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

Spark NZ FY20 — Breaking the Quarter Buck; NEUTRAL

NEUTRAL
The main news in Spark's (SPK) result was it has eased back on its ambition to sustain its NZ25cps dividend, guiding to NZ23–25cps in FY21. The impact from COVID-19 has further tipped the balance between SPK's commitment to an A- credit rating, and funding medium-term capital requirements (including mobile spectrum, 5G infrastructure, Southern Cross Next cable, Spark Sports). A dividend cut is no fait accompli — SPK has a strong track record on execution, consistently outperforming market expectation, and COVID impacted revenue streams such as mobile roaming will bounce back once lockdowns end. Even with a cut, SPK should still offer an attractive yield in an income scarce world. After a strong share price performance through this volatile year, we downgrade to NEUTRAL principally on valuation grounds.


FY20 and FY21 in line with our expectation; guidance a touch below market consensus


SPK's FY20 and FY21 guidance were in line with our expectation, although the latter was a touch below consensus. SPK navigated COVID (with an estimated NZ$25m EBITDA impact, expanding to NZ$75m in FY21) hitting its original guidance, albeit with help from various gains on sale. Mobile remains the principal good news story, with gross margin up +7%/NZ$54m on continued trading up: prepaid to postpaid, higher tier plans, and more data, and despite a c.NZ$15m revenue impact from lost roaming.
Beyond mobile, growth remains challenging. Cloud, security, and service management delivered +11% headline revenue, but margin pressures and investment in staff means profit growth is minimal. Broadband suffered from the stalling of selling wireless, and an appearance of ARPU pressures. (SPK has ambitions to reignite wireless broadband growth in FY21, supported by 5G's greater capacity and speeds). Legacy voice, GM down -13%/-NZ$37m, remains the largest headwind. The good news is the base keeps getting smaller, now 12% of SPK's total GM vs. 22% only 3 years ago.&nbsp;


SPK's&nbsp;dividend is a principal focus for investors


SPK is principally owned by income-seeking investors. COVID may have finally brought to an end SPK's ability to manage opex and capex to sustain its dividend. We do not, however, expect cuts to be dramatic. The mobile market is healthy and rational, SPK has a strong track record on execution, COVID impacted revenue streams will bounce back, and it has introduced a dividend reinvestment plan. The next significant test (outside of COVID) will potentially come in FY23 when it may need to pay for spectrum rights for 5G — both the sum and timing of payments (possibly staged) remains uncertain.&nbsp;


Downgrade to NEUTRAL


We downgrade SPK to NEUTRAL. In a world hungry for yield SPK still offers an attractive income, but we view the stock as fairly priced relative to international telco and NZ defensive peers. We view the medium-term risks to earnings and dividends as both balanced and relatively modest.




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




Spark NZ: FY20 — Breaking the Quarter Buck; NEUTRAL

Spark New Zealand

Spark NZ: FY20 — Breaking the Quarter Buck; NEUTRAL