SPK- Spark NZ (TELCO)

[bull....]

What you haven't realised is that it is likely Chorus increasing broadband pricing, with Spark merely passing the price rise on. All other retail players in the broadband market will be facing the same broadband cost pressures. So I don't think this is a competitive mis-step by Spark.

SNOOPY

I was not implying it was a mis-step. kiwikeith summed it up 30% of there customers on wireless.

anyway snoopy have you taken account of the last yr mobile growth has benefited from massive immigration, this is no longer the case. i am thinking the growth driver of the company may be flat as with immigration now declining from lofty levels and people holding off handset upgrades and downgrading there plans. add in soft it spend as they have said and i imagine people downgrading broadband plans a further downgrade in earnings may be possible although they will probably lay of more people too try to off-set this decline.
was not the increased div's from the tower sale ? if so they may fall a little as well ?
So maybe thats why price under pressure still ?
be a buy at some stage for sure but the guess is when.
pe currently 16 too high or right ?

[bull....]

i forgot to add yest that seasonality july is normally a good mth
since 2015 over 60% probabilty of being a positive mth. of course nothing guaranteed as june was normally good but was a bad one this yr but i guess we have oversold to add to probabilty as well for a bounce in july

[see weed]

Hey bull looks like SPK is on the move

[kiora]

Great idea !
https://businessdesk.co.nz/article/n...79ca-446239310

[kiwikeith]

Great idea !
https://businessdesk.co.nz/article/n...79ca-446239310

Here is a link which is not behind a paywall. I still think the Spark's data centre potential is not factored into the share price.

https://www.bing.com/ck/a?!&&p=e7a75...a2xhbmQv&ntb=1

[bull....]

Hey bull looks like SPK is on the move

oversold on the weeklies
seasonality for july on the aus stock is it rises 87% of the time , 67% for nz so overall very strong mth is july historically. hopefully it continues this july but obviously no guarantee's seasonality works. ( look at june normally positive but down this yr ) being oversold adds some weight hopefully.

[Snoopy]

I do wonder if the market is taking account of Spark's data centre potential. The development pipeline could increase total capacity from 22MW to 93 MW.

I have just had another look at the HY2024 presentation material from Spark, kiwikeith. Slide 11 on "Data Centre Growth Ambition" is of particular interest.

"• Targeting returns of ~9-10% over time as utilisation scales."

And what does 'returns' mean in this context?

10/ Spark is looking for a 'return' of 9-10% ('return' meaning, a 'net operating profit after tax' over 'invested capital') on data centres once operating at capacity. Third party partners may be brought in to help fund these data centres. A 9-10% return ensures that the IRR is above WACC. The signed customer contracts include an inflation adjustment element This is a higher return that global hyperscale data centres are generating. But remember, global hyperscale is on a 'next level' compared to Spark 'hyperscale'.

Slide 6 from HYP2024 suggests that data centre revenue for Spark is on track to be $35m for FY2024. Exactly how much of that revenue flows straight to the bottom line (to NPAT) is another matter.

Spark's 'flagship' datacentre opened in Takanini in 2014 with a mere 2.3MW capacity (albeit still significant back in the day) and at a cost of $60m.
https://aecom.com/nz/projects/projec...i-data-centre/

A major update has been completed, lifting capacity at that site to 12.3MW, out of a total Spark built capacity to date of 22.3MW. 22.3MW is up from a total built capacity of just 10MW at EOHY2023 one year earlier. The built capacity is continuing to increase. But for the purposes of this exercise, I am going to assume that the total billed load for Spark datacentres amounts to 22.3MW per year over FY2024.

Spark noted that from 8th April 2023, they had budgeted between $250-$300m to expand their data centre capacity over three years.
https://www.datacenterknowledge.com/...5g-in-new-plan

That is what it will take to complete a 70MW expansion of the data centre portfolio, with both greenfield and brownfield additions and amounts to a cost of $3.57m-$4.28m per MW. If I backdate the 'higher cost bound' of that 'cost range' across the 22.3MW of data centres fully built, I get an historic cost to build of $4.28m/MW x 22.3MW = $95.6m. Lets add a 20% odd factor of safety to that total (because I suspect on a per MW basis historical build costs were higher) and call it '$120m spent on data centres to date', in round figures. We know that Spark estimates they will earn 9-10% on their initial outlay. I will call it 9% because 10% is when the equipment is fully utilised, (and we know even with Sparks diligent pre-selling these centres are never 100% utilised on day 1) . So expected annual earnings (NPAT) from the Spark data centre portfolio over FY2024 is to be: 0.09 x $120m = $10.8m.

If the data centre revenue prediction of $35m is accurate, this represents a net profit margin for data centres over FY2024 of: $10.8m/$35m= 30.9%

SNOOPY

[kiwikeith]

Thanks for those calculations Snoopy. Another way to slice it is to say they are planning to spend $250m -$300m on data centres over the next 3 years. A 9-10 % return on invested capital gives an average of the range return of $26m pa. (using their definition of return being net profit after tax/invested capital). SPKs NPAT hovers around $400m annually. So the Data centre expansion is going to add about 6.5% (26/400) to annual NPAT. Not insignificant but not a game changer either.

[Snoopy]

Thanks for those calculations Snoopy. Another way to slice it is to say they are planning to spend $250m -$300m on data centres over the next 3 years. A 9-10 % return on invested capital gives an average of the range return of $26m pa. (using their definition of return being net profit after tax/invested capital). SPKs NPAT hovers around $400m annually. So the Data centre expansion is going to add about 6.5% (26/400) to annual NPAT. Not insignificant but not a game changer either.

You have gone one step ahead of me kiwikeith - thanks for that. In fairness with Spark being one of the most traded shares on the NZX, it would have been unlikely if any of us on the forum would uncover 'market moving information' for Spark shares. But it is nice to gain a bit more of an insight so that plebian Spark shareholders like us can better understand the powerful, whimsical (quick to surge into depression or elation) and exploitable force that is 'Mr Market'. 3% underlying growth for two years in a row? I will take that. And it gives me more confidence that Spark earnings growth is indeed on track to meet the newly upgraded dividend rate.

Now here is some even more interesting stuff. Ferg on the Infratil thread has managed to decipher what the EBITDAF to data centre power ratio figures are meant to be in those Infratil CDC owned data centres.
https://www.sharetrader.co.nz/showth...=1#post1058692

What happens if we do the same exercise on the data centres at Spark?

For FY2024 I am looking at NPAT of $10.8m from Spark data centres. => NPBT = $10.8m/0.72 = $15m

Net Interest Apportionment

Net finance expense for the half was $49m (annualised at $98m).
Operating revenues were $1,976m (annualised $3,952m). It data centre revenue for FY2024 is $35m, that represents $35m/$3,952m= 0.89% of the total. The apportioned finance expense to datacentres should therefore be: 0.0089 x $98m = $0.9m

Depreciation Apportionment

Section 3.6 in AR2023 gives the depreciation schedules used by Spark. Some examples: Buildings 15-53 years, Air Conditioning 8-20 years, Computer Equipment 2-8 years, Internal IT system assets 3-15 years. We don't know what proportion of what value of what class of equipment are present n those Spark datacentres. But looking at those numbers, I believe a weighted average depreciation schedule of about 20 years looks reasonable, given Spark is a 'hybrid data centre provider'. Total data centre build value on the books I have already estimated at $120m. Depreciated over a straight line over 20 years gives an annual depreciation charge of $120m/20= $6m

Amortisation Apportionment

None (because I don't expect any amortisation).

------------------------

Note that I am using New Zealand dollars in this analysis, as all of Spark's data centres are in New Zealand.
We can now estimate the Spark Data Centre EBITDA, which is more correctly EBITDAF, (because it does not contain any one off 'funny business adjustments') as follows:

EBITDAF (data centres) = $15.0m + $0.9m + $6.0m = $21.9m

OK, we have derived an EBITDAF figure for Spark data centres over FY2024. How does this stack up against CDC's ballpark standard ($2m per MW) where power used to run the computing power in a data centre is stacked up against profits derived from the efficiency of that power usage?

Information Communication Technology (ICT) MW = EBITDAF/(Earnings per MW) = $21.9m/ $2m per MW = 11.0MW

Given we know the power capacity of the total data centre computer processing equipment up and running at Spark (23MW), we can work out how efficiently utilised that was in generating those annual earnings.
=> ICT MW / Capacity MW = 11.0MW / 22.3MW = 49% (c.f. 45% for CDC datacentres)

Of course there are a few problems with trying to relate profitability metrics between one data centre provider and another like this. In particular the '$2m per MW' profit figure taken from CDC and highlighted in bold. This is an accurate historical figure achieved by CDC. But it may or may not be relevant to Spark, depending on whether the cost structures of the two businesses are similar or not. The EBITDAF earned by Spark per MW of power used is likely to be considerably lower (for the amount of power used), because Spark are paying the costs of their in house owned computer equipment, over and above just charging for space and integration wiring in the datacentre building. By contrast, at CDC, it seems it is up to the customer to install and run their own computer equipment. So for Spark it might be more realistic to say that the 'equalising divisor' should not be $2m per MW, but more like $1m per MW (this is equivalent to saying Spark is earning 50% less gross profit on the computer power used in their installations). If we make this change, the 'efficiency of energy used' to 'generate dollars' calculation changes as follows:

Information Communication Technology (ICT) MW = $21.9m/ $1m per MW = 21.9MW
=> ICT used MW / ICT Capacity MW = 21.9MW / 22.3MW = 98% (c.f. 45% for CDC datacentres)

That 98% data centre utilisation rate is more in line with the sort of utilisation rates that Spark are claiming. But is this the same thing as saying Spark are less efficient at extracting profits out of data centres than CDC is? I guess the answer is yes. But less efficient doesn't mean 'less dollars in.'

Right, so a long waffly post - have I learned anything at all? In this case it amounted to taking some known, or at least claimed data, the computing power utilisation rates at both of the CDC and Spark datacentres, and 'extrapolating from that' the 'earnings power' per MW of computing power burned.

[Snoopy]

https://www.marketscreener.com/quote...2600/finances/

Is Spark a dividend trap?

Earnings are forecast to grow at 3.5%?
Net margin forecast to be flat?

EBITAI forecast lowered 2025,2026 ?

Transferred from the IFT thread

I don't believe that Spark have issued a profit forecast for FY2025 and FY2026 as yet. marketscreener analysts will forecast what they forecast. I do believe that much of Spark's profit downgrade earlier in 2024 from big business and government projects will be work postponed rather than work lost. Exactly when this work comes back on screen I can't say exactly. I just have to be a shareholder when it does.

Your reference appears to show the dividend holding steady and the earnings to dividend ratio tracking down to 100%. That is my view as well, although it is possible the dividend could be reduced. This is where 'buying with a margin of safety' comes in. For me, with Spark being an incumbant 'utility type investment' I am happy owning Spark giving a fully imputed dividend yield of 6.5%. But of course we all prefer to buy at a discount. So my target yield price to buy at was around a 7.5% gross yield. My most recent parcel I bought at a gross dividend yield approaching 9%. That gave me a massive margin of safety.

My current average holding price is well below the more recent share price parcels I have been buying too, at $3.71

SNOOPY