A note from Morningstar’s Han also highlighted the growing importance of mobile, which he said accounted for some 40 per cent of revenue and 50 per cent of profit across the two largest players.
And it’s in mobile where some see Spark surprising, on the upside.
In a February 22 note, Forsyth Barr analysts Aaron Ibbotson and Benjamin Crozier said while Spark’s mobile margins and average revenue per user were “a slight disappointment” in the second half of FY2023, “there could be [a] possible upside to Spark’s mobile service growth guidance of 5 per cent for FY2024 with current high migration and a normalisation of roaming revenue” (telco analyst Peter Wise earlier said pandemic board restrictions cost Spark, One NZ and 2degrees a collective $120 million in high-margin roaming fees).
Jarden’s Dekker said that in the “all-important mobile segment”, the market structure was “stable and supportive”. Customers paying $80 or more for top-tier plans had seen pricing come down and more generous data allowances over the past two years, over the three mobile players.
But further down the food chains, the telcos have been stingier with data - and in some cases punters are paying more.
Or, as Dekker puts it in more diplomatic and technical language: “We have observed strong market discipline in the data allowances and pricing of entry-level and medium-level post-paid plans where prices have held or are increasing against very small increases in data allowances.”
For Ibbotson and Crozier, the upshot of this trend is that mobile arpu (average revenue per user) will increase by 22c to $30.31 per month.
Costs back in check?
The Forbarr pair will also be keeping an eye on costs. Spark “impressively” held operating expenses largely flat from FY201between 2016 and 2022 before rising 6 per cent in FY2023 as inflation and new investments increased.
“Further costs creep would be a negative,” they said. They’re looking for costs to grow no more than 2 or 3 per cent.
Cloud and data centre growth?
Expect Spark to talk up the ongoing boom in cloud computing, which is now been amplified by the AI craze. The question though is how much of this rapid growth will end in the telco’s lap.
Ibbotson and Crozier say Spark’s revenue for the past three halves has been flat at about $103m, in the context of a transition from “private cloud” to “public cloud” under way, with Spark both investing more in its own data centres and expanding its partnerships with the Big Tech firms who are building their first local “hyperscale” data centres around Auckland’s northwest. Ibbotson and Crozier see potential downside risk “should the industry seek other public cloud options”.
Spark shares were recently trading at $5.18.
The stock is up 2.3 per cent over the past 12 months.
Morningstar has a three-star rating and a $4.90 fair valuation estimate.
Jarden has a neutral rating and a 12-month target of $4.95.
Forbarr has a neutral rating and a target price of $5.30.
Ibbotson and Crozier see a “solid” first half.
Looking at the full year, the pair estimate revenue will nudge up from FY2023′s $3.91 billion to $4.01b, while net profit slips from $465.0m to $447m and the full-year dividend increases by half a cent to 27.5c per share.
They see normalised ebitda increasing from FY2023′s $1.19b to $1.23b. Spark’s guidance is 1.22b to $1.23b .
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.
