Spark New Zealand

Fat Prophets

Friday 4th December 2015

Hot Stock - Spark New Zealand (SPK.ASX)

What’s new?

Spark has successfully completed the first stage of its transformation plan to stabilise revenue and margins in its core business segments in FY14/FY15. As the largest revenue stream, Home, Mobile and Business division achieved a modest revenue growth of 2.9 percent during the period, while the EBITDA margin was maintained at 25 – 27 percent.

Mobile connections continue to grow strongly and are up by 600,000 since FY13, with 172,000 added in the last financial year. Spark now has around 36 percent of the New Zealand mobile market and is closing the gap on Vodafone.

The company also has the scope to take on more debt, where necessary, to facilitate its strategic imperatives. Accordingly, we are not surprised to see Spark launch a retail bond offering of up to $150 million to take advantage of the current low interest rate environment.

Outlook

While the New Zealand mobile market is competitive, there are plenty of gains to be had, and the overall outlook remains strong. McKinsey & Company forecasts that New Zealand mobile data usage will see a 70 percent compounded annual growth rate by 2020. Spark is looking to position itself over the next three years for this, and is aiming to driver greater value from existing connections.

The second stage of Spark’s transformation plan is to drive market revenue and margin growth while continuing to improve unit costs. Given the operational momentum that the company has on a variety of fronts, and the recent proven ability of management to execute, we are also backing this outcome.

In our view, Spark’s exclusive products such as Lightbox position it well to grow engagement and boost data usage. Improved customer experiences should also reduce churn, and provide a further fillip to profitability. In the New Zealand broadband market, Spark has a dominant position with more than 45 percent of the market, but it faces the challenges from both traditional and non-traditional players.

Price

Spark is currently trading at 16.5 times next year’s forecast earnings and offering a 7.5 percent yield, which we view as highly appealing in a low cash rate environment. Encouragingly for investors, the fundamental view is currently consistent with Spark’s technical outlook, with the share price having recently rotated higher following the formation of a double bottom at $2.65. With a bullish moving average cross in place, momentum is likely to strengthen further, and we envision prices tracking towards the $4 region in the coming months.

Summary

We believe that the market is yet to allow for the earnings uplifts that are coming through to Spark in the coming years, and view the current price metrics as undemanding.

Greg Smith is Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

Disclosure: Spark New Zealand is held in the Fat Prophets Global Opportunities, Australian Share Income, Concentrated Australian Share and Small/Mid-Cap Models.

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