Stocks’ Details 

Spark New Zealand Limited

Well Positioned to Provide IT & Managed Services: Spark New Zealand Limited (ASX: SPK) provides telecommunications and digital services in New Zealand. The services include mobile service, voice services, broadband services, Internet television (TV), cloud, security, and service management services. SPK is well positioned to provide businesses with IT and managed services. SPK enables businesses to manage transitioning to the cloud and continue providing professional services on an enhanced scale. SPK is a market leader in New Zealand in meeting higher demand for digitisation. The company holds highly valuable assets portfolio to secure business growth.  

Update on Extension of Standby Facility: SPK’s wholly owned subsidiary Spark Finance Limited has announced regarding an extension of its NZ$200mn committed standby revolving credit facility. The credit facility is extended by one year and mature on 30 April 2024 providing liquidity cushion to SPK. 

1HFY21 Financial Highlights: The company has registered a decline in its operating revenue to NZ$1,796mn in 1HFY21 against NZ$1,824mn in 1HFY20 due to closure of borders resulting in fewer migrants. Similarly, the company has registered a decline in its earnings to NZ$148mn in 1HFY21 against NZ$167mn in 1HFY20. SPK has posted an improvement in its cash position to NZ$103mn as on 31 December 2020 against NZ$53mn as on 30 June 2020.

Liquidity Position (Source: Company Reports)

Key Risks: The company requires regulatory approvals to carry out its business efficiently. Any delay in regulatory approval may result in liabilities for the company. The company operates in a highly competitive environment. Thus, the company is exposed to risk of losing market share against its close competitors.

Outlook: SPK expects IT & Managed services to grow at a CAGR of ~4.6% till FY23. SPK expects an opportunity for growth for cloud market with strong growth in public cloud. The company expects nearly 80% of enterprises globally shift to colocation or cloud from on-premises digital storage by 2025. The company expects its EBITDA in a range of NZ$1,100mn – NZ$1,130mn for FY21. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of SPK gave a return of ~1.71% in the last one month and a return of ~-5.25% in the last three months. The current market capitalisation of SPK stands at ~$7.78bn as of 18 May 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$4.010-~$4.680. On the technical analysis front, the stock has a support level of ~$3.929 and a resistance of ~$5.23. We have valued the stock using an EV/Sales Value multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering an increase in cash as on 31 December 2020 and expectation of robust growth in cloud market. For this purpose, we have taken peers TPG Telecom Ltd (ASX: TPG), Vocus Group Ltd (ASX: VOC), Telstra Corporation Ltd (ASX: TLS), to name a few. Considering an improvement in liquidity position, Leadership in providing IT & managed services in New Zealand, liquidity cushion with extension of credit facility, current trading levels, and valuation, we recommend a “Hold” rating on the stock at the current market price of $4.15, down by ~0.48% as on 18 May 2021. 

Seven West Media Limited

Agreements with Google and Facebook to Underpin Growth: Seven West Media Limited (ASX: SWM) operates through various segments, including Television, The West and Other Business and New Ventures in Australia. SWM has announced on 3 May 2021, regarding agreements with Google and Facebook. The agreement enables the company to witness a growth in its digital platform. SWM expects revenues from digital platform (associated with the agreement) before the end of FY21. The company paid off its debt amounting to $45mn (Proceeds from the Airtasker IPO) with a total debt retirement of $195mn in the 2H till date. 

1HFY21 Financial Highlights: The company has registered a decline in its revenue to $644.23mn in 1HFY21 against $714.46mn in 1HFY20. Despite a decline in revenue, the company has posted a profit of $116.35mn in 1HFY21 against a loss of $49.35mn in 1HFY20. The company has reported an improvement in its liquidity position with cash and cash equivalents at $411.66mn as on 31 December 2020 against $352.02mn as on 30 June 2020.

EBITDA Growth in 1HFY21 (Source: Company Reports)

Key Risks: The company holds interest-bearing liabilities. Thus, any severe change in interest rate may lead to financial losses for the company. The company requires regulatory approvals to carry out its business efficiently. Any delay in regulatory approval may result in liabilities for the company.

Outlook: The company has provided a guidance on its net debt to be in a range of $270mn-$280mn by the end of FY21. The company remains focused on cost saving initiatives along with improving its liquidity position through the sale of SWM Ventures and Seven Studios businesses, going forward. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of SWM gave a return of ~-22.33% in the last one month and a return of ~-31.03% in the last three months. The current market capitalisation of SWM stands at ~$569.07mn as of 18 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$0.077-~$0.590. On the technical analysis front, the stock has a support level of ~$0.322 and a resistance of ~$0.521. We have valued the stock using an EV/Sales Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount as compared to its peer median, considering a decline in revenue in 1HFY21 and impact on content production activities throughout 2021 due to Covid-19. For this purpose, we have taken peers Prime Media Group Ltd (ASX: PRT), Enero Group Ltd (ASX: EGG), Southern Cross Media Group Ltd (ASX: SXL), to name a few. Considering the company has registered profits against losses in 1HFY21, an increase in cash balance as on 31 December 2020, agreement with Google and Facebook for growth of its digital platform, current trading levels, valuation, and key risks associated with the business, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.40, up by ~8.108% as on 18 May 2021. 

5G Networks Limited

Wholesale Offering to Boost Revenue: 5G Networks Limited (ASX: 5GN) is principally engaged in providing high speed broadband access to businesses. It also offers cloud-based solutions, managed services, and network infrastructure services. 5GN has announced on 13 May 2021 regarding a launch of 5GN wholesale to its Melbourne base. 5GN Wholesale will offer its customer with varied features such as – access to data centres, high speed connectivity services upto 100GB to international locations, IP transit with DDOS capability of over 600GB/S and 5GN cloud services. The company expects its revenue to grow by $10mn per annum. 

An Update on Q3FY21 Performance: 5GN has posted a robust growth in its revenue to $26.5mn in Q3FY21 on the back of increasing demand for the 5GN voice bridge one Microsoft teams’ product. The company has achieved its EBITDA target of 20% of revenue for the March month. The company has partly repaid the debt amounting to $42mn. 5GN is expecting a further $15mn of bank debt facility for any potential acquisitions. In early May 2021, 5GN has launched Wholesale automated service fulfilment portal. 

1HFY21 Financial Highlights: The company has registered an increase in its revenue to $37.25mn in 1HFY21 against $25.36mn in 1HFY20. WCG has contributed $9.3mn of revenue to the total revenue. 5GN has incurred a loss of $2.25mn in 1HFY21 mainly on the back of acquisitions and transaction costs. WCG has contributed an operating loss of $0.5mn during 1HFY21. The company has seen a weaker liquidity position with a decline in cash and cash equivalents to $8.26mn as on 31 December 2020 against $22.11mn as on 30 June 2020. 

Financial Performance (Source: Company Reports)

Key Risks: The company is exposed to the failure of technology risk, which may result in discontinuation of its business for an indefinite period. The company operates in multiple countries. Any severe movement in foreign exchange prices may lead to forex losses for the company.

Outlook: 5GN has reviewed number of strategic acquisitions and likely to utilise its debt facility to acquire potential opportunity. 5GN has been witnessing a rapid progress towards Data Centre Fibre build with 13 data centres online. The company is expecting 35 data centres online by 30 June 2021 and ~80 targeted by the end of the calendar year. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of 5GN gave a return of ~-18.85% in the last one month and a return of ~-33.99% in the last three months. The current market capitalisation of 5GN stands at ~$113.68mn as of 18 May 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$0.885-~$2.440. On the technical analysis front, the stock has a support level of ~$0.837 and a resistance of ~$1.327. We have valued the stock using an EV/Sales Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some discount as compared to its peer average, considering the company has incurred a loss in 1HFY21 and higher transaction costs. For this purpose, we have taken peers Aussie Broadband Ltd (ASX: ABB), MNF Group Ltd (ASX: MNF), Spirit Technology Solutions Ltd (ASX: ST1), to name a few. Considering an increase in revenue in 1HFY21, launched wholesale offering to boost revenues, paying off its debt, current trading levels, and valuation, we recommend a “Buy” rating on the stock at the current market price of $0.99, down by ~0.503% as on 18 May 2021.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters) 

Note: Investment decision 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.

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