Buy the Spark Dip | Our Capital Gains Tax Views – KiwiSaver, Why?

28 February 2019

Global markets were mostly lower overnight after US trade representative Robert Lighthizer said the country’s issues with China were “too serious” to be resolved by promises of more purchases of US goods by Beijing.

Given the large amount of feedback from Taylor’s (Money Morning NZ) write up on the proposed Capital Gains Tax yesterday, we would like to point out that yesterday was his last sponsored comment in our daily market email.

We also thought we would outline our general high-level views on the recent NZ capital gains tax (CGT) proposals:

There is no real doubt that there is a housing affordability issue in NZ, and in terms of a CGT on property (beyond the family home) it may not be the worst idea given our inflated house prices. In saying that, a CGT is a blunt tool, as for example it will also discourage investment into building more houses, and we already have a massive housing supply shortage problem. Unfortunately, there are no easy answers to what are complex issues involving wealth, equality, and taxes. 

However, where we do clearly see large problem with the CGT proposals is on a potential tax on unrealised Aussie/NZ share gains on KiwiSaver & Managed funds. Why you would want to tax KiwiSaver further makes no sense to us, and goes against everything the government should be trying to do to encourage investment. It will have a massive impact on the end balance of the average person’s KiwiSaver on retirement given there will be an annual CGT calculation!

Further, in Australia for example, the CGT is on realised (when you sell) capital gains & losses, and such taxes if implemented will reduce the attractiveness of NZ shares as an investment – with the NZX already expressing its concerns.


Stock in Focus: Spark (SPK:NZX / SPK:ASX)

SPK shares fell sharply after its 2019 first half result, which didn’t contain enough negatives to warrant a fall of this level, in our view. 

One disappointment for us is that the content currently available on the Spark Sport service may not be enough excite the average New Zealand viewer in our opinion, as the base content excludes Rugby Union (outside of the Rugby World Cup), NRL, or Cricket.  In term of the 2019 first half result, SPK saw a slight revenue decline of -0.4% from last year due to heavy declines in legacy voice and managed data. Fortunately, operating earnings were up +7.2% due to improved margins in key business areas and benefits from Spark’s digitisation and automation initiatives. Unfortunately, net profit after tax was down -5.6% due to a $28m decline in Southern Cross dividend. Spark remain ambitious about rolling out 5G technology while the Huawei issue has been a minor setback. 

We have been positive on Spark for some time now, and the margin expansion and cost saving benefits being realised have also increased our confidence in Spark. While there are execution risks, SPK have been agile and at the current share price investors also receive an attractive 6.6% dividend yield. 

We reiterate our buy rating for medium-term investors.


Australia & New Zealand Market Movers

The Australian share market was in positive territory on Wednesday (ASX 200 index +0.36%). The Banks were higher and mining and energy stocks also rose, with Rio Tinto higher ahead of its results being released after the close of trade.

In stock news, NEXTDC declined after the company downgraded its revenue guidance for 2018-19 due to property acquisitions which will result in lower interest and distribution income. Seek shares rose despite downgrading its profit guidance for 2018-19 due to increasing investment. The company said it was investing in early-stage ventures and putting more capital into high-returning areas in the Asia-Pacific. Vocus Group announced plans to undercut the NBN with a mobile broadband alternative as the company reported a 29 per cent slump in its half-year underlying net profit after tax.

The New Zealand market lost ground yesterday (NZX 50 index -0.45%) as a large order of Contact Energy shares weighed on rivals Mercury NZ and Meridian Energy, while Genesis Energy gained on a better result than expected. Scales Corp rose after beating earnings guidance, with the agri-business reporting a 44 percent gain in net profit. Michael Hill International climbed after posting a smaller decline in first-half earnings than anticipated and maintaining its interim dividend. The jewellery chain's new chief executive Dan Bracken also identified tweaks to the firm's restructuring plans.


3 Things Markets Will be Watching this Week

  1. US-China trade deal related new-flow remains a focus for investors.
  2. Local earnings season continues across NZ and Australia this week.
  3. US Federal Reserve chairman Jerome Powell will give two days of testimony to US lawmakers on Wednesday.


Have a Great Day,


We thought we would outline our general high-level views on the recent NZ capital gains tax (CGT) proposals.

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