Cash News
The latest negative news for the company came yesterday afternoon as Forsyth Barr downgraded the telco to underperform and slashed its 12-month price target from $4.20 to $2.90.
The attendant market cap fall has sparked concerns the telco risks falling out of a key index used by managed funds to allocate stocks to their global portfolios.
“There is definitely a risk that Spark drops out of the MSCI World Index. That makes people jittery,” Forsyth Barr analyst Aaron Ibbotson said.
There are only five NZ firms in the global index. It was possible Spark’s place could be taken by One NZ owner Infratil.
Ibbotson and fellow Forsyth Barr analyst Benjamin Crozier also see Spark’s dividend under pressure. The pair said in their research note yesterday that they see a “sustainable dividend” of 20 cents per share. They see the telco covering the shortfall with its 27.5cps guidance in FY25 and FY26 with a discounted dividend reinvestment plan. “But see a cut to NZ20cps in FY27 as likely.”
The telco faces a “dividends or data centres” decision, the pair said.
“Spark’s historically dominant position within private cloud in general, and government cloud in particular, is also deteriorating, driven by a combination of structural, technical and competitive factors,” Ibbotson and Crozier said. Pressure would mount with Amazon and Microsoft building their first hyperscale data centres in NZ (half Infratil-owned CDC Data Centres has already opened two giant server farms in Auckland’s northwest).
With core infrastructure assets gone, the telco was more vulnerable to cyclical pressures, the pair said.
“The sale and lease back of its tower assets added an economic $1.4 billion liability. The offsetting cash receipts have already been spent on unfunded dividends and share buy-backs.”
Spark does have a data centre expansion underway.
The firm’s data centre (along with mobile) was a bright spot in its FY2024 results, with revenue rising 54.2% to $37m in FY2024 as it Takanini campus expansion completed on time and on budget and new revenue streams coming online. The growth was strong, but not as strong as the $40m that Jarden had been picking.
Chief executive Jolie Hodson noted Spark’s planned “surf lagoon” data centre in Dairy Flat – which gained resource consent in the final days of FY2024 – would be a source of future growth. Stage one will feature a 10-megawatt (MW) data centre. Expansion to 40MW is planned (putting it toe-to-toe with CDC and the Big Tech players), with an investment partner possible.
Spark’s plan is to boost its data centre capacity from 22MW today to 92MW. ForBarr’s analysts support that ambition – if noting what they see as the probable impact on the dividend.
At its full-year result, Spark said it intended to raise $1 billion to fund its data centre expansion. Hodson said it was exploring are range of options, including a capital partnership.
And although slowing or stalled Government and enterprise business has been a key pain point over recent months, Spark was able to reveal a big win with Transpower last week on a $100m network upgrade, scheduled for 2025 to 2030.
A big part of Spark’s FY2024 revenue and profit tumble was down to the fact the telco’s FY2023 result benefited, to the tune of $583m, from the sale of 70% of the passive assets of its cell tower network (there was also a negative one-off, with $54m in costs associated with the closure of Spark Sport).
On an adjusted basis, revenue was down 1.2% to $3.861b, net profit fell 21% to $342m and earnings before interest expense, tax, share-based payments, defined benefit expense, depreciation, amortisation and impairment (ebitdai) dropped 2.5% to a below-forecast $1.163m.
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.