Are Investors Undervaluing Spark New Zealand Limited (NZSE:SPK) By 46%?

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23-04-2025

The projected fair value for Spark New Zealand is NZ$3.86 based on 2 Stage Free Cash Flow to Equity
Spark New Zealand is estimated to be 46% undervalued based on current share price of NZ$2.07
Analyst price target for SPK is NZ$2.96 which is 23% below our fair value estimate
How far off is Spark New Zealand Limited (NZSE:SPK) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
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We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (NZ$, Millions)
NZ$407.0m
NZ$331.2m
NZ$307.5m
NZ$331.5m
NZ$300.1m
NZ$298.3m
NZ$299.9m
NZ$303.9m
NZ$309.5m
NZ$316.5m
Growth Rate Estimate Source
Analyst x3
Analyst x3
Analyst x3
Analyst x2
Analyst x2
Est @ -0.58%
Est @ 0.54%
Est @ 1.32%
Est @ 1.87%
Est @ 2.25%
Present Value (NZ$, Millions) Discounted @ 6.6%
NZ$382
NZ$291
NZ$254
NZ$257
NZ$218
NZ$203
NZ$192
NZ$182
NZ$174
NZ$167
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = NZ$2.3b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.2%. We discount the terminal cash flows to today's value at a cost of equity of 6.6%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = NZ$317m× (1 + 3.2%) ÷ (6.6%– 3.2%) = NZ$9.4b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= NZ$9.4b÷ ( 1 + 6.6%)10= NZ$5.0b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is NZ$7.3b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of NZ$2.1, the company appears quite undervalued at a 46% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Spark New Zealand as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.6%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
See our latest analysis for Spark New Zealand
Strength
Debt is well covered by earnings and cashflows.
Dividend is in the top 25% of dividend payers in the market.
Weakness
Earnings declined over the past year.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Trading below our estimate of fair value by more than 20%.
Significant insider buying over the past 3 months.
Threat
Dividends are not covered by earnings and cashflows.
Annual earnings are forecast to grow slower than the New Zealander market.
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Spark New Zealand, there are three important aspects you should further research:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Spark New Zealand (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for SPK's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NZSE every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.