Our opinion on the current state of TELKOM(TKG)Historically, Telkom (TKG) was the government-controlled provider of fixed-line telephone connectivity in South Africa. With the advent of cell phones, Telkom was forced to subsidize the development of its own competition in the form of Vodacom, MTN, and more recently Cell-C. This subsidy took the form of termination rates for calls which are now being phased out. Over the past twenty years, the CEO of Telkom, Sipho Maseko, stated that Telkom has effectively subsidized other networks to the tune of R70bn. Telkom is currently listed and is owned 41% by the government and 11.9% by the Government Employees Pension Fund (GEPF), so it could still be considered to be government-controlled. In reality, it operates as an independent organization divided into five divisions:
1. **Open Serve**: South Africa's primary supplier of wholesale connectivity with the country's largest network.
2. **Telkom Consumer**: The largest supplier of broadband internet connectivity with a growing mobile phone network.
3. **Yellow Pages**: Provides advertising and marketing to local businesses.
4. **BCX**: An ICT solutions company operating in Southern Africa.
5. **Swiftnet**: Formed in April 2018 to house Telkom's masts, towers, and property interests. Swiftnet owns a diverse portfolio of 1,330 properties and has 40 earmarked for development.
Telkom is impacted by the rulings of the Independent Communications Authority of South Africa (ICASA) regarding "inter-connect" fees. However, in our opinion, Telkom has been well managed, and its downsizing should result in improved profitability going forward. The company is steadily switching from fixed-line to mobile.
On 23rd July 2021, CEO Sipho Maseko announced that he would be stepping down with effect from 30th June 2022. In its results for the six months to 30th September 2023, the company reported revenue up 2.5% and headline earnings per share (HEPS) up 46.7%. The company said, "Profit for the period was boosted by lower depreciation charges and growth in EBITDA, while higher interest rates materially increased net finance costs compared to the comparative period."
In a trading update for the three months to 31st December 2023, the company reported revenue up 2% and EBITDA stable at R2477m. The company said, "Our cost-reduction initiatives also contributed to improved operating EBITDA as they partially offset inflationary increases, increased bad debt provisions and the added cost of load shedding."
In a trading statement for the year to 31st March 2024, the company estimated that normalized HEPS would increase by between 195% and 205%. The company said, "Growth in earnings has also been positively impacted by lower depreciation and write-offs in FY2024 after asset impairments recognized in FY2023. This growth was partially offset by higher net finance charges and foreign exchange and fair value movements in FY2024."
On 22nd March 2024, the company announced that they had sold Swiftnet for R6.75bn to a consortium of investors. The cash will be used to reduce Telkom's debt.
Technically, Telkom's share fell from highs of around R98 in June 2019 to levels around R15.00 in March 2020. It has been moving sideways and down since then. The company has high debt levels compared to its market capitalization, which makes it risky for investors.
In our view, this company is battling to find a new direction in a very difficult economy and against stiff competition. Despite efforts to improve profitability and reduce debt, Telkom faces significant challenges that make it a risky investment. Potential investors should be cautious and consider the company's high debt levels and the competitive landscape.
