Telkom’s week from hell

Telkom had a week from hell. After reporting a drop in revenue on Monday, investors dumped the stock, which resulted in its share price plummeting by 13%.

Telkom CEO Serame Taukobong put up a brave face, saying they demonstrated a solid performance in the broadband market despite an intensely competitive landscape.

He added that their wholesale business, Openserve, continued with its growth trajectory in the fibre market and that their mobile and masts and tower businesses continued to grow.

However, all eyes were on Telkom’s declining revenue.

Challenges in Telkom’s legacy business and IT divisions offset the gains in its mobile and towers business, which resulted in a decline in year-on-year revenue for the last quarter.

Increasing revenue has been Telkom’s Achilles heel for the past few years.

Former Telkom CEO Sipho Maseko relied on Telkom’s mobile division to increase revenue, but despite solid gains, it has been unable to offset declines in other business units.

With pressure mounting on Telkom to increase earnings, Maseko did what most CEOs do when their growth flatlines — cut costs.

Telkom started to retrench staff and slashed its spending on things like Openserve’s fibre expansion.

These cost-cutting measures had desirable benefits, like improved efficiencies and a higher EBITDA margin, but they did not solve the main problem — making more money.

Investors did not like what they saw and started dumping their Telkom shares as soon as the market opened on Monday.

When the market closed on Monday, Telkom’s share price was down 7% — from R50.46 to R46.75 — which wiped R1.8 billion off its market cap.

The share price decline continued on Tuesday and Wednesday, and Telkom’s stock was trading under R44.00 per share by the close of business on Wednesday.

Many analysts highlighted that Telkom cannot cost-cut itself to growth, raising questions about the company’s growth prospects.

Graeme Körner from Körner Perspective said the market is taking a dim view of Telkom’s prospects, especially its legacy fixed-line business.

“Telkom’s traditional copper businesses are dying a slow but very clear death,” he said.

Telkom’s fibre business is decent, but pricing is under pressure because new providers are rolling out infrastructure, and players like Rain are offering affordable 5G broadband services.

“It has suddenly become a very crowded space. The bottom line is broadband prices are falling, and people are not prepared to pay what they used to for voice calls,” Körner said.

Apart from challenges around increased competition and lower margins, Telkom has been implicated in dodgy dealings.

Last month, President Cyril Ramaphosa issued a proclamation directing the Special Investigating Unit (SIU) to investigate allegations of maladministration and misconduct at Telkom.

It raises the question of whether Telkom’s assets are valuable enough to split the company up to unlock shareholder value.

Telkom informed shareholders that its “value unlock programme”, which will see its masts and tower business — Swiftnet — listing on the JSE, remains on track.

The company’s board believes that a separate listing of Swiftnet will affirm the valuation of the masts and tower business, thereby unlocking value for shareholders.

Körner said that while Telkom has a few valuable assets, you cannot asset strip the business if you do not believe in the company’s core.

“There is also no guarantee that the asset value is going to be unlocked,” he said.

He did, however, say the idea of breaking up Telkom into pieces and allowing separate management teams to focus on the different business units makes sense.

“My sense is that the sum of the parts is worth a fair amount more than the current share price,” he said.

Even if this strategy is implemented, Körner warned, you are still going to inherit a mobile unit that struggles to compete against Vodacom and MTN, and a dying fixed-line business.

Now read: Dodgy Telkom deals under investigation — including one where it made a R7 billion loss

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Telkom’s week from hell