Why Spark New Zealand (NZSE:SPK) Is a High-Risk, Low-Reward Gamble

Investors seeking stability and growth should steer clear of Spark New Zealand (SPK). Despite its status as a telecommunications giant, its deteriorating financial health, crushing debt burden, and stagnant growth metrics paint a bleak picture. Let’s dissect why this stock presents a high-risk, low-reward proposition and why prudence demands caution—or outright divestment.

1. ROCE: A Decline in Capital Efficiency Signals Weak Profitability

Spark’s Return on Capital Employed (ROCE) has been in freefall, dropping from 19.5% to 17.7% in the latest reporting period. This metric reflects how effectively a company generates profits from its capital investments—a key indicator of long-term health. A falling ROCE suggests Spark is struggling to reinvest in growth opportunities that deliver meaningful returns.

Compare this to the Telecom industry average, where ROCE typically hovers around 18–20%. Spark’s slipping performance here signals a loss of operational efficiency, compounded by rising debt and underwhelming revenue growth.

2. Debt-to-Equity Ratio: A Time Bomb Ticking at 129.8%

Spark’s debt-to-equity ratio has surged to 129.8%, meaning its debt exceeds equity by nearly 1.3 times. With total debt at NZ$1.86 billion and equity at NZ$1.44 billion, the company is heavily reliant on borrowing to fund operations. While its interest coverage ratio of 3.8x currently shields it from immediate default risk, this metric offers little comfort:

• A 5.1% rise in operating expenses in H1 2025 (to NZ$1.52 billion) is squeezing profits.
• Depreciation and amortization costs jumped 19.5%, reflecting aging infrastructure or over-leveraged capital projects.

Analysts warn that even a moderate economic downturn or further margin compression could push Spark into liquidity trouble. Investors should ask: Is this debt fueling growth or merely propping up declining performance?

3. Revenue Growth: Stagnation Meets Decline

Spark’s revenue growth has been anemic for years, averaging just 2.8% annually. In H1 2025, it worsened:

• Total revenue fell 1.9% year-on-year to NZ$1.94 billion.
• The Business segment, which accounts for nearly half of revenue, collapsed by 4.8%, while Consumer revenue dipped 1.9%.

Even the Wholesale segment’s 17.6% growth couldn’t offset these losses. Worse, mobile connections dropped 4.0%, and broadband connections fell 2.4%, signaling customer flight.

This is a sector where innovation and customer retention are critical. Spark’s inability to reverse these trends suggests a loss of competitive edge.

4. Margin Collapse: Profitability in Free Fall

Profit margins have cratered:

• Reported net profit margin plummeted from 8.0% to 1.8% in H1 2025, with adjusted margins dropping to 2.9%.
• Adjusted EBITDAI margins fell 3.7 percentage points in its Data Centres division, highlighting operational inefficiencies.

These declines aren’t just about costs—they reflect a business model in disarray. When a telecom giant can’t sustain margins in a sector with industry growth of 11.5%, it’s a red flag.

5. Dividends and Capital Allocation: Hollow Returns

Even dividends—a key investor lifeline—are under threat:

• Ordinary dividends per share dropped 7.4% in H1 2025, to NZ$0.125.
• A NZ$45 million equity buyback in 2024 may have been a desperate bid to stabilize share price, but with debt already sky-high, it’s a risky move.

Investors are being asked to bet on a company that’s divesting assets (e.g., selling its tower business to Ontario Teachers’ Pension Plan) just to stay afloat.

Why the Reward Isn’t Worth the Risk

Spark’s valuation may look cheap on paper, but its fundamentals are deteriorating. Key risks include:

1. Debt Overhang: Rising interest rates or slower revenue growth could cripple its ability to service debt.
2. Competitive Erosion: Losing customers to rivals like 2degrees or Vodafone in a saturated market.
3. Capital Misallocation: Sinking cash into underperforming segments (e.g., legacy voice services, which saw a 17% revenue drop) instead of growth areas.

Final Verdict: Walk Away

Spark New Zealand is a cautionary tale of over-leverage and missed opportunities. Its ROCE decline, crushing debt, and revenue stagnation create a toxic mix for investors. While some may see value in its “cheap” price, the risks far outweigh potential rewards.

Action to Take:
- Avoid new positions in SPK.
- Sell existing holdings before margin pressures and debt costs escalate further.

The telecom sector demands agility and innovation—qualities Spark seems to have lost. Investors deserve better.

Stay vigilant. Stay profitable.