Formerly known as Telecom New Zealand, Spark New Zealand Ltd (ASX: SPK) doesn't attract the attention that it's Australian cousin Telstra Corporation Ltd (ASX: TLS) has become accustomed to.
After a year of reorganisation and shedding non-core businesses, investors can get a clearer picture of how the core Telecom business is operating and the results aren't too shabby:
- Revenue down 2.9% to $3,351m
- Net Profit After Tax fell 18.5% compared to 2014*
- Profit from continuing operations rose 16.1% to $375m*
- Operating costs fell 5% to $2,566m
- Earnings per share of 20 cents
- Paid dividends of 20 cents per share
- Added 172,000 mobile connections during the year
- $80m cash at bank (down from $208m in 2014)
- Guidance for 0-3% growth in Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) and 10% increase in dividends in 2016
* 2014's profit was elevated due to profits achieved on the sale of AAPT; 'profit from continuing operations' strips out this and similar items and appears a better indicator of how the core business performed
So What?
I like Spark's decision to exit non-core businesses and redeploy the capital into other 'digital services' like data centres and IT services which should be a natural fit with its telecom businesses. Spark also looks to be taking market share from its competitors, with 172,000 new mobile connections reflecting a meaningful portion of New Zealand's population of 4.4 million.
However, Spark also notes that controlling churn is one of the key priorities for its mobile business, so it is uncertain just how valuable the customers it adds will be. Spark has also developed a bunch of new services to complement its mobile and broadband offering; Revera (cloud services), Qrious (data analytics) and Lightbox (tv streaming).
The addition of these services looks to be a big positive but cloud services and tv streaming, in particular, are becoming highly competitive sectors and investors should watch to see that Spark is able to create value for shareholders with these services.
Probably the biggest thing to catch my eye was Spark's high dividend payout ratio, which was 100% of profit in 2015. This means that Spark went backwards in terms of free cash flow and with dividends forecast to increase 10% in 2016 despite a 0-3% increase in EBITDA, this occurrence looks set to continue.
Capital expenditure will fall in 2016 which means that Spark may be able to fund its dividends from free cash flow, but I instinctively shy away from companies that pay such a high percentage of profits as dividends. Having recently commenced a bunch of new services I would prefer to see Spark invest in those or put cash aside for future investing needs.
Spark does maintain an 'A-' credit rating with stable outlook from Standard & Poors, but this is something investors should keep an eye on.
Now What?
I've had my eye on Spark for a couple of years now, and it caught my eye again last year when it sold its rentals business to FlexiGroup Limited (ASX: FXL). Today's results look to be a step in the right direction, but I still feel it is too early to consider adding Spark to my portfolio.
