SPK - Spark NZ

[entrep]

Good grief there isn't much on the NZR worth investing in. 

Agree, most people in my age bracket and younger are just putting their money in US ETFs.

[LoungeLizard]

20% down! Getting into way-oversold territory (again). Pull-back in the days to come.

[ValueNZ]

Many thanks for your detailed work Ferg showing this is a no growth company which has been paying far more in dividends than it can afford.

Unfortunately, many have been suckered into this dividend trap and lead down the garden path thinking their data center plans would be the panacea for all the companies' problems.

If you take the average eps for the last 10 years of ~ 20 cents and apply a no growth PE of 8.5 to that I still see fair value as south of $2.

Look at the massive amounts of cash Spark has spent on growth capex over the last few years only to have revenue decline massively in real terms and I think you'll agree applying a 8.5 P/E is way too generous.

[Stockgathering]

That is a great way of looking at the lack of growth in revenue. Since 2016 Spark spend more than $2b NET on capital expenditure. That is >$2b spend compared to assets sold for no obvious gains by my calculations.

[Ferg]

That is a great way of looking at the lack of growth in revenue. Since 2016 Spark spend more than $2b NET on capital expenditure. That is >$2b spend compared to assets sold for no obvious gains by my calculations.

Indeed - your calculations are correct.  SPK put up a table in today's release that shows maintenance vs growth capex - the majority of capex is for maintaining the asset base.  This is important IMO for calculating free cash flow - maintenance capex should definitely be part of the calculation.  And as you have noted, the values spent on (growth and/or all) capex have not resulted in an increased EPS for SPK over the past 10 years.

Debts are now at an all time high of $1.86b.

I feel for current shareholders given today was brutal.  In other news I see ACC unloaded 550k shares yesterday which puts them below 5%.

[Basil]

Quote from: LoungeLizard on Nov 08, 2024, 01:37 PM
No growth calculations may be accurate as a technical exercise, but aren't always that helpful when translated into reality. To say that $1.90 is "fair" value for Spark, is basically saying they are un-investable, as the share price will never get that low. $1.90 ignores the weight of Sparks SP history, the high yield, and the assessment of all the agencies who say that fair value is around $4.

Basil
I have no idea how analysts are arriving at $4+ because the way I value stocks gives a very different answer.  When there's a major disparity between my valuation screening process and analysts I always go with my methodology. In terms of the dividend yield, you have a point there as this is obviously supporting the current share price but for how long can a company making circa 18-19 cps keep paying out 25 cps especially when they have plans for a capital-intensive data center?

We'll see LL, I reckon $1.90 is on the cards now or even lower.  Blind faith in average analyst forecasts is never a good idea.  You need to understand the assumptions they are putting into their DCF valuation models.  The old garbage in, garbage out rule applies if the assumptions behind their model are fundamentally flawed.  I feel blessed to have the skills to value these no growth companies for myself.  I see there's that major dividend reset coming later this year that I also forewarned about.

[LoungeLizard]

We'll see LL, I reckon $1.90 is on the cards now or even lower.  Blind faith in average analyst forecasts is never a good idea.  You need to understand the assumptions they are putting into their DCF valuation models.  The old garbage in, garbage out rule applies if the assumptions behind their model are fundamentally flawed.  I feel blessed to have the skills to value these no growth companies for myself.  I see there's that major dividend reset coming later this year that I also forewarned about.

As I've said ad naseum I have no faith, blind or otherwise, in analysts SP valuations. In fact it is you, that has the tendency to quote analysts when it suits, and to reject them when it doesn't.

As for $1.90 - well, we'll see shall we? I don't think it will get anywhere near that and is more likely to rebound.

TBH, I tire of your self congratulatory missives, Basil. We all invest in stocks for different reasons, timeframes and risk appetite. It is clear you don't like stocks like IFT/SPK/AIA or indeed almost any stock that you would classify as "no growth." Yet they form the backbone of any balanced portfolio. The key word being balanced.

[Basil]

As I've said ad naseum I have no faith, blind or otherwise, in analysts SP valuations. In fact it is you, that has the tendency to quote analysts when it suits, and to reject them when it doesn't.

I read their reports and see if I agree with the underlying assumptions behind their DCF valuations.  The validity of their DCF valuations is only as good as the validity of their underlying assumptions that go into their valuation model.  The quality of work varies a lot.

As for $1.90 - well, we'll see shall we? I don't think it will get anywhere near that and is more likely to rebound.

I have a lot of respect for Ferg's abilities as an experienced accountant.  I don't need to expand upon his work, but it seems crystal clear to me there's no growth here.  You see it otherwise and good luck with that.

TBH, I tire of your self congratulatory missives, Basil.

Feel free to put me on ignore if you no longer value my input on here, (same applies to anyone else who feels that way).

We all invest in stocks for different reasons, timeframes and risk appetite. It is clear you don't like stocks like IFT/SPK/AIA or indeed almost any stock that you would classify as "no growth." Yet they form the backbone of any balanced portfolio. The key word being balanced.

It might surprise you to know I have ~ half of my portfolio invested with professional fund managers.  Matt Peek of Kingfish has done a good job over the years or sorting the Wheat from the Chaff and successfully avoided long term value destruction companies like SPK, OCA, and FBU to name just three.  Kingfish have plenty of AIA and IFT in their portfolio and I have plenty of kingfish shares bought at a ~ 10% discount to NTA.   I have no need to replicate their holdings in my own portfolio. I'll leave you in peace to lick your wounds now.

[LoungeLizard]

I read their reports and see if I agree with the underlying assumptions behind their DCF valuations.  The validity of their DCF valuations is only as good as the validity of their underlying assumptions that go into their valuation model.  The quality of work varies a lot.I have a lot of respect for Ferg's abilities as an experienced accountant.  I don't need to expand upon his work, but it seems crystal clear to me there's no growth here.  You see it otherwise and good luck with that.  Feel free to put me on ignore if you no longer value my input on here, (same applies to anyone else who feels that way).It might surprise you to know I have ~ half of my portfolio invested with professional fund managers.  Matt Peek of Kingfish has done a good job over the years or sorting the Wheat from the Chaff and successfully avoided long term value destruction companies like SPK, OCA, and FBU to name just three.  Kingfish have plenty of AIA and IFT in their portfolio and I have plenty of kingfish shares bought at a ~ 10% discount to NTA.   I have no need to replicate their holdings in my own portfolio. I'll leave you in peace to lick your wounds now.

My underlying comment is this. You have your methods of investing and you are happy with the results - as you keep telling everyone. If you are happy with KFL's total gross return for the last 5 years of 7.8% then fine- you're easy pleased.

My approach to investing is different and very simple - apportion funds over all the major players in all our major industries, including SPK, and keep holding, even when those industries may be struggling. I make some adjustments, up or down, but, but esentially I am in it for the long run.  At any one time there are stocks that are doing well IFT, FPH - and occasionally the odd one that is not - SPK. That is not unlike any fund I would imagine. What I have seen over the last 15 years is that as long as you don't put too much in any one stock, then over time, these blue chip companies will perform better, and require less micro management than small cap stocks. My average return over the last 10 years has been 11.9%. Thats not a boast - I am quite sure many have done much better. But my point is Basil -this is not a competition. I am happy with my approach and you are happy with yours. End of story.

As far as Spark are concerned, the other lesson I have learnt is to not to lose one's head, even when those around you are losing theirs. Virtually all the major stocks have had periods of decline or statis, although admittedly not to the degree that SPK has. But because they are the major players in an essential industry, the tendency is for them to recover. The good thing about SPK is that during this period the return will still be better than most stocks, including managed funds. SPK is clearly in a difficult period but I remain convinced that it is radically oversold and its forward PE and SP bears no relation to other telcos in oceania. If in 2-3 years there has not been a substantial recovery then quite frankly, I would be amazed.

[Basil]

If you are happy with KFL's total gross return for the last 5 years of 7.8% then fine- you're easy pleased.

Their return since inception has been just over 10%.  The last 5 years as you know with Covid and the very lengthy recession have been extremely challenging for the NZX market nevertheless they have outperformed over that period quite considerably relative to the NZX50. Mostly I do my own stock picking on the NZX but for the KFL 12% portfolio allocation I have with them, I would be satisfied if over the long term they continued to earn 10%.

I am happy with my approach and you are happy with yours. End of story.

Fair enough.    Approaching retirement, I am mostly interested in yield these days and GARP stocks that pay decent yield. Everyone has different goals, I get that. I think the main purpose for me commenting on this one is the risks around that yield, but Ferg has done a better job of articulating that and indeed, the board themselves have now said their future dividends are subject to review so there's no need for any further barking from me on this one. 

[LoungeLizard]

Their return since inception has been just over 10%.  The last 5 years as you know with Covid and the very lengthy recession have been extremely challenging for the NZX market nevertheless they have outperformed over that period quite considerably relative to the NZX50. Mostly I do my own stock picking on the NZX but for the KFL 12% portfolio allocation I have with them, I would be satisfied if over the long term they continued to earn 10%.Fair enough.    Approaching retirement, I am mostly interested in yield these days and GARP stocks that pay decent yield. Everyone has different goals, I get that. I think the main purpose for me commenting on this one is the risks around that yield, but Ferg has done a better job of articulating that and indeed, the board themselves have now said their future dividends are subject to review so there's no need for any further barking from me on this one. 

I think most holders and commentators were expecting a dividend cut to 20c and I was surprised that that did not happen. I think it would have been prudent to do so, and I'm not as sensitive to yield as you are. As a general rule our biggest stocks don't pay much in the way of dividends. Spark is a bit of an exception - it has always been a yield stock and at current SP, even more so.

I enjoy the perspectives of both Ferg and Snoopy on the other channel and they are both forensic in their approach and come to opposite conclusions. Where Ferg see's structural decline, Snoopy sees overreaction and embedded value. They can of course be both right - SPK has high debt, increasing competion, margin pressure and a Government unwilling to invest in technology. All of that leads to pressure on dividend and market jitters. But - what is it now? - a 60% decline in share price? LOSS making FBU, with all of its real problems and paying NO dividend, is worth a $1 more per share than SPK? If the market looks like it doesn't make sense, then it's probably because it doesn't. If one looks through this period then one can see the intrinsic value of SPK. I have a 2-3 year perspective on Spark, because there's no reason to jump ship (sell low) when the yield (even if cut) is still respectful as a % of my average buy-in.
 

[Basil]

Who knows, you could be right.  Even 18 cps 75% imputed gives 22.8 cps gross which is reasonably supportive on the share price as at close of trade in Friday.  Comparing anything to FBU is a mug's game though as it sets such an incredibly low bar. From the other channel:

Fletcher Building's recently appointed managing director doesn't think he needs to understand what went wrong under his predecessor.

Andrew Reding was asked point blank at Wednesday's analysts' briefing when he'd get around to telling us what he sees as having gone so wrong that a year ago his predecessor, Ross Taylor, and former chair Bruce Hassall had to fall on their swords.

"I'm not sure you will ever find out what went wrong," Reding said, and then piled on word salad about looking to the future.

What was that about those who fail to learn from history being doomed to repeat it?

Its pretty clear to me that if the new Chair doesn't want to understand what went wrong with FBU then FBU is an acronym for f***ery beyond understanding lol

[Ferg]

Nice debate and thanks for the comments.

To clear the air and to avoid any potential misrepresentations.....whilst I think there are structural issues, starting with $1.86b in debts, I don't see SPK as being in terminal decline.  I think the various issues being discussed can be solved and/or mitigated.  But definitely not in a terminal decline (...for now, never say never!).  But much like the QE2, it will take a bit of time and effort to turn the ship around.  But once SPK are through this awful process, I expect they will come out a better business.....so long as the BoD and Mgmt engage in self reflection and have their mea culpa moment.

Most concerning to me, and picking up on LL's comment, is how you can have 2 people looking at the same thing and coming up with opinions / interpretations that are polar opposites.  It's actually a reflection of the state of MSM and wider society at the moment.  It's not good.

[LoungeLizard]

Nice debate and thanks for the comments.

To clear the air and to avoid any potential misrepresentations.....whilst I think there are structural issues, starting with $1.86b in debts, I don't see SPK as being in terminal decline.  I think the various issues being discussed can be solved and/or mitigated.  But definitely not in a terminal decline (...for now, never say never!).  But much like the QE2, it will take a bit of time and effort to turn the ship around.  But once SPK are through this awful process, I expect they will come out a better business.....so long as the BoD and Mgmt engage in self reflection and have their mea culpa moment.

Most concerning to me, and picking up on LL's comment, is how you can have 2 people looking at the same thing and coming up with opinions / interpretations that are polar opposites.  It's actually a reflection of the state of MSM and wider society at the moment.  It's not good.

Good points, Ferg. I wasn't inferring that SPK are in a terminal decline, just that there are a multitude of structural issues and bit of management complacence / neglect that has given rise to a period of decline, however long that period is. Given time, I think they will come round.  We'er on the same page on that I think.

I don't, though, think there's anything wrong in people having opposite views and debating them - that's a healthy thing. It's how it's done is the critical thing - too much one-up-man-ship, personal comments etc, ruins an otherwise good discussion. If people want to invest or not invest in a stock based on the facts as they see them and in accordance with their own personal investment strategy, then they have a perfect right to do so. We're all adults (I think). And I come back to different investment timeframes. What may seem like the wrong thing to do now, may turn out to be absolutely the right thing in 2-3 years time. How many times does a novice investor sell low and buy high on market sentiment, only to find the wind change and they are left stranded?
Anyway, let's see how this pans out. SP still looking fragile even at this level and an absurdly high yield.

[Basil]

https://www.marketscreener.com/quote/stock/SPARK-NEW-ZEALAND-LIMITED-6492600/finances/

Average analyst forecast now for only 14 cps earnings for FY25, rising to 16 cps and 18 cps in the years ahead, (compares to 22 cps in FY22).  Hmmm