Company Reports

Spark New Zealand generates steady cash flow, has a strong position in the New Zealand telecommunications industry, and has the infrastructure to offer a diverse range of products. Although competition is intense in the New Zealand market, we believe Spark's scale provides a competitive advantage. Furthermore, private equity ownership of Vodafone New Zealand has heralded in a new age of rational competitive behavior in mobile. Construction of an ultrafast broadband network will lower barriers to entry in fixed-line and broadband, and represents a risk to Spark's broadband business. Successful execution of product bundling that leverages the mobile network could help defend broadband market share, as will continuing growth in fixed wireless broadband.

The downgrade in Spark New Zealand's fiscal 2024 EBITDA and investment income, or EBITDAI, guidance to between NZD 1.17 billion and NZD 1.21 billion isn't significant enough to lower our fair value estimate. At the midpoint of the range, it represents a decline of just 4%, with minimal drag from core mobile service (26% of group revenue at estimated gross margins of almost 70%).

Spark New Zealand generates steady cash flow, has a strong position in the New Zealand telecommunications market, and has the infrastructure to offer a diverse range of products. Although competition is intense in the New Zealand market, we believe Spark's scale provides a competitive advantage. Furthermore, private equity ownership of Vodafone New Zealand has heralded in a new age of rational competitive behavior in mobile. Construction of an ultrafast broadband network will lower barriers to entry in fixed-line and broadband, and represents a risk to Spark's broadband business. Successful execution of product bundling that leverages the mobile network could help defend broadband market share, as will continuing growth in fixed wireless broadband.

The 4% rise in Spark's fiscal 2024 first-half underlying EBITDAI to NZD 530 million was broadly in line with our expectations. The mobile unit delivered again, with mobile service revenue up 6% to NZD 500 million and mobile gross margins expanding 100 basis points to 66.2%. Unfortunately, some of the shine was lost by the continuing decline in voice (gross profit down 28%), an underwhelming showing in broadband (gross profit down 1%), and uninspiring performances from supposedly "growth" units such as IT and procurement (combined gross profit down 3%).

Spark New Zealand generates steady cash flow, has a solid position in the New Zealand telecommunications market, and has the infrastructure to offer a diverse range of products. Although competition is intense in the New Zealand market, we believe Spark's scale provides a competitive advantage. Furthermore, private equity ownership of Vodafone New Zealand has heralded in a new age of rational competitive behavior in mobile. Construction of an ultrafast broadband network will lower barriers to entry in fixed-line and broadband, and represents a risk to Spark's broadband business. Successful execution of product bundling that leverages the mobile network could help defend broadband market share, as will continuing growth in fixed wireless broadband.

Shares in narrow-moat-rated Spark are just above our NZD 4.90 per share fair value estimate, or AUD 4.50 at current exchange rates. This is understandable. Faced with economic uncertainties, investors generally gravitate toward companies with dependable earnings operating in stable industries. Spark is one such company.

The 1% rise in Spark New Zealand’s fiscal 2021 EBITDAI to NZD 1,124 million was another in-line result relative to our estimate, as was the guidance range of NZD 1,130 million to NZD 1,160 million for fiscal 2022 (versus our unchanged NZD 1,146 million forecast). This consistency, backed by a steady NZD 433 million in free cash flow, showcases the defensive character of Spark, a telecom utility that has delivered dividend of NZD 0.25 per share every year since fiscal 2016, come rain, hail or COVID-19.

Cost control was on full display in Spark's flat year-on-year fiscal 2021 first-half EBITDAI of NZD 502 million. A NZD 30 million cut in costs more than offset the NZD 28 million or 2% fall in revenue to NZD 1,796 million—one that was more curtailed by one-off factors (NZD 17 million fall in wire maintenance charges, NZD 26 million COVID-induced fall in roaming) than declines in underlying demand. In fact, adjusted mobile service revenue was up 4% to NZD 441 million, lifting Spark's share of the mobile service revenue market by 20 basis points to 40.4%.

Spark New Zealand generates reliable cash flow, has a solid position in the New Zealand telecom market, and has the infrastructure to offer a diverse range of products. Although competition has been intense in the New Zealand telecommunications market, we believe Spark's scale provides a competitive advantage. Furthermore, recent private equity ownership of Vodafone New Zealand could herald a new age of rational competitive behaviour in mobile. Construction of an ultrafast broadband, or UFB, network will lower barriers to entry in fixed-line and broadband and represents a risk to Spark's broadband business. Successful execution of product bundling that leverages the mobile network could help defend broadband market share, as will continuing growth in fixed wireless broadband.

Spark New Zealand generates reliable cash flow, has a strong position in the New Zealand telecom market, and has the infrastructure to offer a diverse range of products. Although competition has been intense in the New Zealand telecommunications market, we believe Spark's scale provides a competitive advantage. Furthermore, recent private equity ownership of Vodafone New Zealand could herald a new age of rational competitive behaviour in mobile. Construction of an ultrafast broadband, or UFB, network will lower barriers to entry in fixed-line and broadband and represents a risk to Spark's broadband business. Successful execution of product bundling that leverages the mobile network could help defend broadband market share, as will continuing growth in fixed wireless broadband.

Spark New Zealand released its fiscal 2014 result with operational performance broadly in line with our expectations. Underlying earnings before interest, tax, depreciation and amortisation, or EBITDA, of NZD 936 million was marginally ahead of our NZD 928 million estimate. However, underlying net profit after tax, or NPAT, of NZD 321 million, 13% below the prior year, was slightly ahead of our NZD 304 million forecast. The lower earnings were due to a sustained deterioration in fixed voice services which could not be offset by cost outs and growth in mobile and IT service revenues.

The recent sale of AAPT has bolstered the balance sheet of Telecom New Zealand, or Telecom, with gearing levels now below long-term management targets. In the absence of a material increase in the dividend, Telecom will degear further in the medium term on our estimates. A strong balance sheet provides scope for Telecom to undertake new capital management initiatives within the next 12 to 24 months, assuming delivery of operational and cost saving targets.

Telecom New Zealand released its first-half fiscal 2014 result which came in slightly below our expectations. Although the result was slightly weaker than expected, Telecom New Zealand guided for underlying earnings before interest, tax, depreciation and amortisation, or EBITDA, in fiscal 2014 of NZD 925 to NZD 945 million, excluding AAPT. On a like-for-like basis, we were forecasting fiscal 2014 underlying EBITDA of NZD 944 million (our actual EBITDA estimate was NZD 1,014 million including AAPT). Earnings guidance implies improved performance in the second half with management citing upside from cost control and strong subscriber growth. However, we remain cautious on the near-term outlook given margin pressures; Telecom New Zealand's market share focused strategy is driving lower average revenue per user, or ARPU, in mobile and broadband. We have lowered our fiscal 2014 EBITDA forecast to NZD 928 million on a like-for-like basis, in line with guidance.

Narrow moat-rated Telecom New Zealand, or Telecom, has announced the sale of its AAPT Australian operations for an enterprise value of AUD 450 million. The sale is consistent with Telecom's stated strategy of focusing on its domestic New Zealand operations. The transaction will be completed on 28 February 2014, meaning that AAPT will provide a full-period earnings contribution in fiscal 2014's first half, and a small contribution in the second half. Sales proceeds will be used to repay debt, and leaves Telecom very conservatively geared in our view. Net debt/EBITDA will be 0.57x in fiscal 2015, the first full clean year post sale.

Narrow moat Telecom New Zealand, or Telecom, has formalised details for the deployment of its 4G network and participation in the 700 Megahertz, or MHz, spectrum auction. Both events were expected to occur in the second half of this calendar year and there is no change to our view on Telecom. We expect the launch of its 4G network to help sustain subscriber growth momentum in the second half of fiscal 2013. We also forecast average revenue spend to rise from greater smartphone penetration and increased demand for mobile data from consumers. As for the spectrum auction, we expect all three players in the mobile market to participate. Telecom's scale and existing cost advantage, a key moat source, will allow it to acquire a greater amount of spectrum in the auction relative to its competitors, in our opinion. Reinvestment in spectrum will reaffirm Telecom's competitive edge in network quality. Our fair value estimate of NZD 2.70 is unchanged and, with the shares trading below our fair value estimate, we continue to see value in Telecom as the company progresses on its turnaround strategy. Our forecasts are also unchanged and we anticipate revenue to stabilise in fiscal 2015.

We have undertaken a review of our Telecom New Zealand forecasts following the release of its fiscal 2013 result. Our fiscal 2014 revenue forecast is revised 2% lower to NZD 4.1 billion, representing a 2.5% decline on fiscal 2013 as Telecom exits low-margin business. We now expect overall revenue to stablise in fiscal 2015. Despite the modest changes to our fiscal 2014 forecasts, our fair value increases 8% to NZD 2.70 as we gain confidence in Telecom's strategy in delivering longer-term growth. Initial signs are the stabilisation of market share in fixed-broadband and mobile subscriber net additions in the second half of fiscal 2013. In our view, the turnaround is not yet factored into the current valuation and we believe the stock is undervalued. We retain our narrow economic moat rating which is underpinned by Telecom's mobile network, which enjoys efficient scale. Telecom and Vodafone's dominant position in a mature New Zealand market, act as a barrier to entry for new entrants.

Telecom New Zealand's fiscal 2013 result was in line with expectations and there is no change to our long term view on the company. The launch of its 4G network, improved offering in corporate IT services and investments in backhaul infrastructure are key initiatives for Telecom in fiscal 2014. We expect revenue to stabilise in fiscal 2014 as these strategies gain traction. Our forecasts are under review and fair value is unlikely to change materially. Our narrow economic moat rating remains. Telecom New Zealand's mobile network enjoys efficient scale, with its and Vodafone's dominant positions in the mature New Zealand market acting as a barrier to entry for new entrants.

Over recent months a number of initiatives have been announced which support Telecom New Zealand's TEL transformation to a service-based company. Similar to global telecoms, the traditional business in providing a pure connection is mature and under pressure from competition. Telecoms are seeking new opportunities in mobile and managed IT services for growth. In our view, the launch of its 4G network, the acquisition of a data centre operator and improvement in backhaul infrastructure will support its transition going forward. We expect further commentary on the company's future strategy at the May 16 investor day. Our thesis on Telecom remains intact and our New Zealand dollar fair value estimate is unchanged. However, our Australian dollar fair value estimate increases from AUD 1.90 to AUD 2.10 as we adjust our Australian dollar/New Zealand dollar exchange rate assumption to NZD 1.20. Telecom's narrow moat rating is underpinned by efficient scale in the mobile sector. Dominant positions by Telecom and Vodafone in a mature market act as a barrier to entry for new entrants. Focus in the short term remains on the cost front. We expect revenue to decline further in fiscal 2013 due to competition, before stabilising in fiscal 2014 as the above strategies gain traction.

The result was in line with expectations. The top line was soft as revenue fell 8.5% to NZD 2.1 billion. Revenue declined across all business units, with IT managed services division Gen-i and AAPT in Australia the most disappointing. Decline in voice and data volumes, pricing and customers leaving the network saw revenues decline 4.5% and 30% respectively for the two divisions. On a product basis, mobile performed well and fixed-broadband was in line. Fixed-voice service continues to be hampered by mobile substitution, but we expect the decline in revenue to slow. At a group level, earnings before interest, taxes, depreciation and amortisation (EBITDA) increased 3.7% to NZD 506 million as operating costs declined at a faster pace on lower headcount and labour costs. The strong net profit growth of 57% to NZD 156 million is attributable to lower depreciation and interest costs post the demerger of Chorus. An interim dividend of AUD 0.08 per share was declared, imputed at 75%.

Telecom New Zealand TEL reported a fiscal 2012 result in line with our expectations. On an adjusted basis, excluding seven months contribution from Chorus, net earnings of NZD 281 million were slightly ahead of our estimate of NZD 265.7 million. Mobile was the highlight but decline in fixed voice revenue was larger than expected. There is no change to our thesis on the company and fair value of NZD 2.50. We continue to see pressure on Telecom's fixed voice and broadband business in the medium term, offset by a resilient mobile business.