Spark New Zealand ((SPK)) will become predominantly a wireless broadband provider leveraging 5G spectrum and, in simplifying its business, reduce a dependence on legacy technology.
The company’s FY21-23 financial targets include a higher number of enhanced mobile broadband subscribers, NZ$500m in free cash flow and a 5G roll-out completed by the end of the period. Brokers assess the free cash flow target is achievable by FY23.
The company has ascertained that wireless is increasingly able to meet most customer needs and intends to participate in extended data analytics to unlock better customer experiences.
Spark NZ expects to be value accretive in the short term through its core business of wireless broadband and the cloud, and in the long-term through new markets such as digital health, Internet of Things and sport.
Confidence is justified, Credit Suisse asserts, as the company has turned around its business and provided modest revenue and operating earnings growth. The stock has re-rated and benefited from the reduction in interest rates, trading at a similar premium to ten-year government bonds as it did three years ago.
The 5G plan is to cater to customers with high data needs and free up 4G spectrum to increase capacity in regional and rural areas. Macquarie notes management’s disciplined approach to capital expenditure with a target of 10-11% of revenue, which will focus on the phased roll-out of 5G and investment in rural communities.
In addition, a long-term investment will be required in mobile spectrum in FY21 of NZ$50m and again in FY23 to secure long-term rights to critical 5G C-band spectrum. Nationwide coverage by FY23 in 5G is envisaged and the higher subscriber targets signal to UBS peak industry wireless broadband subscribers of more than 350,000.
Credit Suisse agrees Spark NZ still needs full access to spectrum to make the necessary investment in 5G and this will be an issue that should be watched over coming years.
Competition remains a key threat to dividend growth, the broker asserts. A benign competitive environment in mobile is countered by the potential for further competition in broadband, which may mean pressure on margins.
Credit Suisse notes Spark NZ has significant gross margins embedded from fixed input bypass and the large copper base, and with 5G coming on stream can understand why the company is confident it can grow fixed wireless further.
Nevertheless, if Spark NZ is to ultimately sustain 30-40% of its broadband base on fixed wireless, and retain the margin that accompanies this, competition coming from fibre will increasingly need to be addressed.
An “emboldened” Chorus ((CNU)) is looking to embed fibre as the broadband network of choice, the broker asserts, and fibre is growing at a faster rate than fixed wireless. Fixed wireless lags fibre on latency although Spark NZ is confident in its ability to close the gap.
To leverage the trends, Macquarie asserts the company needs to anticipate customer needs and in this requires a future-facing technology plan to support the growth of data, AI and machine learning capability.
UBS also highlights customer analytics as key, which in turn should reduce marketing, advertising discounting and, possibly, churn. The broker retains a Neutral rating and NZ$4.55 target and valuation is based on medium-term dividends growing to NZ31c by FY28.
While there is a lot to like about the investment case, Credit Suisse has a Neutral rating and NZ$4.38 target and is mindful of the steady growth in debt over the last five years as well as in working capital.
Dividends have supported the yield above cash earnings, but the company cannot continue to increase debt with such modest earnings growth, the broker asserts, all the while keeping working capital and investment in check.
Macquarie, with a Neutral rating and NZ$4.80 target, assesses the target for free cash flow potentially supports a dividend of NZ27.5c, consistent with the company’s intentions of delivering a sustainable dividend over time.