WEEKLY STOCK COMMENT: SPARK NEW ZEALAND
Roy Davidson, 10 May 2018
Spark New Zealand (SPK) (formerly Telecom New Zealand) is the largest retail telecommunication service provider (RSP) in New Zealand. Following the demerger of its fixed line access network business, (now Chorus), SPK comprises the Home, Mobile and Business unit, Spark Digital (previously Gen-i) and Spark Ventures. SPK now competes on an equal footing with other RSP's across voice, broadband, mobile and business data markets.
SPK's investor day was anchored around its 3-year ambition to deliver higher cost-out driven earnings growth to cover a flat total dividend of 25cps across FY18-20. The key changes to SPK’s forward 3-year strategy include: (1) more emphasis on exiting copper to fibre and/or Fixed Wireless Access, (2) product simplification to drive better customer experience (net promoter score measured) and lower cost to serve, and (3) focus on delivering gross cost savings of NZ$150-200mn pa by FY20.
The broadband market is fiercely competitive with a number of new entrants taking market share from the major players such as SPK. Competitors are capitalising on demand for data, new online services such as internet TV, and the ultra-fast broadband roll-out which creates a churn event as customers compare their current providers to new alternatives. While market conduct is becoming more disciplined and the flood of new entrants appears to have ceased SPK will continue to face stiff competition, limiting any ability to exercise pricing power. SPK is operating a value led strategy, offering add-on’s such as its Lightbox TV streaming service, as opposed to competing purely on price. This is similar to its strategy in mobile, which has been successful.
SPK has a highly competent management team. We think company, over recent years, has executed well modernising its incumbent starting point (largely fixed line) and specifically rebuilding its market position in mobile and strengthening its IT offering via Cloud and data center capabilities. Broadband and the Enterprise & Government end-markets have been hypercompetitive and are likely to remain so looking forward. From an investment perspective, SPK delivering broadly flat EBITDA and EPS performance over the last five years has resulted in total shareholder returns outperforming key peers TLS and CNU. New growth businesses, such as Lightbox, Bigpipe and the recently created Morepork smart home security system are yet to provide a meaningful contribution to earnings. With a relatively flat industry revenue outlook, SPK needs to deliver its cost-out strategy to deliver its earnings and dividend ambitions.
Potential downside risks for SPK include 1) increased competition, 2) regulatory change, and 3) rising interest rates.