S&P re-rating knocks Telkom stock
Telkom stock took a last-minute dip yesterday after Standard & Poor’s re-rated the group.
After topping R115 during the day, the share price was R111 at the close.
The rating agency gave Telkom a corporate credit rating of stable, down from a positive outlook in June.
The fixed-line operator has good cash-flow generation, a conservative financial policy and robust capital structure. But there is a lack of visibility on its future strategy and likely performance in the mobile sector once it divests from Vodacom.
Vodacom contributed 43% of Telkom’s revenue in the year to September, and provided chunky dividends. When it is stripped of Vodacom, Telkom will have to build a profitable mobile business afresh.
It also faces increasing competitive and regulatory pressures, and the challenge of operating against rivals now that its monopoly is no longer cushioned by law.
Standard & Poor’s said its stable rating reflected an expectation that Telkom’s fixed-line operations would continue to perform well and generate the solid cash flows needed to improve its network.
However, the outlook might be revised to a negative rating if there is a pronounced deterioration in the fixed-line business profitability, or if a more aggressive combination of capital expenditure and shareholder distributions replaces its conservative financial policy.
Standard & Poor’s expects the operator to lengthen its debt-maturity profile and limit its exposure to foreign currency debt. It has gross debt of R19,3bn of which R1,7bn is foreign debt.
On the other hand, it holds R1,2bn in cash, has R3bn in undrawn credit facilities and R4bn in free operating cash flow. These resources, plus good access to the local funding market, are adequate to cover its sizable short-term debt of R8,6bn.
Its profit margin has slid to 35,1% from 38,7% on a deterioration in fixed-line profitability. Still, cost-cutting efforts, its market leading position, improving network capabilities and its future offerings should preserve a sound margin.
But its cash flows could be dented by growing capital expenditure, which could soon reach 25% of its sales.
Next year, Telkom will sell 15% of Vodacom to the UK’s Vodafone for R22,5bn. Much of that will be paid out to shareholders, but it will retain about R9bn for infrastructure and funding a new mobile strategy.
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