Treasure Chest: Spark New Zealand

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

The company is included in ASX300 and ALL-ORDS

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Jarden

The subject:

A confluence of factors, including a commitment to A-credit rating, a data centre transaction, asset sales, with both cyclical and structural headwinds, is driving Spark New Zealand ((SPK)) to review its capital structure and dividend policy.

More info:

Jarden’s latest update zooms in on the expectation of an “inevitable” dividend resizing for Spark New Zealand. The analyst has been highlighting the possibility for the last 18 months to align pay outs to shareholders more closely with the company’s “real” cash flow.

In this context, the balance sheet remains robust, but conflicting levers between earnings pressures in FY26 against a desire to retain its A-credit rating point to a dividend near the lower end of the communicated range.

At the 1H25 earnings report, Jarden emphasised the NZ20c per share dividend might become the new target, but more substantial cuts are required. A NZ25c dividend for FY25 is currently forecast.

The analyst envisages a dividend per share re-sizing inside the range of NZ15c-NZ17.5c. Its forecast for FY26 ranges from NZ17c to NZ20c, based on forecast free cash flow of NZ16c or around NZ20c excluding data centres, which the company is considering taking off balance sheet.

The downsizing is expected to be announced with the release of FY25 results in late August.

Jarden observes management’s cost-out program, while trading conditions are expected to remain challenging into FY26, which should affect mobile revenues and the IT business.

The broker’s target price has been reset to NZ$2.80 from NZ$3.10 with an Overweight (Buy-equivalent) rating retained. The market would likely welcome the reset to restore credibility, the broker suggests, as well as announcements on a revised strategy on mobile, details on the cost-out, and on how the data centre JV is progressing.

Macquarie also believes a new dividend policy will be instated from FY26 onwards based on free cash flow projections, alongside changes in working capital and capex growth, as well as restructuring costs.

A rebasing to around NZ15c per share from FY26 is anticipated, with a future dividend payout ratio of around 70%-90%, with renewed scope for growth in dividends as earnings advance and flexibility is reinstated around the payout ratio.

Up until FY25, shareholders had been receiving gradual increases in annual payouts to NZ27.5c, but the trend is about to reverse with this year’s payout forecast to be NZ25c and next year’s payout expected to be substantially lower.

FNArena’s three daily monitored brokers, consisting of Macquarie, UBS and Morgan Stanley, are currently suggesting FY26 will see the dividend decline to NZ19c only.

The prospect of reduced cash rewards for loyal shareholders has weighed heavily on the shares, with the share price declining from near $5 in early 2024 to $1.96 at yesterday’s close.

The release of interim results in February triggered a reset from $2.60 to below $2. If Jarden’s view proves correct, a reset of the dfividend might rekindle investor interest in the shares.

Macquarie has set a target price set of NZ$3 with an Outperform (Buy-equivalent) rating. This broker sees Spark New Zealand as a solid “core” telco earnings generator, with upside potential from high-tech earnings growth and a robust position in the NZ data centre market.

Goldman Sachs’ 1H25 telco review highlighted how the interim result disappointed, including a downgrade in earnings (EBITDA) guidance of -7% at the midpoint post a previous downgrade of -4% in October 2024.

This broker forecasts FY26 free cash flow of NZ17.8c and believes dividend sustainability is now a key issue, expecting it will be cut materially, depending on balance sheet strength.

Goldman Sachs set a target price set of NZ$2.75 with an unchanged Neutral rating.

On current forecasts, and translating NZD into AUD at current values, implies the shares are offering a yield of 11.9% for FY25, projected to decline to 9%, which once again highlights that an oversized yield on offer is likely the result of the market’s conviction that the dividend has become unsustainable.

History does suggest if management can come clean on future dividend reduction, this could forewarn of better times ahead for suffering shareholders.

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