Spark New Zealand Ltd's (ASX : SPK) share price is currently in the vicinity of $3.62. Last year's earnings per share (EPS) were 22c and are expected by the company to remain stable in coming years.
The resultant price to earnings ratio of around 16.5 is on the high side and reflects a market view that Spark is solid, stable and reliable.
A bill to add greater certainty to New Zealand's telecommunications industry is currently before the New Zealand Parliament and is likely to be passed.
Within this framework, Spark can create a good future for itself albeit one in which revenues, prices and service standards for core services are overseen by the government. Investors should never expect sky high (super normal) profits within this kind of regulatory space.
New Zealand is a small and somewhat saturated telecommunications market that is unlikely to experience the rabid levels of competition and infrastructure duplication by large players in the Australian telecommunications sector. This is good news for Spark shareholders.
Nonetheless there are 80 retailers of broadband products within New Zealand using common fibre and copper cable that is owned by Chorus New Zealand (NZX: CNU). Chorus was required to demerge from Spark in 2011 and is prohibited by regulation from providing direct telco services to customers. Spark does however retain some backhaul fibre and copper assets. Spark's competitors include Vodaphone New Zealand, 2degrees and Vocus.
Spark is achieving excellent customer retention rates in the migration from copper to optical fibre connections or from copper to a wireless broadband connection. Many New Zealand households now opt to do without a land-line. A reported 77% of Spark customers have reportedly been migrated off copper land-line connections.
Revenue from Spark's legacy voice and managed data services continues to decline, however, this reduction has been countered by recent growth in IT Services. Spark reports that it has been successful in winning some major government contracts and that the government as a customer remains happy.
As is the case with many telcos, Spark aims to continue cost reductions by simplifying and digitising both operations and customer interfaces.
Whether or not Spark deserves a spot in your portfolio may depend partly on your investment exposure to the ebbs and flows of the Australian economy. New Zealand's economy is not without its own risks, however, there is a significant stretch of water between Spark and the so-called Sydney and Melbourne property bubbles.
Foolish takeaway
Spark's recent ability to maintain or grow market share, revenue and profitability in its areas of operation is a significant green flag. While Spark maintains this trend the company will continue to be viewed as a safe haven. Perceived safety does come at a price and Spark shares are not cheap.
Further out there is a risk that Spark will not be able to sustain dividends that exceed company earnings. Spark will need to retain earnings to invest in itself for a longer-term future.
