Investors in Spark awaiting the sparkle

TOM PULLAR-STRECKER
Last updated 05:00 18/08/2014

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Telecom has a new name in Spark but has yet to show it can shake off the headwinds that have long dogged the company, analysts say.

Most remain lukewarm on Spark ahead of its annual result on Friday, despite some speculation it could cheer investors with a share buy-back.

Spark has enjoyed a strong run with its shares up more than 20 per cent so far this year but analysts see no immediate end to declining profitability in its fixed-line business.

However, the results are likely to be raked over for signs of a turnaround in its retail business, the chances of which the company appeared to talk up at its interim results briefing in February.

Analysts forecast Spark would report an operating profit of $920 million to $935m for the year to June, down from $1.04 billion last year.

J P Morgan analyst Paul Brunker forecast net profit would come in at $329m on a 13 per cent drop in revenues to $3.65b. The broker has a "neutral" recommendation on Spark, valuing its shares at $2.65.

Brunker forecast Spark's profit margins would erode as customers switched off the copper public-switched telephone network (PSTN), which Spark still owns, and on to the ultrafast broadband (UFB) network, which it only resells.

Spark is now more than seven months late delivering a telephony service than can run through UFB.

That means it is having to continue to provide customers who switch to the government-backed fibre-optic network with a copper phone line rented from Chorus, eating into its margins from its nascent UFB sales.

However, J P Morgan said Spark's sale of Australian subsidiary AAPT for A$450m (NZ$494.5m) in December could leave scope for a $250m share buy-back in the new financial year.

At $2.88, its shares already have market-beating net dividend yield of 5.56 per cent.

Spark will launch its Lightbox internet television service on Thursday week, providing some "blue sky" for investors.

Forsyth Barr expects Spark shares to underperform when compared with the broader sharemarket, but analyst Blair Galpin backed its name change.

"While for many the name change may seem unnecessary, the target is clear," he said in a research note.

"Spark is about having a brand that is attractive to the younger market; something Telecom would never be.

"It is also about signalling internally to staff that the company is something new."

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