Spark New Zealand Limited

SPK Details

Connect 8 Agreement: Spark New Zealand Limited (ASX: SPK) offers a wide variety of telecommunications, information technology, media and other digital products and services. Its segments include mobile; voice; broadband; cloud, security, and service management; procurement and partners; managed data and networks, and other. In December 2021, SPK signed an agreement to buy back 50% of the Connect 8 shares from Electra Group – an electricity distribution company. The above said transaction is expected to be completed in early 2022.

FY21 Group’s Financials:

• Director’s Appointment: SPK appointed Sylvia Ding as a future director, which is effective from 1^st February 2022 under the Future Directors Programme.
• Income & Profitability: Due to the loss of roaming revenues, the company recorded a marginal decrease of ~0.8% Y-o-Y in its total revenue as ~NZ$3,593 million in FY21 leading to a ~8.6% Y-o-Y decrease in its net profits to ~NZ$384 million versus ~NZ$420 million in FY20. The decrease in NPAT is owed to higher depreciation and increase in tax expenses.
• Balance Sheet: The company declared FY21 dividend of ~NZ$25 cents per share and closed its balance sheet with an increase in cash and equivalents to ~NZ$72 million at the end of 30^th June 2021 versus ~NZ$53 million at the end of 30^th June 2020.

Cash Balance Highlight (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19: The company is vulnerable to the risks associated with the impacts of COVID-19 and the new variant Omicron and affects the employees, operational functions, and thereby profitability.
• Regulatory Risks: With the uncertainty in regulations and approval from government authorities the company is susceptible to the risks associated with the delays.

Outlook: Looking forward the company is anticipating its roaming revenues and overall growth in broadband & prepaid markets to be impacted by lockdown restrictions. On the other hand, labour market is also affected due to lower migration. With the completion of Phase 1 of Infrastructure Assets Review, SPK anticipates further investments in FY22, a total of ~NZ$125 million which will include ~NZ$35 million to accelerate 5G rollout. It expects to cover ~90% of population by the end of CY23. The group’s First Half FY22 results are awaited to be released on 23^rd February 2022.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: 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 the company has given a negative return of ~8.31% in the past six months. Currently, the stock is trading below the average of its 52-week low and high levels of $4.01 and $4.78, respectively. The support and resistance levels for the stock are placed at ~$3.70 and ~$4.32, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with a correction of high-single-digit (in % terms). The company can trade at some premium its peers’ average EV/Sales multiple, taking into consideration that the company has been trading at a premium on historic basis to its peers’ average EV/Sales multiple and reducing debt-to-equity ratio, etc. For the purpose of valuation, peers such as TPG Telecom Ltd (ASX: TPG), Telstra Corporation Ltd (ASX: TLS), and others have been considered. Considering the expected downside in valuation, expected headwinds related to COVID-19 Omicron, labour constraints and lower roaming revenues environment, current trading level, and key risks associated with the business, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $4.16, 10:30 AM (GMT+10), Sydney, Eastern Australia, as on 27 January 2022.

SPK Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV 

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and is subject to the factors discussed above alongside support levels provided.

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