Spark’s High Dividends can be Maintained

Business Strategy & Outlook:

Spark New Zealand generates dependable 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, 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.

Spark’s moat is supported by cost advantage and economies of scale in a relatively small market. Spark is the equal-largest player in mobile with over 40% revenue market share. The dominant market positions of Spark and Vodafone may make it difficult for new players to enter the market and establish necessary scale. With its price-focused strategy, 2degrees, the third player in the mobile market, has gained some traction, although it is financially constrained under private ownership. Given the small New Zealand market, there is a low risk that a new player will enter as an infrastructure network operator. Any new players may adopt a wholesale access mobile virtual network operator model, selling mobile services using the infrastructure of another network. Spark captures part of the revenue by wholesaling its infrastructure to MVNOs, and recently launched its skinny service to compete in the value-end of the broadband market. Other operations in IT services, managed data, and international fibre are supportive. This includes cloud computing services and international connections offered to corporate and government entities.

Financial Strengths:

Spark New Zealand is comfortably geared. Net debt/EBITDA before investment income as at the end of December 2021 was 1.2 times. Reliable free cash flow means that operations, maintenance capital expenditure, and investment can be largely funded by cash flow. Spark New Zealand’s capital structure is maintainable in its current form. The company aims to maintain an external credit rating in the A band, with the goal of keeping net debt/EBITDA below the internal threshold of 1.4 times. Spark New Zealand’s metrics to remain in line over the long term.

Bulls Say:

Spark New Zealand is the largest telecom provider in New Zealand, where it provides the most diverse range of telecommunications services. These characteristics provide reasonable diversity and will allow the company to execute a product-bundling strategy.
Spark New Zealand has a high-quality mobile network and has secured the greatest capacity in recent spectrum auctions. These attributes provide a valuable competitive advantage in the New Zealand market.
Free cash flow generation is strong, despite ongoing requirements to invest in networks, technology, and spectrum.

Company Description:

Spark is one of only two large integrated telecommunications companies in New Zealand. It is the dominant provider of fixed-line services in the country and effectively equal-number-one player in the mobile telephony market. It also boasts a commanding presence in the New Zealand corporate and wholesale telecommunications services provision space. Spark’s operations are split into mobile, voice, broadband, and digital-related services.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.