Telkom versus the rest
Last Monday, when outgoing Vodacom Group CEO Alan Knott-Craig had completed his last-ever presentation of the cellular group’s financial results, the auditorium, packed to the rafters with analysts and fund managers, rose in unison and gave him a standing ovation.
It was a fitting tribute to the man many regard as the father of cellular communications in SA. Over the past 15 years, Knott-Craig has built Vodacom into SA’s largest mobile operator and one of the country’s most successful companies.
The group produced the goods again in the 2008 financial year. Despite a rapidly maturing market, Vodacom lifted net profit 21,3% to R8bn on revenue that rose 17,1% to R48,2bn. The full-year dividend was raised 10% to R5,9bn, bringing total dividends paid since the cellular group’s inception to R23bn.
Now Knott-Craig, who says he will stay involved in the sector, is set to make way for fresh blood. With Vodafone likely to take control of Vodacom soon, it’s not clear if it will appoint one of its own executives or look inside Vodacom. Group chief operating officer Pieter Uys is the most likely internal candidate.
Whoever replaces Knott-Craig will need to manage a changed business, with growth set to slow, especially in SA. Vodacom has begun building complementary businesses in areas such as business data services and mobile advertising to offset the expected slowdown in growth in its core business.
Spending on its new Vodacom Business division has crimped operating profit growth, but Knott-Craig describes the investment as critical to Vodacom’s future success. “If we aren’t successful with Vodacom Business, we will be giving up the opportunity of three to five years hence.”
The consequences of failure to invest in the future is something Vodacom’s parent company Telkom knows only too well. Under former foreign shareholder Thintana, the group failed to invest sufficiently in its fixed-line network. It now has to play catch-up by spending billions on infrastructure. Capital expenditure will range between 23% and 27% of revenue over the next two years, reducing to 18%-22% in 2011.
The group plans to build a new wireless network using the same 3G technology used by MTN and Vodacom. But it insists it has no plans to become SA’s fourth cellular network operator. Rather, the new network will be used to complement its fixed-line network, especially in areas where copper cable theft is affecting service levels.
Cable theft has become a serious problem for Telkom, says CEO Reuben September. “At one stage, 40% of calls coming into our call centres were because of cable theft and load shedding.”
The increased investment by Telkom in its network, coupled with growing competition and rising inflation, is placing pressure on margins. Telkom has reduced its guidance and now expects earnings before interest, tax, depreciation and amortisation as a percentage of revenue to fall to between 32% and 36%.
The traditional voice business continues to take strain, though product bundles are proving successful in retaining customers. The data and broadband business continues to do well, with the number of broadband digital subscriber line users up 61,2% to more than 400 000.
International expansion is going well, especially in Nigeria, where its Multi-Links business, which Telkom acquired last year, is showing strong growth. Telkom says it will add 3,5m customers to the Multi-Links network in the 2009 financial year, from the 1m base now. In 2008, Multi-Links reported profit after tax of R49m on sales of R845m.
The company still has designs on the technology services market, despite its failed attempt to buy Business Connexion. “It’s important to look beyond our borders at what we can buy,” says September.
Despite the challenges facing Telkom, Irnest Kaplan of Kaplan Equity Analysts believes the share has the potential to outperform MTN’s in the short term because of the potential corporate action involving Vodafone and Mvelaphanda (see main story). “For the long term, though, I’d still be more comfortable putting my money in MTN,” Kaplan says.
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