Spark New Zealand Limited

SPK Details

Company Overview: Spark New Zealand Limited is one of the largest telecommunication companies that provide a range of product and services including telecommunications, information technology, media and other digital products and services, including mobile services; voice services; broadband services; Internet television (TV); cloud, security and service management services; procurement and partner services and managed data and networks services. The Company’s segments include mobile; voice; broadband; cloud, security, and service management; procurement and partners; managed data and networks, and others. The Company’s subsidiaries include Computer Concepts Limited, Digital Island Limited, Gen-i Australia Pty Limited, Lightbox New Zealand, Qrious Limited, Revera Limited, Spark Finance Limited, Spark New Zealand Trading Limited and Spark Retail Holdings Limited.

Spark New Zealand Limited (NZX: SPK) is a supplier of digital services and telecommunications in New Zealand and operates through three segments: Spark Home, Mobile & Business; Spark Digital, and Spark Connect. The market capitalisation of the company stood at ~$8.3 billion on 3^rd May 2021.

Looking at the past performance, SPK’s top-line and bottom-line over FY16-20 grew with a compounded annual growth rate (CAGR) of 0.68% and 3.65%, respectively. Its total revenue for FY20 stood at $3,593.0 million, as compared to $3,497.0 million in FY16, and net income for FY20 stood at $427.0 million, as compared to $370.0 million in FY16.

Results Performance (Half-Year Ended 31 December 2020)

The company reported a decline of 1.5% in revenue for the interim period to $1,796.00 million on the previous corresponding period (pcp). This decline in revenue can be attributed to the loss of higher-margin mobile roaming revenue from sustained COVID-19 border closures and higher voice revenue declines due to a non-recurring provision to refund historical wire maintenance charges.

Mobile service revenue declined by 1.2%, however, stripping out the impact of the loss of roaming, mobile service revenue increased by 3.8%. The company continued to grow in cloud, security and service management revenue which was up by 4.6% to $229 million. The broadband and pre-paid markets suffered from fewer people migrating to NZ during the period owing to border closures.

EBITDAI over the interim period grew by 0.4% to $502 million as a result of disciplined cost management which caused operating expenses to decline by 2.3%.

Net profit after tax for the first half period declined by 11.4% YoY to $148 million due to an increase in depreciation and amortisation charges.

The Board of Directors declared an interim dividend per share of 12.5 cents (fully imputed).

Exhibit 1: Group Result

(Source: Company Reports)

Results Performance (Year Ended 30 June 2020)

The total revenue for the full-year period stood at $3,623 million, an increase by $90 million or 2.5% y-o-y. This can be attributed to the rise in the cloud, security, and service management revenue of $43 million (10.8%), strong performance in mobile with growth in high margin service revenue of $32 million (3.9%) and growth in emerging revenue streams via Spark Sport and Qrious data analytics business. Due to strong performance in key mobile and cloud markets and cost discipline, EBITDAI rose 2.1% y-o-y to $1,113 million. Net profit after tax for the period increased by 4.4% to $427 million mainly because of an increase in EBITDAI and lower tax expenses.

The company announced a dividend of 12.5c per share for H2FY20, bringing the total FY20 dividend to 25c per share.

Exhibit 2 : Income Statement

(Source: Company Reports)

Top 10 Shareholders: The list of top 10 shareholders has been highlighted in below given pie chart, which together forms around 18.91% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 5.17% and 4.71%, respectively, as provided in the table below:

Exhibit 3: Top 10 Shareholders

(Source: Refinitiv (Thomson Reuters)), Analysis by Kalkine Group

A Quick Look at Key Metrics: The company’s EBITDA margin has increased from 27.4% in H1FY20 to 28.0% in H1FY21. Its ROE in H1FY21 stood at 10.1%, better than the industry median of 4.1%, implying a decent return to shareholders. Its current ratio for H1FY21 stood at 1.17x, better than the industry median of 0.70x, implying that the company possesses better capabilities to meet the short-term obligations than the peer group. The company also experienced an improvement in cash cycle days from H1FY20 of 100.2 days to 96.5 days in H1FY21.

Exhibit 4: Key Metrics

(Source: Refinitiv (Thomson Reuters)), Analysis by Kalkine Group

Recent Update:

The company on 16 April 2021 announced that its wholly owned subsidiary, Spark Finance Limited has extended the term of its NZ$200 million committed standby revolving credit facility by one year, to mature on 30 April 2024. The standby is being provided through participation from Australasian and global banks.

Key Risks:

The company is exposed to risks related to COVID-19 as the spread can lead to border closures which could impact the company’s revenue. This is because the impact can be felt on higher-margin mobile roaming revenue. Border closures can also impact broadband and prepaid markets as this could result in fewer people migrating to NZ.

Outlook:

The company is making solid progress and has grown its competitive advantage across core markets and future growth markets including IoT, digital health and sports. It has 5G available in five locations across New Zealand. It aspires to become primarily wireless, digitally native, and a leading cloud custodian, by the year 2023.

Due to the impact of the pandemic, the company has narrowed its FY21 EBITDAI guidance range to $1,100 million to $1,130 million, along with the revision in full-year dividend guidance to the top end of the range at 25 cents per share.

Valuation Methodology: P/E Based Relative Valuation (Illustrative)

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

After the previous week of sell-off, the stock has given a strong opening and closing on the first trading session of the ongoing week with a gap created on the chart. The technical indicator RSI with a reading around 45 and a curve at the end pointing up, suggests gaining of bullish momentum for the stock.

Going forward, the stock may have resistance around the converging point of the 61.8% retracement level and 20 periods SMA of $4.60 whereas support could be around the previous low of $4.30.

Stock Recommendation:

The company is introducing a new frontline operating model where it is cross-skilling its customer care team members to improve first contact resolution, which is an important driver of customer satisfaction, and productivity. Demand for business transformation through digitization continues to grow, driven by the rapid adoption of new ways of working established due to COVID-19. SPK is also investing in digital skills program for its small business customers, to support their adaptation to an increasingly digital marketplace.

The stock declined by ~7.2% in 3 months and by ~9.7% in 9 months. It has made a 52-week low and high of $4.30 and $5.09, respectively and it is trading towards the 52-week lower levels.

We have applied P/E based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a slight premium to P/E Multiple (NTM) (Peer Average) considering its operational scale as well as improvement in liquidity position which could help the company in navigating tough conditions.

Hence, we give a “Buy” recommendation on the stock at the current market price of NZ$4.475 per share, up 1.7% as on 3 May 2021.

SPK Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

Note: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

Kalkine New Zealand Limited is authorised to provide class advice only. The information on this site does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.