Spark’s mobile surprise – and how it’s spending its $900m windfall

Analysts were looking for a capital return following Spark’s sale of 70 percent of its cell tower network for $900 million.

And that’s what the telco delivered this morning, announcing a $350m return to shareholders
via an onmarket buyback. A further $350m will be invested in growth areas like the Internet of Things, mobile and the telco’s new health unit.

The firm also said while its full-year dividend would be 25 cents per share (for the sixth year in a row, in line with guidance), the profit payout would increase to 27 cents per share, 1cps ahead of what analysts were picking.

Shares were up 1.89 percent to $5.40 in early afternoon trading. The stock is up 9.4 percent for the year.

The telco also revealed a new long-term dividend policy that will see 80 to 100 percent of free cashflow paid out in dividends.

Ebitdai was $1.15b, at the top end of Spark’s forecast, as per its mid-year update.

Net profit increased 7.6 percent to $410m, with Spark crediting gains in mobile plus a large health contract.

Total revenue increased 3.5 percent to $3.72 billion.

Mobile revenue was up 5.5 percent to $899m as Spark made gains in total pre-pay (up 30,000 to 1.04m) and pay-monthly (up 51,000 to 1.40m) mobile connections/

Average monthly revenue per user (arpu) also continued to trend upwards, which CEO Jolie Hodson put down to increased data use. Pre-pay arpu rose 9.9 per cent or $1.48 to $16.37, while the average phone bill for contract mobile customers rose 1.1 per cent or 46c to $40.60.

Morningstar analyst Brian Han said the strong mobile numbers were the only real surprise in Spark’s report.

“The robust growth in mobile was more than I expected,” Han said. He saw the strong mobile numbers as being one of the key reasons for the forecast profit lift in FY2023.

Broadband revenue fell 4.6 per cent to $639m, although Spark said the drop was partially offset by the fact that higher-margin fixed-wireless connections (which cut wholesaler Chorus out of the loop) increased by 16,000 and now form 28 per cent of its total broadband base of 704,000 – and are on track to account for 30 percent of its broadband customers in FY2023.

Cloud, security and service management revenue was near flat, up 0.7 percent to $446m, although Spark Health appeared to be a bright point, with its (undisclosed) revenue increasing 46 percent.

Guiding to higher earnings

Spark guided to $1.19b to $1.23b ebitdai for FY2023 and said capex would be flat at $410m.

Full-year FY2022 free cashflow dropped by a third to $296m, but the telco guided to free cashflow between $460m and $500m for FY2023.

Dividends from the Southern Cross Cable remain suspended (a measure introduced as Spark chipped in for the new Southern Cross Next cable due to go live next year). Spark says it expects the profit payout to resume in FY2024.

On Spark Sport, the company said its “focus remains on accelerating strategic partnership opportunities to drive improved returns.”

Jarden’s Arie Dekker recently said it was time for Spark to sell its streaming business, which he saw as relatively high risk for low reward. Morningstar’s Han said while Spark Sport might not make money in itself, it was probably worth keeping in the fold as a tool to entice people onto higher-yielding broadband and mobile plans.

The celltower sale – which saw 70 per cent of Spark’s passive network assets go to a Canadian pension fund, with Spark retaining a 30 per cent stake “TowerCo” – is subject to Overseas Investment Office approval and expected to wrap up in the first half of FY2023.

On a conference call, CFO Stefan Knight said the $350m share buyback would occur after the sale closed. It was possible that the telco could explore other options for a capital return, subject to market conditions.

Asked what share price would constitute unfavorable market conditions for the $350m buyback, Knight declined to give a figure. Morningstar’s Han saw the qualifications around the buyback as a routine precaution. “You don’t want to paint yourself into a corner,” he said.

Knight said roaming revenue return to around 60 to 65 percent of pre-Covid levels in FY2023, helping to drive 5 to 8 percent revenue growth in mobile and the forecast growth in operating earnings overall.

The CFO said broadband revenue dropped as Spark made its plans “more competitive”. Revenue would rise in FY2023 as immigration resumed, he said.