Spark New Zealand (ASX:SPK): Bearing the brunt of its homeland’s tough economic times

Did you know that Spark New Zealand (ASX:SPK) one of the biggest telcos across the ditch, is listed on the ASX? If you don’t you know now.

As an isolated country, staying connected has always been important, evident by the fact that in 1939, only Americans had more phones per capita than New Zealand. But that doesn’t mean business has always been good. In fact, business has been very touch for Spark lately.

Spark New Zealand (ASX:SPK)

Spark was born in 1987 as one of three state-owned telco enterprises, ten known as Telecom and it launched New Zealand’s first mobile phone network, and it was in 1990 when it was privitised and listed on the New Zealand and Australian stock exchanges.

In 2011, Telecom was split into two separate companies – Telecom for the retail market and Chorus for the wholesale marker (i.e. an operator of networks that sells access to its networks to retail telcos). Telecom was renamed Spark in 2014 in a move to reflect its new direction. In other words, to let existing and prospective customers and investors know that it was no longer just a landline provider.

Spark is the number one provider of mobile services in the country, generating over NZ$1bn in revenue from its 2.7m connection. It also provides broadband and has 687,000 connections, not to mention cloud services and even provided streaming services for a few years (although this was unsuccessful). The company is also building its own data centres, possessing a pipeline of 118MW.

1H25 was a tough time for Spark

Last week, we included the company on our list of stocks that recorded poor 1H25 results. Spark’s shares shed 20% on the day of its results and have more than halved in the last 12 months.

Despite maintaining a top market position, its revenue fell 2% to NZ$1.9bn and its profit fell 77% to NZ$35m.

The company cut its full year ‘EBITDAI’ guidance (The I stands for Investment Income for those wondering) and told investors it was taking actions to turn things around. The sale of Connexa would deliver NZ$310m in the current quarter, and it was cutting net labour and opex by $80-100m in FY25. The company still paid an interim dividend of 12.5c per share, which amounted to NZ$230.5m.

It’s the economy

The company blamed the tough economic conditions in New Zealand – Chair Justine Smyth did not shy away from the fact that they were impacting the company.

She reminded investors that she said last October,’ We were experiencing one of the longest and deepest recessionary periods in recent history’, and that even 4 months afterwards,’ We have seen no improvement in these conditions, and while there has been movement on monetary policy, this is yet to flow through to any meaningful change in consumer or business spending’.

New Zealand is in the worst economic downturn since the 1990s recession. New Zealand saw a 2% economic contraction between March and September last year and growth in the December quarter was 0.4%. HSBC declared it was the worst performing in the developed world. This was an effect of starting the rate hiking cycle very early and turning off the stimulus very quickly – the RBA successfully engineered a recession as it confirmed in November 2022 it was trying to do.

Unemployment is at a 4-year high, the number of people in work declined the most in a year since 2009 and companies are going under at the fastest pace in over a decade. And as a result, Spark customers were downgrading to lower priced plans with Spark or switching telcos.

It will be all about New Zealand’s economic recovery

Consensus estimates expect stagnant revenue over the next 5 years, fluctuating between just under or just above NZ$3.5bn for the next 5 fiscal years and for EBITDA to fluctuate around NZ$1bn. Would you want to buy a company that isn’t going to grow in the next 5 years? We wouldn’t.

Those same analysts do have high share price targets for Spark: at A$2.80 on the ASX (compared to $2.04 right now), NZ$3.65 vs NZ$2.25 now. But it is hard to see a realistic catalyst that’ll lead to the share price recovering. Yes if the New Zealand economy recovers it could, but we don’t see this happening any time soon.

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