Spark earnings preview: One analyst sees company as hugely undervalued; others see big problems

The sale of the latter is being explored.

The Herald has been told Spark employees are bracing for possible major redundancies following an email sent to staff late last week.

Spark chief marketing and corporate affairs officer Leela Ashford said it had recently completed consultation with its senior leaders to “align leadership roles with this new structure”.

The changes included the “heavyweight” Tommy Bjorkberg, previously with KPN in the Netherlands, being appointed chief operating officer.

“Our leaders are now undertaking organisational design within their areas to ensure their teams are aligned too,” Ashford said.

“Where any proposed changes may affect roles, we will consult with our people and seek their feedback, as we always do.”

Asked what percentage of roles could be affected, Ashford said: “I can’t provide any further details as design is still underway.”

Plans are due to be finalised by the end of this year.

If the “non-core” Digital Services division (representing around 25% of revenue) is sold, then the fate of its staff could be in the hands of a new owner.

In FY2025, the company saved more than $50m by cutting 1300 staff (down to 4043) and outsourcing more IT and mobile work to Indian outsourcing and offshoring giant Infosys.

Source / Spark investor presentation

‘Oversold’, worth double today’s share price

Spark has made missteps, including overpaying its dividend, moving too slowly on cost-cutting, business losses to 2degrees and financially under-performing compared to One NZ, Morningstar’s Brian Han said in a June 23 research note.

But he also thought investors had over-reacted.

“Spark is in the midst of a simplification and cost-out programme, the belatedness of which, compared with peers, coincides with a persistently weak Kiwi economy,” Han said.

“With few progress updates, investors are assuming the worst and materially under-valuing the stock.”

Spark shares have recently hit their lowest point since the Chorus split.

The telco’s shares have been in a multi-year slump. Last month, they hit $1.77 – an all-time low since Telecom was broken into Spark and Chorus in 2011. They were recently trading at $1.94.

Han estimated their fair value to be $3.60, if earnings stabilise and the telco continues its solid performance in mobile, and “continuing to extract operational efficiencies”.

Han said his fair value remained $3.60 following the July core/non-core business split announcement.

Non-core operations, particularly IT services, had been a drag on profit and a distraction for management.

Savings target

“The result needs to be mostly expense-driven, to show management has its arms around costs,” Morningstar’s Lochlan Halloway said in his August Market Snapshot earnings preview for Spark.

“That will boost confidence the annualised cost savings target of $110 million to $140m by end fiscal 2027 can be achieved and show the current 8% [dividend] yield is durable.”

How much Digital Services could sell for

Spark could raise around $500m by selling Digital Services and its remaining 25% stake in its data centre business, Forsyth Barr analyst Ben Crozier said.

But he also noted that, over the next few years, Spark will have to pay around $300m in spectrum renewal rights.

The previous Government cancelled the last five-yearly spectrum auction, instead directly granting Spark, One NZ and 2degrees 5G airwaves in return for a pledge to spend more on expanding their provincial and rural mobile networks.

In July, the current Government flagged a return to commercial auctions.

That means the bulk of the asset sale revenue could go on paying for airwaves.

Borrowing more is not an option, or at least a costly one.

Spark has “only” around $900m in net bank debt after its cell tower network and 75% data centre asset sales reduced its debt-to-ebitda ratio from 2.3x to what he expects will be 1.7x in Thursday’s numbers.

But this still gives the telco little headroom, Crozier said.

It is currently at the upper limit of its A- credit rating, with S&P putting it on negative watch. It could not maintain its current dividend outlook while retaining its A- rating unless Digital Services sale proceeds are used to meet its spectrum bill.

Crozier has a neutral rating with a $2.30 12-month target price.

Time for ‘regime change’

“I think regime change is necessary,” independent researcher and BusinessDesk columnist Eden Bradfield told the Herald.

“I find it remarkable that Jolie’s still there when the stock price has been decimated under her tenure,” Bradfield said.

“In Australia or America, you’d have activists going, ‘What the hell is happening here?’.”

Some of the proceeds from asset sales had gone to share buybacks and propping up its dividend at a time when Spark was struggling to find an estimated $1 billion to expand its data centre business.

Asset sales have included selling down Spark’s stake in the Southern Cross Cable, offloading its minority stake in Hutchison Telecommunications Australia for $47m, selling the passive assets of its celltower network (in two phases, raising $1.2b) and the recent sale of 75% of its data centre business to Australia’s Private Equity Partners for $453m, with a possible $98m performance payment).

Bradfield said a slide from a Spark strategy deck this year, which said data centre demand would grow by 8x over the next decade, was “like being the fifth Beatle then telling everybody how good the band would be”. He said he would have floated that part of the business to raise funds.

There had been a decision to diversify Spark’s businesses, which pre-dated Hodson, followed by the recent decision to refocus on its core business.

“Once you’ve sold the family silver, and the furniture, what’s next?” They’ll become just an ordinary Joe Bloggs telco; a utility, and that’s how they should be valued.”

New CEO ‘on next chair’s agenda’

Earlier, the Herald asked Salt Funds’ managing director Matthew Goodson if he expected leadership change at Spark.

“Spark themselves have already clearly signalled significant board changes, so that is something that is expected by the market. We’ll be looking for the addition of further strong industry expertise as opposed to more generalist governance directors,” Goodson said.

“I’d expect that [a new chief executive] will be on the agenda for the next chair. Jolie Hodson has had over seven years as CEO and has had senior roles at Spark since 2013, so it would be a natural time to transition to a new leader.

“Given the commoditised nature of much of their business and the lack of revenue growth, we’ll also be looking for a real focus on opex to preserve margins.”

Chairwoman Justine Smyth said her current term will be her last. In August last year, Spark added new directors including ex-Mercury chief executive Vince Hawksworth and Milford Asset Management chair Lindsay Wright.

Existential threat from above

Harbour Asset Management’s Shane Solly said publicly listed telcos around the world had seen their share price under pressure because of the threat of broadband from above.

While Spark is a wholesale partner for Starlink in New Zealand (along with One NZ and 2degrees), analysts have long seen the possibility that the SpaceX-owned Starlink could expand from a rural product (where it recently moved ahead of Spark to become number one in NZ) to embark on an urban takeover.

SpaceX founder Elon Musk made the threat explicit earlier this month as plans were revealed for a Starlink mobile service in the US, using femtocells (mini cellsites on the ground) to supplement its satellite broadband.

In the here-and-now, Solly said it was notable that Spark had been able to reaffirm its FY26 guidance despite the economic slowdown persisting.

How the first-half went

Spark reported an improved first-half net profit of $64m but, in line with expectations of a “reset”, also cut its dividend to 8 cents per share versus the 12.5cps payout for H12025.

During July, the telco reaffirmed its full-year guidance including earnings before interest tax, depreciation, amortisation and impairment (ebitdai) of $1.01b to $1.07b and free cashflow guidance of $290m-$330m, which it earlier said would underpin a full-year dividend of 15 to 17cps – compared to 25cps for FY2025 and 27.5cps for FY2024.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.