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>A Beacon of Value; Upgrade to OUTPERFORM</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>We upgrade Spark (SPK) to OUTPERFORM. We now expect SPK to navigate the headwinds of COVID-19 without a significant pullback in earnings, and likely maintain its NZ25cps dividend. We believe such an outcome will reinforce&nbsp;SPK's&nbsp;qualities — a solidly positioned business with an&nbsp;impressive execution track record, robust valuation metrics, a strong balance sheet, and an attractive dividend income in a yield hungry world.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY21/22/23E EPS +4%/flat/flat;&nbsp;DPS +9%/+4%/flat.</li>
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<h3>Navigating COVID-19 with earnings and dividend likely intact</h3>
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<p>Back in August SPK eased on its ambition to sustain its NZ25cps dividend, guiding to NZ23–25cps in FY21, on the back of impacts from COVID-19. We now expect SPK is likely to navigate FY21 with broadly flat yoy operating earnings, cash flow and dividend supported by: (1) a stronger than anticipated economic backdrop benefitting the likes of store and handset sales, bad/doubtful debts, and demand from business customers, (2) mobile and broadband ARPU growth/margin benefit from the sale of and explicit pricing for Lightbox (previously provided free of charge), (3) a NZ$14m reduction in cash paid for the Telco Development Levy (provisioned for in FY20), (4) margin improvement from additional fixed wireless broadband subscribers, and (5) cost savings where SPK has a strong track record on execution, consistently outperforming market expectation. These benefits should be sustained medium-term, and COVID-19 impacts such as mobile roaming will bounce back once border closures end. Even if we are shown to be too optimistic and SPK's dividend is eased, the stock should still offer an attractive yield in an income scarce world.&nbsp;</p>
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<h3>A beacon of value in an expensive market</h3>
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<p>SPK has lagged other defensive exposures in the NZ&nbsp;market in recent months. We believe&nbsp;the stock offers&nbsp;robust&nbsp;valuation metrics and an attractive income relative to other defensive NZ exposures, global&nbsp;telco&nbsp;peers, and fixed income. Key for a solid&nbsp;medium-term earnings outlook, ​​​​​​​NZ's&nbsp;mobile market&nbsp;(SPK's&nbsp;most important&nbsp;exposure)&nbsp;is healthy and rational. The company has a strong pedigree in reducing costs and navigating market&nbsp;changes.&nbsp;We view the medium-term risks to earnings and dividends as both balanced and relatively modest, and expect better cash flow conversion with working capital growth&nbsp;slowing.&nbsp;SPK's&nbsp;<wbr>defensive appeal is supported by its strong, A- rated balance sheet​​​​​​​ which could be further strengthened by possible divestment of property and/or infrastructure assets. We upgrade to OUTPERFORM.</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 A Beacon of Value; Upgrade to OUTPERFORM

OUTPERFORM
We upgrade Spark (SPK) to OUTPERFORM. We now expect SPK to navigate the headwinds of COVID-19 without a significant pullback in earnings, and likely maintain its NZ25cps dividend. We believe such an outcome will reinforce&nbsp;SPK's&nbsp;qualities — a solidly positioned business with an&nbsp;impressive execution track record, robust valuation metrics, a strong balance sheet, and an attractive dividend income in a yield hungry world.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;FY21/22/23E EPS +4%/flat/flat;&nbsp;DPS +9%/+4%/flat.



Navigating COVID-19 with earnings and dividend likely intact


Back in August SPK eased on its ambition to sustain its NZ25cps dividend, guiding to NZ23–25cps in FY21, on the back of impacts from COVID-19. We now expect SPK is likely to navigate FY21 with broadly flat yoy operating earnings, cash flow and dividend supported by: (1) a stronger than anticipated economic backdrop benefitting the likes of store and handset sales, bad/doubtful debts, and demand from business customers, (2) mobile and broadband ARPU growth/margin benefit from the sale of and explicit pricing for Lightbox (previously provided free of charge), (3) a NZ$14m reduction in cash paid for the Telco Development Levy (provisioned for in FY20), (4) margin improvement from additional fixed wireless broadband subscribers, and (5) cost savings where SPK has a strong track record on execution, consistently outperforming market expectation. These benefits should be sustained medium-term, and COVID-19 impacts such as mobile roaming will bounce back once border closures end. Even if we are shown to be too optimistic and SPK's dividend is eased, the stock should still offer an attractive yield in an income scarce world.&nbsp;


A beacon of value in an expensive market


SPK has lagged other defensive exposures in the NZ&nbsp;market in recent months. We believe&nbsp;the stock offers&nbsp;robust&nbsp;valuation metrics and an attractive income relative to other defensive NZ exposures, global&nbsp;telco&nbsp;peers, and fixed income. Key for a solid&nbsp;medium-term earnings outlook, ​​​​​​​NZ's&nbsp;mobile market&nbsp;(SPK's&nbsp;most important&nbsp;exposure)&nbsp;is healthy and rational. The company has a strong pedigree in reducing costs and navigating market&nbsp;changes.&nbsp;We view the medium-term risks to earnings and dividends as both balanced and relatively modest, and expect better cash flow conversion with working capital growth&nbsp;slowing.&nbsp;SPK's&nbsp;defensive appeal is supported by its strong, A- rated balance sheet​​​​​​​ which could be further strengthened by possible divestment of property and/or infrastructure assets. We upgrade to OUTPERFORM.




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




Spark NZ: A Beacon of Value; Upgrade to OUTPERFORM

Spark New Zealand

Spark NZ: A Beacon of Value; Upgrade to OUTPERFORM