Spark NZ Steps Up Digital Technology Strategies

This story features SPARK NEW ZEALAND LIMITED. For more info SHARE ANALYSIS: SPK

-More emphasis on digital growth
-Caution over medium term outlook
-Morgan Stanley questions Lightbox
 

By Eva Brocklehurst

Spark New Zealand ((SPK)) is positioning to exploit its key markets of mobile, broadband and communications technology to offset a decline in its legacy voice network. The company updated analysts at its recent strategy briefing, signalling that its formula may not have changed at the top line but better growth should come from mergers, investment in adjacent technology and market share gains.

For the first time in years, Morgan Stanley observes the company provided an aspirational goal of 0-2.0% growth in revenue over FY15-18. This is to be driven by market share gains in mobile, holding share in broadband, capturing a share of transitions to the cloud and selective acquisitions. Capital expenditure is to be maintained at 10-12% of sales. The Digital First program is expected to deliver around NZ$150m in earnings benefit over the next three years.

Productivity gains remain necessary, UBS observes. The company's ambitions for broadband and mobile are broadly in line with the broker’s forecasts. The source of upside is with platform services, and the cloud, which is expected to grow at 11-14% per annum, with considerably higher margins.

The broker believes the company is executing exceptionally well but remains cautious about the magnitude of growth. New Zealand earnings forecasts stagnate from FY18, as operating expenditure reductions fade away. Still, positive news flow and a prospective cash yield of around 8.0% continues to support the stock, the broker observes.

There was further insight into where the company expects earnings growth to come from along with a refinement of its mobile strategy, Credit Suisse notes. The company remains confident in the near term outlook for earnings and dividends but was light on specifics for the medium term.

The broker acknowledges the company is cautious about the extent that cost savings can be retained in a competitive market while investment into new ventures is not expected to contribute for some time. Hence, Credit Suisse envisages somewhat of a discrepancy emerging between strong top line growth and cost cutting potential and how this translates to greater earnings growth.

A stabilising regulatory environment and a return to revenue growth were positive features of the briefing, and considered supportive of Morgan Stanley's Overweight call, although industry feedback suggests to the broker there is an elevated level of competition in mobiles and broadband.

Retaining share in broadband could provide difficult, Morgan Stanley observes, with CallPlus and Trustpower continuing to win share and MyRepublic entering the industry. Cost cutting remains the driver of earnings growth and Morgan Stanley suspects the company could extract another NZ$50-70m in reductions over the next two years.

The broker does question the company's belief that Lightbox is improving its brand, driving data growth and potentially increasing the lifetime value of its broadband customers. This runs counter to Morgan Stanley's feedback, which suggests acquiring media content to drive data growth is risky. The broker believes Lightbox should be shut down and there would be a potential uplift to free cash flow and earnings of 5-6% if this occurred.

The main variation from Deutsche Bank's outlook is the company's 3-year outlook for broadband growth. The digital offering is intent on capturing the share of spending that is moving to consumption based cloud and platform services from the traditional capital intensive information technology.

While this offers potential, the issue for the broker is the pressure that continues on the traditional telco services. That said, Deutsche Bank notes management's plans to work in its digital offering more closely with its Connect business to improve efficiency and customer solutions. All up, there are better outlines of priorities and challenges but not enough to make the broker change estimates materially.

FNArena's database has one Buy rating for Spark NZ (Morgan Stanley) with five others rating the stock Hold.
 

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