SPK - Spark NZ

[Basil]

Great idea...just keep buying heavily in a downtrend...what could possibly go wrong lol

[LoungeLizard]

Great idea...just keep buying heavily in a downtrend...what could possibly go wrong lol

I agree on not buying in a downtrend as a pretty hard and fast rule - but Spark is the exception that proves the rule, in my view.
Spark is different as there has been a certain amount of confection created by both shorting and index re-setting. The fundamentals though simply don't support nearly a 50% sell off. It is a defensive infrastructure stock with a (still) good yield providingng a service that is required in good times and bad (ie it is not cyclical). The sell-off just isn't supported by SPK'S history, market position, industry or indeed, it's own performance. 
I remain convinced that once the dust is settled people will start to realise just how ridiculous this selling-low mindset really was. 

[Basil]

I'm going to stick with my gold standard valuation methodology that has served me so well for more than a decade, derived from Ben Graham's valuation criteria that a no growth company is worth no more than a PE of 10.  Using that benchmark has helped me successfully navigate all sorts of trouble over the years.  There's a long-proven history as articulated best by Ferg, that this company cannot grow eps and is stuck averaging about 22 cps over the last decade, and I note too that eps is forecast to be lower than that over the next few years.  Obviously, I am deeply skeptical that building and funding, (not sure how they are going to fund it?) a data center is going to be meaningfully eps accretive, but who knows, predicting the future is far from an exact science and I certainly got a lesson, (thankfully a free one), on that this year with Heartland, so fair enough LL and I wish you good luck with it.

[LoungeLizard]

I'm going to stick with my gold standard valuation methodology that has served me so well for more than a decade, derived from Ben Graham's valuation criteria that a no growth company is worth no more than a PE of 10.  Using that benchmark has helped me successfully navigate all sorts of trouble over the years.  There's a long-proven history as articulated best by Ferg, that this company cannot grow eps and is stuck averaging about 22 cps over the last decade, and I note too that eps is forecast to be lower than that over the next few years.  Obviously, I am deeply skeptical that building and funding, (not sure how they are going to fund it?) a data center is going to be meaningfully eps accretive, but who knows, predicting the future is far from an exact science and I certainly got a lesson, (thankfully a free one), on that this year with Heartland, so fair enough LL and I wish you good luck with it.

Cheers, Basil. This isn't an exact science and we all to some extent have to back our instincts. My instincts tell me this valuation of Spark is completely wrong, historically and looking forward.
 
I get your "no growth" metrics but that's too blunt an instrument in my view. It's a good guide that serves most investors most of the time, but market leading infrastructure/utility stocks can't be judged by the same metrics as say, retail business's. They demand a premium because of their position in the very safe, non-cyclical market they operate in. If they pay a very good dividend (which Spark has, and will continue to do so) then that also is a factor to consider, beyond the "no growth" mantra.
Let's see how this turns out. IFT and SPK are my biggest stocks (IFT the biggest) so in some ways there's a bit of a hedge there. I'm backing that both will follow their very long historical paths of being very good investment stocks to have in one's portfolio.

[BlackPeter]

Cheers, Basil. This isn't an exact science and we all to some extent have to back our instincts. My instincts tell me this valuation of Spark is completely wrong, historically and looking forward.
 
I get your "no growth" metrics but that's too blunt an instrument in my view. It's a good guide that serves most investors most of the time, but market leading infrastructure/utility stocks can't be judged by the same metrics as say, retail business's. They demand a premium because of their position in the very safe, non-cyclical market they operate in. If they pay a very good dividend (which Spark has, and will continue to do so) then that also is a factor to consider, beyond the "no growth" mantra.
Let's see how this turns out. IFT and SPK are my biggest stocks (IFT the biggest) so in some ways there's a bit of a hedge there. I'm backing that both will follow their very long historical paths of being very good investment stocks to have in one's portfolio.

Ever wondered, whether Spark is really an infrastructure stock? Chorus, yes - they own most of the fibre, but Spark? Spark is at best one in a happy threesome (Spark, One and 2 degrees) of Telecom utilities with some other minors thrown in. Remove Spark and nobody will really notice a difference ... everybody else is able to provide the same lousy service. No monopoly, no moat - so, why would the market pay a monopoly premium?

I recon that's what the market noticed as well, and Basils (or Grahams) formula makes a lot of sense in this context. Obviously, you can always hope for that the market quickly unlearning, what it just noticed, but despite some market participants being quite average ... not sure, I would put money on them forgetting this lesson so soon.

But anyway - I have no money in Spark (though they might be a minnow in one of my funds) - i.e. I don't care. Good luck to holders - and lets hope IFT isn't doing at some stage a Spark on you.

[LoungeLizard]

Ever wondered, whether Spark is really an infrastructure stock? Chorus, yes - they own most of the fibre, but Spark? Spark is at best one in a happy threesome (Spark, One and 2 degrees) of Telecom utilities with some other minors thrown in. Remove Spark and nobody will really notice a difference ... everybody else is able to provide the same lousy service. No monopoly, no moat - so, why would the market pay a monopoly premium?

I recon that's what the market noticed as well, and Basils (or Grahams) formula makes a lot of sense in this context. Obviously, you can always hope for that the market quickly unlearning, what it just noticed, but despite some market participants being quite average ... not sure, I would put money on them forgetting this lesson so soon.

But anyway - I have no money in Spark (though they might be a minnow in one of my funds) - i.e. I don't care. Good luck to holders - and lets hope IFT isn't doing at some stage a Spark on you.

Well I suppose Spark are a mixture of a utility and infrastructure stock. They own several datacentres (and are expanding), part-own Sothern Cross international cable, and they do actually own fibre as well, not the door-to-the-door type like Chorus, but what I believe is called the "back-haul" fibre network between the major centres.

 That, together with their IT Services, cloud technology etc sets them apart from One NZ and 2Degrees. They don't have a monopoly in any of these individual areas, but no-one else comes near to providing the range of services that Spark offer. That's why, to just dismiss them as a regular "no growth company" is a bit simplistic in my view.

[Mos]

Craig's latest note on SPK.

SPK – Spark is now out of the MSCI but that hasn't stopped the share price slide with the stock closing on a new low of $2.86 yesterday ... we couldn't help but reflect on Tim Hunter's NBR article last month discussing whether SPK has shot itself in the foot ... if SPK were to have a second "reset" of its dividend to a more 'affordable' level of circa 18-20cps then the stock would be trading on a minimum 6.2% net yield, the question then is does that make the stock cheap when there has been close to zero EBITDA growth for a decade? It's interesting to look back on past research notes .... In FY13 SPK EBITDA was c$1.043B, the bottom end of SPK's guidance for the current FY25 year is $1.120B an increase of 7% in 12 years. Even more interesting is that a decade ago SPK's share price was $3.15 and 1 Yr Fwd DPS was 19cps putting the stock on a net yield of 6% at the time....from an historical perspective perhaps SPK is not so cheap after all despite its c45% share price fall this year from a high of $5.40 to the current $2.86.

[seaweed]

Craig's latest note on SPK.

SPK – Spark is now out of the MSCI but that hasn't stopped the share price slide with the stock closing on a new low of $2.86 yesterday ... we couldn't help but reflect on Tim Hunter's NBR article last month discussing whether SPK has shot itself in the foot ... if SPK were to have a second "reset" of its dividend to a more 'affordable' level of circa 18-20cps then the stock would be trading on a minimum 6.2% net yield, the question then is does that make the stock cheap when there has been close to zero EBITDA growth for a decade? It's interesting to look back on past research notes .... In FY13 SPK EBITDA was c$1.043B, the bottom end of SPK's guidance for the current FY25 year is $1.120B an increase of 7% in 12 years. Even more interesting is that a decade ago SPK's share price was $3.15 and 1 Yr Fwd DPS was 19cps putting the stock on a net yield of 6% at the time....from an historical perspective perhaps SPK is not so cheap after all despite its c45% share price fall this year from a high of $5.40 to the current $2.86.

Good points Mos and agree on just about all of what you said. The low for the year was $2.85c and that was my doing on 30/10/24 at 10.02 am and 5 mins later was back to 2.89 and closed that day at $3.00. The real low for that day would of been 2.89 if I hadn't sold 20,000 at 10.02. I am still waiting for it to go down to 2.20 or so as people on here have been saying. At what price would it interest you to buy into SPK. 

[LoungeLizard]

Craig's latest note on SPK.

SPK – Spark is now out of the MSCI but that hasn't stopped the share price slide with the stock closing on a new low of $2.86 yesterday ... we couldn't help but reflect on Tim Hunter's NBR article last month discussing whether SPK has shot itself in the foot ... if SPK were to have a second "reset" of its dividend to a more 'affordable' level of circa 18-20cps then the stock would be trading on a minimum 6.2% net yield, the question then is does that make the stock cheap when there has been close to zero EBITDA growth for a decade? It's interesting to look back on past research notes .... In FY13 SPK EBITDA was c$1.043B, the bottom end of SPK's guidance for the current FY25 year is $1.120B an increase of 7% in 12 years. Even more interesting is that a decade ago SPK's share price was $3.15 and 1 Yr Fwd DPS was 19cps putting the stock on a net yield of 6% at the time....from an historical perspective perhaps SPK is not so cheap after all despite its c45% share price fall this year from a high of $5.40 to the current $2.86.

Strange commentary. Craigs can't seem to decide whether to evaluate Spark as a growth or yield stock, when it's clear that SPK has been the latter for donkeys years. The answer to its own question of whether a further cut dividend to 18-20c (I don't think it will go that low), representing a 6.2% NET yield, would make the stock cheap is - yes, absolutely. I'll take that yield whilst Spark gets its house in order and the data centre investments starts to pay off.

Craigs then change tack and talk about EBITDA growth over the last ten years. Is that really that relevant for a stock that has delivered a solid yield over that period? It delivered a 6% NET yield 10 years ago (when interest rates were 3.5%), and even if the dividend is cut further (which it may or not be) the yield would, as Craigs say, be 6.2% net. A pretty solid yield over a sustained period because IT"S A YIELD STOCK.

I also note, that even though the ratings agencies have jumped a bit on the MSCI bandwagon, the average target SP for SPARK is still around $4. Sounds to me that even they don't believe their own story.

[BlackPeter]

I alos note, that even though the ratings agencies have jumped a bit on the MSCI bandwagon, the average target SP for SPARK is still around $4. Sounds to me that even they don't believe their own story.

Funny post.

I assume you realize that Rating Agencies have absolutely nothing to do with making up target prices? Latter is what some brave stock market analysts do who don't have enough investment skills to live off those.

While its not unheard of that Rating agencies get the credit rating wrong, there is still some statistical relevant correlation between their rating and the survival of the rated security.

Target prices however are always statistically irrelevant - and neither produced by rating agencies.

[LoungeLizard]

Funny post.

I assume you realize that Rating Agencies have absolutely nothing to do with making up target prices? Latter is what some brave stock market analysts do who don't have enough investment skills to live off those.

While its not unheard of that Rating agencies get the credit rating wrong, there is still some statistical relevant correlation between their rating and the survival of the assessed security.

Target prices however are always statistically irrelevant - and neither produced by rating agencies.

Just my use of the term there BP. I'm referring to business's like Craigs that do have target share prices, based on their analysis. What I was trying to say is that there is a disconnect between their doom and gloom analysis and their projected SP for Spark.

[BlackPeter]

Just my use of the term there BP. I'm referring to business's like Craigs that do have target share prices, based on their analysis. What I was trying to say is that there is a disconnect between their doom and gloom analysis and their projected SP for Spark.

Absolutely - however, if you widen your analysis, you will find many stocks where target prices make no sense at all (e.g. if you compare them with the buy recommendation). Target prices are published for entertainment value, not for being correct or for making sense.

Using them as argument is like investing based on your weekly horoscope in the newspaper. You know, that horoscopes are pure fiction, don't you? Same with target prices. Sure - most are created by some model, but all these models require input describing the future which nobody knows. Garbage in - garbage out. But yes, some analysts put at least the effort in to align buy recommendation and target prices, but not everybody is as diligent - and lets face it, even if the recommendation is consistent, it won't make it right or at least statistically relevant.

[LoungeLizard]

Absolutely - however, if you widen your analysis, you will find many stocks where target prices make no sense at all (e.g. if you compare them with the buy recommendation). Target prices are published for entertainment value, not for being correct or for making sense.

Using them as argument is like investing based on your weekly horoscope in the newspaper. You know, that horoscopes are pure fiction, don't you? Same with target prices. Sure - most are created by some model, but all these models require input describing the future which nobody knows. Garbage in - garbage out. But yes, some analysts put at least the effort in to align buy recommendation and target prices, but not everybody is as diligent - and lets face it, even if the recommendation is consistent, it won't make it right or at least statistically relevant.

You're missing my point. I'm not defending Craigs or any of their ilk. Quite the reverse. That's why I highlight the obvious inconsistency in their "analysis" which seems to suggest that SPK could/should go lower and yet they maintain a $4 target. Which is correct the analysis or the conclusion?

I'm on record as saying that these institutions are too closely linked to the industry they are commentating on. I'd also agree that historically they have a worse record in picking stocks than say, flipping a coin. So why do so many, otherwise intelligent people, quote them as if they have any greater insight than anyone else? Beats me. All I can come up with is a confirmation bias for a decision already made. 

[BlackPeter]

You're missing my point. I'm not defending Craigs or any of their ilk. Quite the reverse. That's why I highlight the obvious inconsistency in their "analysis" which seems to suggest that SPK could/should go lower and yet they maintain a $4 target. Which is correct the analysis or the conclusion?

Looks like we are agreeing on the relevance of target prices. And this was my point. Given that they are point- and meaningless, there is no point either to use them as argument - which it appeared you do. So- clearly, if they don't mean anything, we can't use them as argument that the stock in undervalued, can we?

So, maybe we better find something else to justify a higher stock price.

Typical candidates would be

a) future earnings potential, but let's face it ... Sparks PE is still overstretched - if I take the sell of the cellphone towers out of the equation, their annual average earnings is around 20 cents. What would this justify - a SP of $2?

b) earnings growth potential. Always good for a great story and amazing hype peaks, but with Spark - lets face it, they didn't had any earnings growth in the last decade (probably longer, but this is as far as my records reach), they are even dropping after the one off sale of the family silver (Cell phone towers). So why should the market price growth instead of following the earnings?

c) NTA - well, last time i checked it was 41 cents per share, i.e. clearly nothing enticing the market to lift the SP. They basically have nothing valuable left which still could be sold

d) an amazing story creating a hype bubble ... and to a degree it seems this has worked for some investors. The minnow Spark is now building some data centers, same as Amazon, Microsoft, Google, Meta and some 250 other mainly global providers did before them. Great idea! As we all know, if a large number of competitors is running in front of you, you are going to win and take all the cream, isn't this the rule of free markets? Well, looks like some investors seem to assume that related to Spark.

For some reason I have problems with this get rich quick story, but hey, if it works for others.

Any other reason you could think of why the market should re-rate Spark's valuation?

I'm on record as saying that these institutions are too closely linked to the industry they are commentating on. I'd also agree that historically they have a worse record in picking stocks than say, flipping a coin. So why do so many, otherwise intelligent people, quote them as if they have any greater insight than anyone else? Beats me. All I can come up with is a confirmation bias for a decision already made. 

You well might be on the right track re conformation bias. Might be worthwhile to think that through ...

[LoungeLizard]

Looks like we are agreeing on the relevance of target prices. And this was my point. Given that they are point- and meaningless, there is no point either to use them as argument - which it appeared you do. So- clearly, if they don't mean anything, we can't use them as argument that the stock in undervalued, can we?

So, maybe we better find something else to justify a higher stock price.

Typical candidates would be

a) future earnings potential, but let's face it ... Sparks PE is still overstretched - if I take the sell of the cellphone towers out of the equation, their annual average earnings is around 20 cents. What would this justify - a SP of $2?

b) earnings growth potential. Always good for a great story and amazing hype peaks, but with Spark - lets face it, they didn't had any earnings growth in the last decade (probably longer, but this is as far as my records reach), they are even dropping after the one off sale of the family silver (Cell phone towers). So why should the market price growth instead of following the earnings?

c) NTA - well, last time i checked it was 41 cents per share, i.e. clearly nothing enticing the market to lift the SP. They basically have nothing valuable left which still could be sold

d) an amazing story creating a hype bubble ... and to a degree it seems this has worked for some investors. The minnow Spark is now building some data centers, same as Amazon, Microsoft, Google, Meta and some 250 other mainly global providers did before them. Great idea! As we all know, if a large number of competitors is running in front of you, you are going to win and take all the cream, isn't this the rule of free markets? Well, looks like some investors seem to assume that related to Spark.

For some reason I have problems with this get rich quick story, but hey, if it works for others.

Any other reason you could think of why the market should re-rate Spark's valuation?

You well might be on the right track re conformation bias. Might be worthwhile to think that through ...

I'll try again. I'm not making the point that Craigs or any of these investment houses are inherently more correct in their SP forecasts than anyone else. For Spark or any other company. I'm NOT using their analysis or predictions as a basis of why I think SPK has been oversold. Any bias I have is against these sort of pronouncements, not for.

I was trying to point out that if you are going to quote these institutions "analysis" as some sort of basis to follow - as the original poster appeared to do - then you've got to follow it through. You can't accept the rather shonky assertion that SPK are perhaps OVERVALUED, and then ignore the fact that these same institutions, at the end of the day, after all their analysis and criticism, still come up with a $4 SP. You can't cherry pick the negative analysis and throw out the target price. It's either both or none. I vote for none.

There are better number crunchers than me that have drilled down into Sparks accounts and have provided what seems - to me anyway - compelling evidence that Spark is in better shape than what some would think. Snoopy on the other site, has gone into a lot of detail, which I'm sure you've read (and probably disagree with).

The overselling is, to put it mildly, a historical anomaly. Some negative reaction to an underwhelming set of results and guidance, is appropriate, but 45%? Some people like to say that with the future being anyone's guess, then the past is our best indicator. Hang on, I think that might have been you? Sparks past - the SP, dividend history, and relative stability (until now) - doesn't sit well with the current negativity and volatility, some of which was manufactured by shorters and short-term index traders. All of this will come to pass.

 I still see value in Spark as a solidly defensive stock in a number of essential industries that has a long, and on-going history of paying a good yield. Is the current yield sustainable? Maybe, maybe not. At the moment, with the country being in the grip of an austerity minded Government that is leading us boldly into recession, Sparks "discretionary" sources of income - mobile, cloud, consultancy - is under pressure. They are also spending money on broadening their income into data-centres, which I think is the right thing to do, but is too soon to bear fruit.

But whatever the reason for the SP dip, its severity doesn't look or feel right to me, partly for historical reasons and partly because I think a lot of the current problems are temporary and will, in time, be corrected. That might require the wider economy to improve first, but in the meantime I'm happy to bank the (current) 8.6% dividend.

If one looks to fundamentals only, would anyone think that FBU are worth more than Spark right now? FBU who made a 227m Net LOSS and haven't paid dividend since the middle of last year are worth more than Spark who made a 316m PROFIT and paid a 27.5c dividend? Of course not, yet that is how the market sees it. I realise I'm swimming against the tide here, but I remain convinced that the market is badly wrong and at some point - sooner or later - there will be a significant favourable re-rating.