Spark, formerly Telecom, has completed a turnaround programme delivering up to $300million in free cash flow savings a year, but Forsyth Barr broker Suzanne Kinnaird has some concerns.
The main concern was the relatively weak operating earnings growth and that high-margin fixed revenues would continue to fall.
Spark's share price was supported by its dividend, underpinned by a strong balance sheet.
Forsyth Barr's rating for Spark was underperform, she said.
Spark's traditional fixed-line and voice revenues would continue to fall as customers dropped those services.
The concern for Spark was those represented extremely high-margin revenues.
''The opportunity for growth is in the increasing demand for broadband and mobile data, but Spark faces continued and increasing competition in both of these areas,'' Ms Kinnaird said.
While the opportunities for revenue growth existed, it was uncertain if they could deliver meaningful earnings improvements.
Meanwhile, sustained cost-cutting required a significant virtualisation of Spark's infrastructure - a major undertaking.
The transformation from Telecom to Spark coincided with increased satisfaction and market share in its key broadband and mobile markets, Ms Kinnaird said.
It had also successfully completed a significant cost-cutting programme.
Those were major successes delivered over the past two years and acknowledged by the market.
With a combination of a 25c dividend for 2016, and a programme of share buy-backs - $100million and 30% complete - Spark remained attractive.
Spark could deliver earnings growth in 2016 but Ms Kinnaird was not certain it could do so beyond next year.
Maintaining its dividend long-term depended on both delivering earnings from new services and maintaining capital expenditure at 11% of sales, which ranked it best within its peers.
''We believe there are risks to both of these aspirations,'' she said.
Key drivers
• Input costs: the unbundled copper local loop (copper) and unbundled bitstream access (broadband) charges represent Spark's major external cost.
• Fixed-line connections: Traditional fixed lines (wholesale and retail) continue to represent the majority of Spark's profitability.
• Mobile market pricing: Competition has increased in the mobile sector.
• Mobile connections: With fixed-line revenue continuing to fall, mobile becomes the key source of earnings growth for Spark.
Key risks
• Continuing price erosion: Spark has noted the impact of continued pressure in the prepaid mobile market, along with competition from Trustpower in the fixed broadband market. Further competition following the merger of M2/Vocus is expected.
• UFB migration: As customers migrate to fibre services, they are expected to also look to review service providers, potentially creating a churn risk to Spark.
• Calling migration: Calling will move to a voice application via data plans over time.
