DAVID WILLIAMS: Welcome to Face to Face. Telkom’s results are out against the background of likely corporate activity in the sector - a lot of intense interest there - with me to talk about the results and the background they’re operating in the chief executive Reuben September. Reuben, let’s look at a couple of the big numbers - operating revenue was up 9% which is really about inflation to R56billion which reminds us how big the company is, earnings moved up 4%, and operating profit was static at R14.5billion. That looks okay - but then you take out Vodacom and it doesn’t look so good - so you’re battling at the moment…
REUBEN SEPTEMBER: If you look at our business as a fixed-line business our contribution to earnings before interest, tax, depreciation and amortisation (Ebitda) is still 60% of the group. Taking that into consideration and going forward - even if you strip out the Vodacom contribution, and the exciting prospects of our Multi-Links acquisition and the contribution flowing from that - I think the prospects are good for the future. But looking at the business domestically yes, we are under price pressure as competition increases, and there’s the environment of high inflation. Against that our defence strategy is working well - we see the movement of our revenues towards annuity based revenues as part of the plan with bundles, packages, etcetera. Our growth strategy around data has grown by double digit figures again. Yes, it’s a company that’s adapting to an environment where we have a fixed-line player moving into data increasingly - but we are looking forward to having a mobile arm ourselves.
DAVID WILLIAMS: Looking at the fixed-line business revenue growth there was almost zero at R36.2billion - again big numbers - with costs up 3%. What is happening in that equation?
REUBEN SEPTEMBER: If you look at revenues being flat that’s an achievement against the price reductions we have had - the tariff adjustments. Last year it was 1.2% so really products and services prices are in absolute decline. Against that we’ve also had decreases in our international private lease lines - so overall we are looking at a price adaptation to meet the market demands. Operating expenditures grew by just over 3.6% the effect of cost containment.
DAVID WILLIAMS: What have you done there? With an operation this size it’s so easy for costs to get out of control - particularly if you battling to get market share - yet it was below the inflation increase. What have you done at the same time as trying to grow your share?
REUBEN SEPTEMBER: If you look at the operations of the business we’ve looked very extensively in terms of our contracts with our vendor community, equipment suppliers. We looked at for example cost containment in terms of staff costs. We looked at also various efficiencies across the business - it’s an ongoing process. It is a business where we need to provide increased customer service levels - so against that backdrop of investment in customer service, as well as capital investment in the infrastructure - I believe 3.6% is a good figure to look at from an operating perspective.
DAVID WILLIAMS: There are other pressures though - the amount of debt in relation to total equity went from 31% before to 49% - that’s quite a big jump.
REUBEN SEPTEMBER: At 31% we haven’t been at the optimal level for our cost structure - 50% to 70% is actually the optimal level for us as a company so we are getting into the right range. We’ve targeted our debt to Ebitda at 1.3 times and that is really a very sound basis from a capital structure point of view - so we are getting into a good range despite the increases…
DAVID WILLIAMS: Your dividend was up by 10%. There are companies that would not have paid a dividend given what we’ve been talking about - they would have said “hang on we need to consolidate” and defer the dividend.
REUBEN SEPTEMBER: Yes, we have a policy that says we want to grow our dividend progressively - this year we’ve done that by 10%. We didn’t declare a special dividend. We are looking at our investments - both in terms of our African operation in Multi-Link’s, as well as the fixed wireless that we’ve announced and in terms of our international cable capacity - these are investments with good returns. So we make the decision if we have an investment and the returns are better there than cash back - then we will do so.
DAVID WILLIAMS: You mentioned the mobile area - fixed-line has been your area of competence - isn’t it the wrong time to be going into mobile? The market has been run pretty much by the big two and then the big three? Aren’t you coming late to that at a time when your other core competence is under pressure?
REUBEN SEPTEMBER: We are not looking at mobile as a separate business - we are looking at it as an integrated business, part of our converged offering to our customers. If you think that we are offering a voice and a data offering - think of our corporate market. Adding a mobile capability to that really enhances our overall offering. This is not separate - this is not Telkom coming at the market and saying we want to grow mobile separate to our current offering - so it really fits in really well with the valid proposition to our customers
DAVID WILLIAMS: Lots of talk about what’s happened - we saw in the news a moment ago about how the 50% Vodacom stake has held both companies back in a way, where MTN has been able go off and run with the ball - so what’s going to happen next?
REUBEN SEPTEMBER: If you look at Telkom and the way our share trades at the moment there is certainly an undervaluing of the underlying of the fixed-line business. Really if we look at it with a mobile capability - together with being let’s call it liberalised from the shareholder’s agreement - Telkom will come into its full rights. It’s good for Vodacom as well - Vodacom is competing with us. There are restrictions on Telkom to compete with Vodacom - I believe this market needs Telkom to be positioned correctly to operate as a fully fledged converged ITC company. We have the underlying network capability, we’ve certainly got the reach and capacity - and we’ve spent money investing in our next generation network. It’s a very good position for Telkom to be in - to come to the market and grow our value for our shareholders.
DAVID WILLIAMS: Sounds like you’ve got big plans - there will obviously be money coming in but will you have enough to do all the things you want to do - could there possibly be more shares issued?
REUBEN SEPTEMBER: If you look at it from a corporate action - and we are under cautionary at the moment - in terms of the indications we’ve given both from the consortium headed up by Mvelaphanda Group, as well as Vodafone - just thinking about Telkom currently as indicated 60% of our contribution still comes from the fixed-line network from an Ebitda point of view, and we are looking at what our Multi-Links acquisition would render for us in terms of contribution. Yes, I believe there is a lot of underlying value that will certainly come to the fore - and I think with a very healthy balance sheet it looks very good for Telkom going forward.
