SPK- Spark NZ (TELCO)

[Snoopy]

The Operating cashflow for Spark has been roughly $800mill for the last four years or .43 cents a share (I understand they may have been buying back shares which would improve per share earnings, buybacks should be made illegal again, if there is excess funds and nothing better to invest in pay out a bigger dividend) at 1,845 mill shares and dividends have been .27cents per share.

Reported earnings include depreciation and amortisation of roughly $500mill which is a non-cash expense.

There are a couple of problems I can see with this explanation. The Spark dividends are fully imputed. Sure you can use cashflow to boost dividends above earnings. But if you did that the portion of the dividend above earnings would not have any imputation credits attached. Given the Spark dividends are fully imputed, this would suggest that they are not being boosted by 'free cashflow' above earnings.

The second point is that all of those electronic gizmos that Spark are putting on mobile towers and in exchanges around the country actually do depreciate. Electronics to physically wear out or become technically superseded. So I don't think you can ignore depreciation. Accounting rules would suggest it is gone in 8-15 years. Then of course you have the mobile transmission spectrum which was bought and has a finite life which must be amortised away, so that Spark can afford the renewal price when the time comes. IOW I don't buy the 'non-cash expense' argument.

SNOOPY

[Snoopy]

this is sparks new div policy

pay-out ratio of ~80%-100% of free cash flow on a long run basis


free cashflow now calculated as


EBITDAI


LESS


Other gains and impairments; Interest; Tax; Lease costs; and
Maintenance capital expenditure


EXCLUDES:
Growth capital expenditure; Spectrum; and Movements in working capital


my rough ball is fcf is 900m odd so there div payout is 50% odd (486 m )

i havnt included maintenance cap exp so figures prob out a little just top of head stuff

If Spark's policy is to pay out 80-100% of 'free cashflow' and you have calculated they are only paying out 50% of free cashflow, this would suggest to me that you calculation of 'free cashflow' cannot be sustainable.

SNOOPY

[JeffW]

The Connexa sale boosted the shareholder equity coffers to $1,940m AND (very importantly) added some deferred tax assets to the books to the extent (see AR2023 balance sheet p90) that a deferred tax liability of $108m from FY2022 turned into a deferred tax asset of $55m in FY2023! Now I am no expert in tax law and I cannot explain how this has occurred. All I can say is that it has occurred, as evidenced by this quote from HYR2023 p10 which explains most of the difference:

"Due to the difference between right of use assets realised at the date of the transaction, a non-tax deferred tax asset of $126m was recognised."

My best explanation of the situation now is that 'deferred tax assets' can be regarded as 'tax already paid' and can therefore be distributed out to Spark shareholders as imputation credits, despite these imputation credits never being earned in any conventional sense (!). If a tax expert is reading this I am happy to be corrected on this point. But I see no reasonable alternative explanation. Reading between the lines, Spark now has enough 'breathing room' (time) to allow new earnings streams (like datacentres and 5G applications) to push underlying earnings to grow to support the increased fully imputed dividends being declared today.
SNOOPY

The deferred tax asset has absolutely nothing to do with Imputation Credits - rather the deferred tax asset is to do with timing differences in tax deductions - in this instance apparently to do with the Right of Use assets

As far as ICA accounts are concerned, they can be in debit (i.e. "Overdrawn") at any point during the year without penalty, EXCEPT 31 March, irrespective of balance date, which for Spark is 30 June. I do not think it is any coincidence that Spark pays its dividends in April & October, and not March & September

[Snoopy]

The deferred tax asset has absolutely nothing to do with Imputation Credits - rather the deferred tax asset is to do with timing differences in tax deductions - in this instance apparently to do with the Right of Use assets

Appreciate the correction JeffW. I know you know your tax stuff. Once the towers were sold, they no longer appear as a towers on the Spark balance sheet, as Spark no longer owns them. Instead Spark gets to report a 'right of use asset' which is depreciated and offset, -not exactly in timing- with a 'lease expense' as Spark now rents the towers from Connexa.

We are talking about IFRS16 here and the accounting reporting requirements around that. Because the IFRS16 depreciation reporting on leases does not align with the IRD depreciation schedule exactly, that means there will be a 'change in timing' of 'IFRS reported tax' and 'actual tax payments' which creates the 'deferred tax asset.' To explain in more detail.....

1/ A deferred tax asset appears in the accounts if reported tax deductions are greater than the actual tax money owed to the IRD (IIRC IFRS16 typically front loads tax deductability in the first few years). Question WHY?
2/ Answer: In any particular year, if reported tax deductability increases, that means the company 'reported after tax profit' decreases.
3/ However the IRD wants none of this. They want the same tax money as before IFRS16 existed, and any company must bow to the IRD's wishes as far as tax is concerned.
4/ The result is that 'our company' (Spark) obeys the IRD and reports paying more tax than the IFRS rules say is due, the extra tax paid being recorded as a 'deferred tax asset' on teh Spark balance sheet. It is deferred because eventually the IFRS16 front loading of the depreciation cycle reverses and depreciation reduces to below the IRD allowable rate. Consequently all the 'deferred tax' turns into 'actual tax paid' by the time the multi-year depreciation cycle ends. This is because the eventual result of using the IFRS16 depreciation schedule for leased assets, and the IRD system is the same. It is only the timing of the deductions that is different.

OK. I hope that shows I know a little bit about the subject of 'deferred tax', even though I don't call myself an expert. I agree with JeffW when he says
"the deferred tax asset is to do with timing differences in tax deductions - in this instance apparently to do with the Right of Use assets"

However, I do not see why "The deferred tax asset has absolutely nothing to do with Imputation Credits." Because the deferred tax is real money that has been paid to the IRD, which the IRD classes under their own alternative set of accounts as income tax paid. So why can actual 'income tax paid' (which is recorded for IFRS accounting purposes only as a 'deferred tax asset') not be reassigned as 'imputation credits for shareholders'? I don't get it?

SNOOPY