Telkom’s share price has plummeted from around R100 per share to just over R50 per share over the last five months, which points to the investment community losing trust in the company.
There are many reasons for the lack of trust, including a rapid decline in fixed-line customers, lower enterprise voice and data revenue, increasing debt, and Telkom’s plan to buy Cell C.
Jean Pierre Verster from Protea Capital Management highlighted that Telkom’s free cashflow generation is negative and that the decline in fixed-line revenue is severe.
While Telkom’s mobile unit is growing, the company is spending a lot of money on this part of the business and is taking on a lot of debt to fund it (its net debt increased to R12 billion).
Stakeholders highlighted that Telkom’s debt is reaching worrying levels and are questioning whether the company accurately assessed the finance charges related to this debt.
Telkom losing fibre market share
Telkom CEO Sipho Maseko said the company will increasingly focus on its mobile services, which comes at the detriment to its fixed-line operations.
Maseko, however, does not seem concerned about losing large numbers of fixed-line and fixed-broadband subscribers.
Telkom’s fixed-line broadband subscribers – which include ADSL, VDSL, and fibre-to-the-home customers – declined from 974,181 in September 2018 to 781,255 in September 2019.
Instead of doubling down on its fibre network investment, Telkom has cut capital expenditure on its fibre network by 36.3% over the last year.
Telkom is focussing its spend on fibre-to-the-base-station to support its mobile operations instead of fibre-to-the-home.
The company said it has a strong focus on fibre-to-the-business and fibre-to-the-base-station because they have significantly higher ARPU than FTTH passed.
This means that Telkom is allowing other fibre network operators like Vumatel, Octotel, and Frogfoot to eat into its fixed-line market share, where it used to be completely dominant.
Wayne McCurrie from FNB Wealth and Investments questioned Telkom’s strategy, saying the company is trying to compete in a saturated environment.
He said Telkom relies on its roaming agreement to offer a decent service, which means its only competitive advantage is price.
This “race to the bottom” is good news for consumers but puts tremendous pressure on Telkom’s bottom line.
Excelsia analyst Mark Narramore also questioned Telkom’s strategy, saying it was spending money with cashflow which it does not have.
Narramore highlighted that Telkom’s share price has been declining over the last four months and that he anticipates the company to be downgraded.
Telkom’s plan to buy Cell C
Commenting on Telkom’s plan to buy Cell C, Verster said these two mobile operators are not great businesses on their own as the number three and four mobile operators in a saturated and mature market.
“When you put them together it is even worse,” said Verster. It is like having a concrete boot on the left foot, and then putting a concrete boot on the right foot as well.
Verster said he hopes there is a good strategy behind Telkom’s plan to buy Cell C and that they have access to the “real numbers”.
“There was an accounting opinion [related to Cell C’s results] which was withheld, and Cell C has still not issued its own audited results,” said Verster.
He added that there is no private company which made higher cumulative losses than Cell C in South Africa.
The graph below shows Telkom’s share price decline in recent months.
Telkom share price
This is an opinion piece.