have dominated the headlines but under the surface the future of normalised travel is nearing closer and is less likely to be subject to ad-hoc restrictions. Along with mobile roaming, SPK's on-premise IT service business is also suffering from restricted access. We expect modest but not insignificant tailwinds over the coming 24 months as these factors reverse, driving our expectations of EBITDA growth of ~+3% per annum.</p>
</div>
<div>
<h3>Time to break the quarter buck after seven long years</h3>
</div>
<div id="m_-5261597802910245626i5d3x">
<p>FY22 will mark the seventh straight year SPK pays NZ25cps in dividends. While dividends have been stable, free cash flow (FCF) has steadily improved and we now expect underlying FCF to exceed NZ25cps in FY23 for the first time in a decade. We do not believe SPK needs to retain any free cash flow. On the contrary, gearing is modest and we would expect some capital release should the announced (part) divestment of the&nbsp;TowerCo&nbsp;be successful. We view the removal of the DRP discount as a clear signal that SPK considers itself well capitalised. A return to even modest dividend growth could be a meaningful positive catalyst for the stock.</p>
</div>
<div>
<h3>TowerCo&nbsp;— many questions, few answers. Positive skew on outcomes but too early to count the chickens</h3>
</div>
<div id="m_-5261597802910245626ipwti">
<p>SPK's&nbsp;intent&nbsp;to&nbsp;transfer its passive mobile tower assets into a separate subsidiary and "explore the introduction of third party capital" dominated the earnings call, but we learnt little new. We believe the range of outcomes stretch from neutral to meaningfully positive. The value of the tower assets will likely primarily be driven by the lease structure.</p>
</div>

Spark NZ 1H22 Result&nbsp;— Time to Break the Quarter Buck

OUTPERFORM
Last time Spark (SPK) increased its dividend&nbsp;Obama&nbsp;was president of the US and Ebola was the most talked about virus. We think FY23 will mark a return to growing dividends after seven straight years of paying NZ25cps. We believe a combination of (1) a return of high margin roaming revenues over the FY23/FY24 period, (2) some capital release from a potential sale of parts of its passive assets, and (3) current low gearing, supports a dividend of NZ26–27cps which we expect SPK will grow into over the next three years. Looking at the result we were encouraged by the strong trends within mobile with gross margins up +200bps&nbsp;YoY&nbsp;and revenue up +4%.&nbsp;SPK's&nbsp;IT services division continues to&nbsp;underperform&nbsp;our expectations with a decline of legacy businesses more than offsetting strong growth in future markets.


What's changed?&nbsp;



Earnings:&nbsp;Modest increases; FY22/23/24 EBITDA +1%/+1%/+2%. Key change is FY23/24 DPS up +2%/+4%
Target price:&nbsp;Increased to NZ$5.40 (from NZ$5.05) given earnings changes and peers re-rating



SPK one of our "late eight" recovery stocks; roaming and IT services headwinds should turn positive


In our report, "The Motley Crews of NZ Inc" published 9 June 2021 we highlighted SPK as one of the "late eight" stocks where we saw the potential for an under appreciated late (COVID) cycle recovery. Since then Omicron and Delta have dominated the headlines but under the surface the future of normalised travel is nearing closer and is less likely to be subject to ad-hoc restrictions. Along with mobile roaming, SPK's on-premise IT service business is also suffering from restricted access. We expect modest but not insignificant tailwinds over the coming 24 months as these factors reverse, driving our expectations of EBITDA growth of ~+3% per annum.


Time to break the quarter buck after seven long years


FY22 will mark the seventh straight year SPK pays NZ25cps in dividends. While dividends have been stable, free cash flow (FCF) has steadily improved and we now expect underlying FCF to exceed NZ25cps in FY23 for the first time in a decade. We do not believe SPK needs to retain any free cash flow. On the contrary, gearing is modest and we would expect some capital release should the announced (part) divestment of the&nbsp;TowerCo&nbsp;be successful. We view the removal of the DRP discount as a clear signal that SPK considers itself well capitalised. A return to even modest dividend growth could be a meaningful positive catalyst for the stock.


TowerCo&nbsp;— many questions, few answers. Positive skew on outcomes but too early to count the chickens


SPK's&nbsp;intent&nbsp;to&nbsp;transfer its passive mobile tower assets into a separate subsidiary and "explore the introduction of third party capital" dominated the earnings call, but we learnt little new. We believe the range of outcomes stretch from neutral to meaningfully positive. The value of the tower assets will likely primarily be driven by the lease structure.


Spark NZ: 1H22 Result — Time to Break the Quarter Buck

Spark New Zealand

Spark NZ: 1H22 Result — Time to Break the Quarter Buck