Weekly, Spark vs Telstra |GNE |SKT |GEM

13 September 2018

Weekly Report

Here’s your weekly update of news, analysis and research from . The full reports can be read on the
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New Stock Reports
SPARK NZ (SPK:NZ / SPK:AX) BUY: Investing in Margins
Spark shares have been trending upwards, most recently after news that competitor
Vodafone NZ reported a decline in earnings. Spark released their 2018 full year result with
deflated net profit after tax (NPAT) of $385m, down -7.9% from last year, although this was
well flagged to the market – as SPK booked an additional $49m of restructuring costs in its
efforts to become the lowest cost operator though its ‘Quantum Programme’. Spark continue
to grow their mobile and cloud security businesses which reported revenue growth, offsetting
declines in its legacy voice business. Spark remain ambitious, investing heavily in
digitalisation and automation so they can better serve and compete with their multi brand
strategy. While there are execution risks with their strategy, SPK have been agile and at the
current share price investors also receive an attractive 6% dividend yield.

TELSTRA (TLS:AX) HOLD: A Very Low Bar
Shares of telecommunications giant Telstra have been in recovery mode, despite recently
cutting its revenue guidance by $300m for the 2019 financial year. The market has had an
optimistic view towards Telstra recently, especially after the announcement of the merger
between TPG Telecom and Vodafone Australia, presumably on the view that one larger
competitor is not as much of a threat as 2 separate competitors in the market – lowering the
chance of a pricing war. While reporting uninspiring numbers during their 2018 financial
result, TLS ended up beating management guidance and the markets very low expectations.
Our view remains unchanged on the basis that competition will remain tough, and while we
acknowledge Telstra is implementing several initiatives, we remain on the side-lines.
GENESIS ENERGY (GNE:NZ / GNE:AX) BUY: Dividend Darling
Genesis and other NZ energy stocks jumped as a sign of relief after an independent review
of the electricity sector found no evidence that they were making excess profits, reducing the
chances of regulation. Genesis delivered a decent 2018 full year result, with recent acquisitions contributing to operating earnings and as it benefitted from the drier season boosting demand for coal and gas fired generation from its Huntly site contributing to stronger wholesale margins. We are generally cautious on the power generator sector, especially in an environment of rising interest rates. However, Genesis remains our top pick in the sector, primarily given its diverse production base (which includes oil – with the oil price rallying to circa US$70 a barrel) and dividend yield of 6.8%.

SKY TELEVISION (SKT:NZ / SKT:AX) SELL: Trying to Stem the Bleed
Sky TV shares continue to fall after reporting a -$240.7m loss for their 2018 financial year.
The result was driven by continued subscriber losses and falling revenues which led to SKY
TV making a $360m write down against its goodwill, to reflect challenging market conditions.
Operating earnings were down only -2.2% as cost cutting efforts partially offset the reduction
in revenue. Sky TV also highlighted there were significantly less subscriber losses in the
second half as opposed to the first. While Sky are trying to stem bleed, you can only cut costs
so far and if subscribers keep falling it is obvious that revenues and earnings will continue to
trend lower. It will be interesting to see how the price slash and adoption of mobile and
internet content supply will work out for SKT, but at this stage we are not convinced it will be
enough.

G8 EDUCATION LIMITED (GEM:AX) BUY (High-Risk): Risky Turnaround?
GEM shares have taken another tumble after its 2018 half year result came in below analyst
expectations. This was almost a month after GEM shares experienced a relief rally on
rumours it may be a takeover target for any number of players in the Australian private equity
industry. GEM reporting a -22% fall in net profit after due to a fall in occupancy rates as
market conditions become more challenging and a rise in expenses, particularly wages which
rose due to regulatory staff ratio changes. While this isn’t new news, the market was
expecting some market stability in the childcare market sooner rather than later. GEM also
cut its dividend significantly. While it was a poor result, we feel the share price reaction is
overdone and would not panic sell at these levels. We change our rating on GEM to a HIGH-
RISK BUY given the challenging market conditions are continuing longer than expected.

weekly 12 Sep

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