Spark’s slump tars communications index as worst performer

The shock underperformance of the normally boring, stable utility Spark has pulled the communications index to the bottom of the sharemarket performers this year.
The S&P/NZX All Communications Services index has slid 21 percent this year, after the share price of its largest constituent, telecommunications company Spark, slumped 41 percent.
Spark, previously part of Telecom before its split from fixed-line network Chorus, has underperformed after several misses disappointed investors. 
The company is normally viewed as a defensive stock with a reliable dividend stream, but it has been affected by the slower economy and reduced Government spending.
Spark reaffirmed its full-year profit forecast for the 2024 year when reporting its first-half profit on February 28, but downgraded that to a lower forecast range just two months out from the end of its financial year, which it then failed to meet. Last month it also downgraded its forecast for the coming 2025 financial year and reduced its expectation for dividend payments.
“When you’ve got a nice, boring, stable utility issuing you a downgrade and then following that up with another one that was even worse, it made people a little bit concerned that management might not quite have a grasp on the situation they find themselves in,” said Hamilton Hindin Greene investment adviser Jeremy Sullivan.
Spark chairperson Justine Smyth acknowledged when announcing its latest downgrade on October 30 that its current financial performance falls short of what is acceptable.
“The challenges we are facing are both cyclical and structural,” she said. “Weak business investment and consumer spending continue to curtail growth and squeeze margins. At the same time, we are undertaking a significant transformation of our enterprise and government division to address structural segment challenges.”
Smyth said though Spark’s products were largely resilient to economic downturns, they were not immune and the company has seen weaker demand in some areas of its business.
Spark has cited public sector spending cuts and deferred private sector investment during the economic slowdown for denting demand for its IT services. Sales of mobile devices and accessories have also been softer than expected.
The company’s fall in value will mean it is dropped from MSCI’s global index later this month, prompting investors who follow the index to sell the shares.
A weak economy has also affected the S&P/NZX Consumer Discretionary index, which is down 13 percent this year.
Hamilton Hindin Greene’s Sullivan said the retail sector was very cyclical and normally suffered in recessionary times.
“The retail sector has been pretty weak,” he said. “People have just put away their wallets in the face of high inflation and high interest rates, and gone back to basics.”
Updates are expected this week from Kathmandu owner KMD Brands, which holds its annual meeting on Tuesday, and the Warehouse Group, which has its annual meeting on Friday.
Shares in the Warehouse Group have slumped 35 percent this year, and KMD Brands has shed 43 percent. 
Outperformers in the sector include Briscoe Group, whose shares are up 9.2 percent, and Hallenstein Glasson, which has jumped 45 percent.
On the other side of the ledger, the S&P/NZX Energy index has been the best performer, up 34 percent.
Sullivan said the turnaround in interest rates had happened faster than some expected, which was the main catalyst for the re-rating of electricity companies.
The Reserve Bank started cutting interest rates in August, reducing the benchmark by 25 basis points. It followed with a 50-point cut last month and is expected to shave off another 50 points this month.
A decline in interest rates makes bonds less desirable, which prompts investors looking for regular income to shift to utility stocks for their dividend income. 
Of the largest constituents in the index, Contact Energy is up 6.3 percent and Meridian Energy advanced 8 percent.
The S&P/NZX Health Care index was the second-best performer, gaining 31 percent, largely because of the performance of Fisher & Paykel Healthcare, which has jumped 56 percent.
Sullivan said that although sales of Fisher & Paykel’s respirator machines had slowed from the surge in demand the company experienced during the peak of the Covid-19 pandemic, the company was still benefiting from demand for replacement parts and accessories for the machines.
To be sure, a weaker New Zealand dollar was also beneficial for the company, which made 95 percent of its sales overseas, he said.
The benchmark S&P/NZX 50 Index is up 8.1 percent so far this year.
Sullivan said he expected the sharemarket to move higher from here as interest rates continue to fall.
“Those that are interest-rate sensitive will benefit from next year’s reduction in local interest rates and a recovery in our economy, which will be broad based across the NZX,” he said.
 Still, he noted global wholesale interest rates had lifted since the US election.
“My view is that interest rates aren’t going to fall as quickly as what they were pre the US election, so whilst I’d expect a modest recovery in the New Zealand economy, I can’t imagine it’s going to be a V-shaped one,” he said.
That could see New Zealand’s economic recovery pushed out to the end of 2025 or potentially 2026, he said.