Forsyth Barr cuts Spark rating, lifts Infratil on stronger One NZ outlook

Spark shares were down 0.2% to $2.38 in early afternoon trading on Wednesday. Photo / Chris Keall

Forsyth Barr analysts have downgraded Spark and upgraded One NZ owner Infratil – with their reratings hinging largely on their analysis of the mobile market.

In a note released on Wednesday, Ben Crozier and Aaron Ibbotson cut Spark from neutral to underperform, saying its share price was well above international peers.

The pair also reduced their 12-month target price from $2.65 to $2.40.

Spark shares were down 0.2% to $2.38 in early afternoon trading. The stock is down 21% for the year.

At the same time, Crozier and Ibbotson upgraded Infratil from neutral to outperform and bumped their 12-month target from $13.25 to $14.60 – with $1 of the increase accounted for by their new, higher valuation of One NZ, which they have lifted from $1.9 billion to $2.9b.

Infratil shares were down 1.4% to $12.13 in early afternoon trading and were down 4% for the year.

The pair say mobile services are crucial for local telcos, accounting for up to 65% of gross profit.

Crozier and Ibbotson see One NZ performing better than Spark in a relatively buoyant mobile market, where overall revenue gains have run slightly ahead of inflation.

The pair also see 2degrees and mobile virtual network operators or “MVNOs” (power companies and the likes of Mighty Ape Mobile which offer mobile plans under wholesale deals) continuing to make gains.

2degrees, One NZ and Chorus have all lifted their operating earnings recently as Spark’s earnings before interest, tax, depreciation and amortisation (ebitda) have fallen away.

Although they see its rivals performing better, Crozier and Ibbotson still find Spark’s mobile performance attractive by average revenue per user per month and other metrics. But they add, “Non-mobile revenue is more important for Spark than One NZ, and we are less attracted to these divisions”.

They say Spark’s long-underperforming IT services division, which has been hit by slowdowns in government and corporate spending on tech projects, could enjoy some cyclical gains as the economy recovers.

“But the endgame is unclear.”

Crozier and Ibbotson add that with its fibre (gone to Chorus) and its more recent mobile network sale and the sale of 75% of its data centre business, “Spark is a relatively infrastructure-light telco which should command a lower valuation than international peers”.

But in actuality, Spark trades at a 12-month forward price-to-earnings ratio of 18x, compared with 13x for its offshore peers, they say.

What’s next?

Infratil is due to report its first-half result, which will include the latest numbers for its 99.90%-owned One NZ on November 13 (the balance of shares is owned by the telco’s chief executive, Jason Paris, and other senior executives).

Spark’s annual meeting will be held on Friday morning, with a slate of new directors including ex-NZ Super Fund director Lindsay Wright and former Mercury CEO Vince Hawksworth up for confirmation and details of a board succession plan expected.

After Spark’s poor first-half result, the telco’s shares fell 19% to $2.38 in a day.

Ibbotson told the Herald the swoon was “potentially an indication that shareholders have lost a bit of faith in current management and board’s ability to turn it around”.

After a recent run-up lost momentum, Spark shares were back near that level today.

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.