Spark New Zealand Limited

Company Overview: Telecommunications and digital services company, Spark New Zealand Limited (NZX: SPK) provides a range of 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, networks, and services.

SPK Details

Spark New Zealand Limited (NZX: SPK) is the country’s leading telecommunications as well as digital services company. The market capitalization of the company stood at ~$8.34 billion on 14^th December 2020.

Results Performance (Year Ended 30 June 2020)

The total revenue for the full-year period stood at $3,623 million, an increase of 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, EBITDAI rose 2.1% y-o-y to $1,113 million.

Figure 1: Key Financial Highlights (FY19-20)

Key Data (Source: Company Reports)

History of Yielding Strong Shareholder Returns

As reflected in the charts below, SPK has a soundtrack record of yielding robust shareholder returns versus few of the closest international peers in terms of market exposure.

Figure 2: 3-Year TSR and ROIC versus International Peers

Key Returns Data (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 18.07% of the total shareholding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. are holding maximum stake in the company at 5.17% and 4.71%, respectively, as shown in the table below:

Figure 3: Top 10 Shareholders

Source: Refinitiv (Thomson Reuters)

A Quick Look at Key Metrics: The company’s EBITDA margin has increased from 28.6% in FY16 to 30.2% in FY20. Its net margin improved from 11.6% in FY19 to 11.9% in FY20. Current ratio for FY20 stood at 1.19x, better than the FY19 result of 0.97x, implying that the company possesses better capabilities to meet its short-term obligations. In FY20, the company’s ROE stood at 28.9%, which has increased from 21.4% in FY16.

Figure 4: Key Metrics

Source: Refinitiv (Thomson Reuters)

Recent Updates:

• Recently, under the Future Director Directors programme run by the New Zealand Institute of Directors, for a period of 12 months, Spark NZ appointed Ana Wight as a Future Director. Ms Wight’s appointment as Future Director has been extended until 31 July 2021, through mutual agreement.
• In another update, Spark Finance Limited, the wholly owned subsidiary of SPK, has extended the term of its NZ$200 million committed revolving credit facility with Westpac New Zealand Limited by three years, to mature on 30 November 2023.

Outlook:

Under its three-year strategy (for the period FY21 to FY23), SPK plans to focus on the company’s established markets of broadband, wireless, and cloud, along with the three future growth markets identified as IoT, digital health and sports.

The company aspires to become primarily wireless, digitally native, and a leading cloud custodian by FY2023. SPK plans to increase its free cash flow to $500 million by FY23, driven by consistent EBITDAI growth, prioritized and prudent capital expenditures (10%-11% of revenues), and ongoing improvement in working capital (target cash conversion of 98%). Healthy free cash flows will thereby support the company’s strategy to deliver a rising and sustainable total dividend over time.

Figure 5: SPK’s Financial Goals for FY23

Financial Guidance (Source: Company Reports)

Industry Outlook:

The Broadcasting and Telecommunication sector in NZ has been witnessing significant change due to digital technology which allows material which was once the domain of television and radio to reach through the PC screen, mobile, or personal digital assistant.

Because of the competition, media companies need to establish advanced strategies for customer attention. Also, higher use of mobile internet, faster connections, app innovation, and convenience offered by smartphones are the factors providing growth opportunities.

Key Valuation Metrics (Source: Refinitiv (Thomson Reuters))

Valuation Methodology: P/E Multiple Based Relative Valuation (illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv (Thomson Reuters))

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Technical Overview:

Monthly Chart

(Source: Refinitiv (Thomson Reuters))

The SPK price has been trading in the higher top and higher bottom pattern on the monthly chart. The stock price has taken the support of its almost 9 years rising trend. The stock price is trading above the 50-simple moving average on the monthly chart, which indicates bullishness in the price. The momentum indicator RSI (14) is also trading above 50 level on the chart, which suggests positive momentum in the price. According to the chart, the key support levels for the SPK is placed at NZD 4.02, while on the upside, the key resistance level is at NZD 5.10.

Stock Recommendation:

As per the presentation dated 16th September 2020, FY 2021 earnings as well as free cash flow forecast is expected to support payment of FY 2021 dividend subject to no adverse change in operating outlook. Future EBITDAI growth is expected to be driven by modest revenue growth from the established markets as well as entry into the new future markets, and expansion of margin from the ongoing focus towards efficiencies.

Considering the aforesaid facts, we have valued the stock using a relative valuation method, i.e., P/E multiple based relative valuation (on an illustrative basis) and there are expectations that the stock price might witness a rise of low double-digit (in % terms).

Hence, we give a “Buy” recommendation on the stock at the current market price of NZ$4.505 per share on December 14, 2020.

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

Disclaimer

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