Jeremy Hutton: Milford Asset Management Equities Analyst on Spark reducing their profit outlook and dividend payout

Spark has reduced its earnings and dividend guidance for the 2025 year, saying its financial performance 'falls short of what is acceptable'.

The company said its operating earnings (Ebitdai) were expected to fall to around $1.12-$1.18 billion in 2025, down 4% from a previous forecast of $1.165-$1.22b.

The company has reduced its dividend forecast from 27.5 cents to 25c, 75% imputed.

Milford Asset Management's Jeremy Hutton unpacks the downturn.

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Episode Transcript

Speaker 1 (00:00):
With me.

Speaker 2 (00:00):
Now is Jeremy Hutton, Milford Asset Management. Hey, Jeremy, Evening, Heather.
We'll talk a little bit about Spark. I haven't a
bad run that's been going on for a little while
and it's just continued today, hasn't it.

Speaker 1 (00:11):
Yeah, another earnings and also the dividend downgrade today and
this was only two months after its previous financial result,
and it's already downgraded as guidance for the FY twenty
five year, so it's preferred earnings metric ebitde by four
percent at the midpoint and disappointingly, just follows, as you said,
a series of downgrades already this calendar year. And these

(00:35):
earnings downgrades have been the main contributor to the stock
being one of the worst performers on the Interdex this year.
So very unusual for a normally defensive blue tap telecoms
company like Spark. Yeah.

Speaker 2 (00:47):
I mean, if you look at what's happened that the
share price is down well over forty percent, you know,
so far this year. So this is basically just a
run of the same kind of news, isn't it.

Speaker 1 (00:55):
Yeah? A little bit parts of the updates were similar,
but there was also some New News as well did
highlight the continued slower mobile division growth, and this is
mainly competition from One New Zealand and two degrees impacting
and effectively. Corporates and government entities are still looking to
rationalize their spend, especially in mobile and IT services, looking

(01:16):
for some more value options and it's been in the
New News. Spark cut its ever important dividends as well
by ten percent. This was down to twenty five cents
for next year expected. So the dividend has traditionally been
the most important value driver for Spark, so meaningful cut there.

Speaker 2 (01:33):
So what's the concern that's led them to the dividend cut?

Speaker 1 (01:38):
Yeah, the biggest issue that the market has had is
over the sustainability of the dividend, and this is due
to the competing demands on its cash flows. So Spark
has been investing a lot in building new data centers
which are pretty expensive. The operating performance has been struggling
as mentioned before, and it wants to maintain its investment
grade credit rating, so words have low debt levels, so

(02:01):
it's balancing a lot of demands. It did cut back
its capital expensure guidance, but looking at it really simply
from here at three cash flow guide as a midpoint
of four hundred and twenty million, but the dividend at
twenty five cents, even at the reduced level, is still
costing four hundred and sixty million, so in theory it's
still borraling to pay this dividend.

Speaker 2 (02:22):
Very interesting. Again, the interesting things that the share price
didn't move very much today was that the market potentially
buying the last downgrade.

Speaker 1 (02:29):
Yeah, certainly could have been especially given how much the
share price has fallen. Parts of this was expected, but
it's probably more in relation to some other news. It's
looking to sell some of its non core assets, like
the remainder of its power CODs heat, and it's trying
to find a capital partner to help fund its data centers,
and both of these will relieve some of the pressure

(02:52):
on the balance sheet and cash flow. There is a
very large value case starting to emerge. Even on the
lower dividend. Cash yield is over eight percent per year,
and this lines up favorably versus other global telecoms peers,
other INJE ex dividend stocks, and also favorably against term deposits,

(03:12):
especially in a falling and gestrade environment. So some value emerging.

Speaker 2 (03:16):
Here interesting, Jeremy, thanks very much, really appreciate it. Jeremy Hutton.
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