David versus Goliath — A tale of two telecommunications companies

On Tuesday, 14 June 2022, Telkom released its annual financial results for the year ended 31 March 2022, revealing a company struggling to grow.

Revenue was down 1.1% to R42.8 billion, and earnings before interest, taxes, depreciation, and amortization (EBITDA) decreased 0.5% to R11.9 billion.

Telkom also revealed negative free cash flow of R2.1 billion, partly due to the spectrum auction that cost the company R1.1 billion.

There were a few positives.

Telkom Mobile increased its customer base by 10.5% to 16.9 million subscribers, with 62.9% of them using broadband services.

Openserve increased homes passed by 52.7% over the last year, while homes connected increased by 38.4%.

Telkom CEO Serame Taukobong highlighted that in the second half of the year, fixed broadband subscribers increased for the first time in several years despite the decline in ADSL subscribers.

Despite these positives, the market did not like what it saw. The revenue decline and negative cash flow raised concerns about Telkom’s prospects.

Telkom’s share price plummeted by over 12% since it released its financial results. It is down 35% since the start of the year.

On the same day as Telkom’s results, Remgro did its Capital Markets Day (CMD) presentation with a focus on one of its key growth assets, Community Investment Ventures Holdings (CIVH).

CIVH is the holding company of Dark Fibre Africa (DFA) and Vumatel, which, in turn, is managed under the newly formed FibreCo.

FibreCo is a placeholder name for the new entity. CIVH and Vodacom have yet to announce what they will call the combined company.

Vodacom is set to acquire 30% of FibreCo and add its fibre-to-the-home, fibre-to-the-business, and fibre-to-the-base station networks to the new infrastructure company.

CIVH said combining the networks and operations of FibreCo with Vodacom’s fibre assets will increase the open-access fibre footprint to ensure greater market efficiencies.

Vumatel also has a 48% stake in Herotel which plans to reach 440,000 homes with its fibre network. Herotel currently has 65,000 fibre customers and 71,000 wireless subscribers.

CIVH said the existing Herotel network could act as an enabler for Vumatel’s low LSM products in secondary cities and towns.

CIVH will become an anchor shareholder and capital provider to fuel future growth for Herotel.

Unlike Telkom, which was struggling to convince shareholders it was the place to put their money, CIVH is the hot new kid on the block.

Its ambition is to become South Africa’s premier open-access wholesale fibre network. With deep pockets and Vodacom’s reach, it is the company to watch in the broadband market.

The image below shows the FibreCo structure after the Vodacom transaction.

The most interesting part is comparing the valuation of FibreCo with the market cap of Telkom.

Vodacom will pay R6 billion in cash for its Fibreco shares, with a R3 billion top-up payment based on its assumption at the time of the transaction.

Vodacom will also contribute its fibre assets to FibreCo at a valuation of R4.2 billion for FibreCo shares.

The transaction gave CIVH — and essentially FibreCo — an implied valuation of R44 billion on 31 December 2021. This valuation excludes the Herotel stake.

Telkom, in comparison, had a market cap of R18 billion on 15 June 2022. This makes FibreCo’s valuation 2.4 times higher than Telkom’s market cap.

What stands out is that Telkom’s assets dwarf that of FibreCo.

FibreCo’s principal assets are:

  • Vumatel’s 30,000km fibre network and its 450,000 connected homes.
  • DFA’s 13,800km network and its 20,000 connected towers, and 22,000 connected commercial buildings.
  • VumaCam’s 3,000 small cell poles.

Telkom, in comparison, has tremendous assets across a wide range of telecommunications services.

Telkom’s primary assets include:

  • Openserve’s fibre network of 169,000km, which touches most parts of South Africa.
  • An extensive mobile network with 7,313 active mobile sites and significant spectrum assets.
  • Swiftnet, with a portfolio of 3,916 towers.
  • Gyro, with a substantial property and data centre portfolio.
  • BCX, with a strong presence in the business market, generated R15.3 billion in revenue.
  • A large subscriber base — 17 million mobile customers, 584,189 fixed broadband customers, 997,000 fixed lines, and 389,109 fibre subscribers.

It raises the question of why Telkom, with such tremendous assets, has a much lower market cap than CIVH/FibreCo’s valuation.

The main reason is that the investment community has lost trust in Telkom, which is majority-owned by the government and the PIC.

Telkom is still a cornerstone of the South African telecommunications market, but poor strategic decisions and its lacklustre financial performance are chasing away investors.

CIVH, in comparison, has gained the trust of shareholders, and its robust business model has convinced Vodacom to invest around R9 billion cash in FibreCo.

The table below compares the assets and valuation of CIVH/FibreCo and Telkom.

It should be noted that CIVH/FibreCo’s R44 billion valuation if forward-looking and is based on a successful deal which will add Vodacom’s capital injection and fibre assets to the company.

Without the Vodacom deal, CIVH/FibreCo valuation is around R30 billion.

Telkom versus CIVH/FibreCo
Valuation Telkom CIVH/FibreCo
Market Cap/Valuation R18 billion R44 billion
Financial Data Telkom CIVH/FibreCo
Revenue R42.8 billion R6.0 billion*
EBITDA R11.9 billion R3.6 billion
Headline Earnings R2.8 billion R0.03 billion
Capex R7.5 billion R3.6 billion
Net debt R14.1 billion R14.7 billion
Operational Data Telkom CIVH/FibreCo
Fibre network 169,000km 43,800km
Fibre subscribers 389,109 450,000
Fibre to base station 20,000 8,655
Enterprise business services 22,000 41,368
Mobile customers 16,936,464 0
Broadband subscribers 584,189 0
Mobile sites 7,313 0
Towers 3,916 0
Data centres Yes No
Mobile spectrum 192Mhz 0Mhz
*Estimate based on Vumatel and DFA’s revenue in previous financial year.

Now read: Telkom’s impressive fibre drive

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David versus Goliath — A tale of two telecommunications companies