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>FY21 Preview&nbsp;— Steady Performer&nbsp;</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Spark (SPK) reports its FY21 result on Wednesday, 18 August. SPK has guided for EBITDAI&nbsp;of NZ$1,100m to NZ$1,130m. We are at the lower end of guidance (NZ$1,103m) but shift our focus to what we see as key areas of interest over the medium-term. Specifically, our key areas of interest are; (1) growth in fixed wireless (FW) and its ability to protect broadband gross margins despite pressures on Average Revenue Per User (ARPUs); (2) free cash flow generation and&nbsp;SPK's&nbsp;path to covering its dividend with free cash flow; and (3) the continued shift from post-paid to pre-paid within mobile. With this note we transfer coverage of SPK from Matt Henry to Aaron&nbsp;Ibbotson.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY21E/FY22E/FY23E EBITDA -0%/+1%/-0%</li>
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<h3>Key area of interest 1: Broadband and the tug of war between FW and declining&nbsp;ARPUs&nbsp;</h3>
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<p>The technological competition in broadband is heating up with the mobile operators pushing hard to convert legacy copper lines to FW&nbsp;while Chorus and many independent retailers are pushing for Fibre.&nbsp;SPK has an ambitious target to add 40k&nbsp;FW customers in FY21. SPK described the status of its ambition at its 1H21 result&nbsp;as "improvement needed".&nbsp;SPK added 9k FW customers in 1H21 and we expect a further 20k&nbsp;to be added in&nbsp;2H21, which we believe is "good enough".&nbsp;Ability to shift existing customers&nbsp;to FW is crucial to protect gross margins within broadband in an increasingly competitive retail market.&nbsp;</p>
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<h3>Key area of interest 2: Free cash flow approaching dividends</h3>
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<p>SPK has consistently paid out over 100% of free cash flow and has funded the shortfall with proceeds from divestments, and lately debt and a dividend reinvestment plan (DRP). We are looking for NZ23.5cps of free cash flow per share in FY21, a slight increase on FY20 (NZ22.7cps). A key focus for us is whether management views the DRP as a long term solution or if it sees itself covering the&nbsp; dividend with cash flow in the near future.&nbsp;&nbsp;</p>
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<h3>Key area of interest 3: Shift from pre-paid to post-paid within mobile</h3>
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<p>Over the last few years there has been a continued migration from prepaid to post-paid within mobile. Post-paid has approximately 3 times the ARPU of pre-paid and this shift has been the key driver of the growth within mobile services revenues. This shift accelerated through COVID-19 as SPK shed over 130k pre-paid customers but continued to grow post-paid. We are looking for 35k new post-paid mobile connections over 2H21 and for ARPU to be largely flat YoY as the lack of roaming revenues will continue to weigh on its result.&nbsp; We also look for any signs of mobile ARPU benefit from SPK's 5G rollout.</p>
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Spark NZ FY21 Preview&nbsp;— Steady Performer&nbsp;

OUTPERFORM
Spark (SPK) reports its FY21 result on Wednesday, 18 August. SPK has guided for EBITDAI&nbsp;of NZ$1,100m to NZ$1,130m. We are at the lower end of guidance (NZ$1,103m) but shift our focus to what we see as key areas of interest over the medium-term. Specifically, our key areas of interest are; (1) growth in fixed wireless (FW) and its ability to protect broadband gross margins despite pressures on Average Revenue Per User (ARPUs); (2) free cash flow generation and&nbsp;SPK's&nbsp;path to covering its dividend with free cash flow; and (3) the continued shift from post-paid to pre-paid within mobile. With this note we transfer coverage of SPK from Matt Henry to Aaron&nbsp;Ibbotson.


What's changed?&nbsp;



Earnings:&nbsp;FY21E/FY22E/FY23E EBITDA -0%/+1%/-0%



Key area of interest 1: Broadband and the tug of war between FW and declining&nbsp;ARPUs&nbsp;


The technological competition in broadband is heating up with the mobile operators pushing hard to convert legacy copper lines to FW&nbsp;while Chorus and many independent retailers are pushing for Fibre.&nbsp;SPK has an ambitious target to add 40k&nbsp;FW customers in FY21. SPK described the status of its ambition at its 1H21 result&nbsp;as "improvement needed".&nbsp;SPK added 9k FW customers in 1H21 and we expect a further 20k&nbsp;to be added in&nbsp;2H21, which we believe is "good enough".&nbsp;Ability to shift existing customers&nbsp;to FW is crucial to protect gross margins within broadband in an increasingly competitive retail market.&nbsp;


Key area of interest 2: Free cash flow approaching dividends


SPK has consistently paid out over 100% of free cash flow and has funded the shortfall with proceeds from divestments, and lately debt and a dividend reinvestment plan (DRP). We are looking for NZ23.5cps of free cash flow per share in FY21, a slight increase on FY20 (NZ22.7cps). A key focus for us is whether management views the DRP as a long term solution or if it sees itself covering the&nbsp; dividend with cash flow in the near future.&nbsp;&nbsp;


Key area of interest 3: Shift from pre-paid to post-paid within mobile


Over the last few years there has been a continued migration from prepaid to post-paid within mobile. Post-paid has approximately 3 times the ARPU of pre-paid and this shift has been the key driver of the growth within mobile services revenues. This shift accelerated through COVID-19 as SPK shed over 130k pre-paid customers but continued to grow post-paid. We are looking for 35k new post-paid mobile connections over 2H21 and for ARPU to be largely flat YoY as the lack of roaming revenues will continue to weigh on its result.&nbsp; We also look for any signs of mobile ARPU benefit from SPK's 5G rollout.


Spark NZ: FY21 Preview — Steady Performer

Spark New Zealand

Spark NZ: FY21 Preview — Steady Performer