Spark New Zealand, the country’s largest telecommunications provider, is attracting the attention of brokers and analysts following the announcement it was accelerating the implementation of its Quantum efficiency programme. Business editor Dene Mackenzie reports.
For Spark New Zealand, the medium-term outlook is promising, Morningstar analyst Brian Han says.
Its mobile market share was increasing and growth in fixed wireless was helping to partly offset the decline in its fixed-line broadband share.
The Commerce Commission's rejection of the Sky TV-Vodafone merger had also, at the very least, substantially delayed the threat of a convergent juggernaut for Spark to grapple with, he said.
``Coupled with a relatively benign regulatory environment, there is breathing space for Spark to consolidate its market position and canvass opportunities to reignite earnings growth - for instance in New Zealand's IT services industry.''
Spark's strong balance sheet furnished the group with defensive appeal and dividend security, Mr Han said.
The acceleration of Spark's Quantum programme had no bearing on Morningstar's $3.70 per share fair value estimate.
The heightened intensiveness of its execution and the rollout of the ``Agile'' operating model - a new way of working for staff - would lead to an additional $25million to $30million in implementation costs in the 2018 financial year, bringing the total to between $50million and $55million.
However, the amount was within expectations and mostly represented a bringing-forward of expenses which would otherwise have been incurred in the 2019 financial year.
The concern Morningstar had regarding the Quantum programme was the execution risks associated with digitising, simplifying and automating Spark's sprawling operations - especially with the potentially disruptive model that was ``Agile''.
``This may partly explain management's decision to accelerate the Quantum implementation, with a view to compressing the period of disruption and uncertainty for employees.''
The first chance to judge the benefits and risks of the Quantum project would be on August 22, when management, in conjunction with releasing the 2018 full-year financial results, would provide earnings guidance for the 2019 financial year, Mr Han said.
Forsyth Barr broker Suzanne Kinnaird said Spark had, for the first time, provided a specific labour savings target.
The company's confidence in delivery was ``clearly positive'' which would take it a long way to achieving its 2020 30% operating profit margin and the 25c per share earnings aspirations.
Spark expected the annualised labour cost run-rate to fall to about $500millon by the end of 2018 and $470million by the first half of the 2019 financial year. Labour costs were $550million in 2017.
``We understand Spark expects to be able to sustain labour costs around this $470 million through the medium-term. Any new investment, in areas such as IT services, will be offset by savings elsewhere.''
Spark had three-year ``aspirational targets'' of 0% to 2% a year revenue growth and low 30% operating profit margins, and Quantum was the key driver of its cost/efficiency programme, Ms Kinnaird said.
The company was aiming to leverage its wireless assets through investment in 4.5G, connection growth, migrating retail customers to higher-tier plans, and fixed wireless broadband which reduced network access charges.
Spark was targeting IT services revenue growth from the rapid migration of companies to cloud services, a focus on cyber security, growth in IT outsourcing and improving its underweight market share in small to medium-sized enterprises (SMEs).
It also wanted its earnings to benefit from the growth of standardised platform services, simplification of its product offering and process automation.
Spark faced escalating price pressures. It operated in competitive markets and any escalation in competition in fixed line, mobile and/or IT services could pressure margins, she said.
The Commerce Commission was to undertake a review of New Zealand's mobile market, which could raise concern about possible changes to New Zealand's light-handed mobile regulatory regime.
Mr Han said Spark was the equal-largest player in mobile, having about 39% market share.
The dominant market positions of Spark and Vodafone might make it difficult for new players to enter the market and establish necessary scale.
With its price-focused strategy, 2Degrees, the third player in the market, had made some traction.
Given the small New Zealand market, there was a low risk a new player would enter as an infrastructure operator.
Any new players might adopt a wholesale access mobile virtual network operator model, selling mobile services using the infrastructure of another network.
Spark captured part of the revenue by wholesaling its infrastructure to MVNOs (mobile virtual network operators) and recently launched its Skinny service to compete in the value-end of the broadband market.
``On balance, we believe advantages remain with the infrastructure owners Spark and Vodafone,'' Mr Han said.
