Overview: With “earnings season” behind us, it is timely to look back at the company that produced one of the better results. Spark New Zealand Limited surprised the market with the promise of increased dividends in 2016, including a 3 cents per share special dividend.
Pros: Also notable in the result was good growth in mobile connections, up 172,000 in 12 months. More importantly Spark has managed to win back market share, seeing their share of mobile revenue rise 2 percent to 41 percent. Mobile revenues grew 4.4%, when overall revenues were off 2.9 percent.
Spark also saw good gains from their IT services with revenue up 5.5 percent. This stems from their acquisition of Appserv in July 2014, a small business focused, cloud based, IT infrastructure provider.
Whilst revenue was down, net earnings from continuing operations were up 16.1 percent to $375 million. This was partly a function of a lower tax bill (due to a combination of the non-taxable gains on the sale of businesses and the impact of prior period adjustments). Much of the difference between the drop in revenue and increase in profit comes back to the cost cutting, or rationalisation of expenses, that Spark has embarked on.
Cons: Cost cutting can only grow the bottom line so far. Spark will be aiming to grow their top line revenue in the long run. This is easier said than done.
Fixed line revenue, i.e. traditional home lines, have been on the wane for a number of years, as new generations forgo the home line in favour of mobiles. Home lines were traditionally Spark’s bread and butter, and their slow demise is forcing the company into more and more competitive markets in order to maintain their bottom line.
Whilst there is no doubt the mobile, broadband, and IT markets are competitive places, Sparks foray into online content delivery is perhaps the best example of the intense competition they face. Lightbox, Spark’s entrance in this space, is up against US giant Netflix and Neon from Sky TV and a plethora of other options. There is also the ongoing risk of technological obsolesce to deal with.
Price performance: The share price shot up 9 percent on the day of their result and has risen a further 8 percent in the subsequent weeks.
Investment outlook: Many will be attracted by the promise of a forward gross yield north of 10 percent (particularly with interest rates in the doldrums). Sparking profit growth could be difficult.
*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.