Spark’s (ASX: SPK) fiscal 2026 first-half result will be the first since the launch of its SPK-30 strategy and revised capital management framework, initiated following a prolonged negative earnings downgrade cycle and balance sheet concerns.

Why it matters: The upcoming half-year results will likely show the strategic initiatives, including cost-cutting and a rejuvenated focus on core connectivity businesses, gaining early traction.

  • Mobile, broadband, and business connectivity account for 80% of Spark’s gross margin. We expect revenue declines in these high-margin segments to slow in fiscal 2026.
  • The SPK-30 program is targeting annualized savings of NZD 150 million to NZD 180 million by fiscal 2030. Trends in operating expenses and EBITDAI margins in the December-half of 2025 will indicate whether the cost-out program is starting to take effect.

The bottom line: We retain our fair value estimate of NZD 3.60 (or AUD 3.30) for narrow-moat-rated Spark New Zealand. Shares are materially undervalued, reflecting market scepticism of the cost-out program and management’s ability to refocus on core connectivity businesses.

  • At a broad level, however, Spark is a defensive company with scale advantages in a rational three-player mobile market. Its strategy to refocus on core connectivity and reduce costs is likely to succeed, and support a maintainable annual dividend of NZD 0.15 per share.
  • Our forecasts are unchanged. We expect Spark’s first-half performance for fiscal 2026 to show progress toward meeting management’s full-year EBITDAI guidance of NZD 1.01 billion to NZD 1.07 billion. We forecast EBITDAI of NZD 1.05 billion.

Long view: SPK-30 is designed to refocus Spark on its core connectivity business and improve returns. Investors will be watching closely to see if the company is on track to lift group ROIC toward the 10%-13% target by fiscal 2030, from 8.7% in fiscal 2025. We forecast ROIC to be close to 13% by fiscal 2030.

We assign Spark New Zealand a narrow economic moat rating, primarily due to its mobile business

The mobile telephony division, forecast to generate almost 60% of group midcycle EBITDA, boasts a moat based on cost advantages and efficient scale. As the largest operator with low-40% mobile subscriber and mid-40% mobile service revenue share, Spark enjoys a scale that allows spreading of network investment, overhead and marketing expenses across a larger customer base than its competitors. It also has greater bargaining powers with device and network equipment providers. All this is leveraged to maintain Spark mobile’s network market leadership in terms of quality, coverage, reliability and pricing, thereby, creating a positive loop to the cost advantage. This is supported by a highly stable and rational industry structure, with the number-two player Vodafone/One NZ owned by private equity and the number-three player 2degrees owned by a consortium of Australian private equity and superannuation entities.

Spark mobile’s moat also stems from efficient scale. New Zealand is a relatively dispersed country with just over 5 million people. The upfront costs to build out a new mobile network (spectrum, hardware, marketing) in this country is prohibitive, and stealing share from the three incumbents is likely to be uneconomic. Unlike in Australia, where TPG tried to enter as the fourth mobile network operator in 2017 and abandoned the venture quickly, there has been no interest whatsoever in launching a new entrant in more than a decade. On the contrary, private equity consortium (Infratil, Brookfield) bought number-two mobile player Vodafone in 2019, while Australian private equity/superannuation consortium (Macquarie, Vocus, Aware Super) bought the number-three player 2degrees in 2022. We believe these owners treasure the stability of New Zealand’s mobile industry and its general telecommunication landscape, and all three players are aligned in terms of rational competitive behavior.

The combined fixed-line units of Spark (Fixed-line Broadband, Fixed-Line Voice - Copper), forecast to generate around 15% of group midcycle EBITDA, lack durable competitive advantages. Spark’s fixed-line broadband market share is high, at 36%. However, it is down from over 40% five years ago and pricing pressures in commodity-like data and connectivity products, and structural changes (for example, Spark is a mere reseller of fixed-line broadband to consumer and small businesses) are creating unrelenting headwinds. Furthermore, Spark’s fixed-line voice business is copper-based and dwindling as customers migrate to fibre. Perennial cost reductions, restructuring, digitization and productivity measures are being implemented to offset these challenges. But they are unlikely to be sufficient to give rise to a moat in the future, especially with ongoing technological advancement and its impact on traditional fixed-line telecom businesses.

We do not believe the IT products and services division, forecast to generate almost 30% of group midcycle EBITDA, boasts any durable competitive advantages. Management sees IT products and services across cloud, managed data and networks, procurement, data centers and Internet of Things as naturally adjunct to its core telecom offerings to small businesses, enterprises, and government entities. However, we believe they are mostly commodity-like, with Spark bringing no specialized expertise to the highly competitive space. Bundled services with telecom products have resulted in no discernible earnings stability or customer stickiness.

Bulls say

  • Spark New Zealand is the largest telecom provider in New Zealand, where it provides the most diverse range of telecommunications services. These characteristics provide reasonable diversity and will allow the company to execute a product-bundling strategy.
  • Spark New Zealand has a high-quality mobile network and has secured the greatest capacity in recent spectrum auctions. These attributes provide a valuable competitive advantage in the New Zealand market.
  • Free cash flow generation is strong, despite ongoing requirements to invest in networks, technology, and spectrum.

Bears say

  • Aggressive competition could place downward pressure on earnings and cash flow.
  • Growth in mobile, broadband, and IT services may not offset structural declines in fixed-voice telephony.
  • Failure to stay in front of the technology curve, and adjust cost base to respond to structural revenue pressures could crimp earnings.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.