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(SPK) Spark

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(SPK) Spark

Hi James, I never miss your well presented Stock Reviews and clear portfolio direction. This falling knife may have bottomed following the Annual Meeting Results. You said in previous Reviews that SPK would begin to look like good value below $3.00. Now trading at $2.83. Although NZ is in Recession and EPSG has been cut along with the Dividend. The big sell is their plan to sell assets to reduce debt and their Data Centre experience and future expansion plans. I would appreciate your thoughts please.

Answer

Hi Richard,

Spark (SPK) is one of those stocks that’s kept getting cheaper through the year, now finding itself down a painful 43% year-to-date.

At the end of October they downgraded earnings guidance by ~3.5% and lowered their dividend guidance by 2.5cps to 25cps, putting it on a yield of over 9%.  The downgrade was a mixture of cyclical (shorter term) issues, and some that were more structural (longer term), both conspiring to hit margins and thus earnings. The cyclical part is what we think investors have not appreciated. i.e. SPK is owned as a defensive yield play, not a cyclical stock.

The broader issue to think about with SPK at the moment, is they remain committed to expanding into high tech and data centre sectors, but they don’t have the funds to do it themselves, so they need a more aggressive capital management reset in our view. The other aspect worth highlighting is a move towards technology and data-centres will (proportionally) reduce it’s exposure to core utility type earnings – not necessarily a bad thing but a change in their earnings profile none-the-less.

This transition won’t be easy and could take 12-18 months to execute. As a positive reference, Singtel has re-rated by +30% in the last six months using a similar strategy. Asset sales would most likely need to happen to help fund the expansion, and we think they need to be more aggressive in cutting the dividend to align with their stated strategy.

  • At $2.70 we believe its offering solid risk/reward but the trend is clearly down and follow through towards $2.50 wouldn’t surprise hence we would call it an accumulate as opposed to “must buy now”.
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Spark New Zealand Ltd (SPK)
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