Telkom plans raising R1 billion amid dwindling profits

Telkom plans to raise R1 billion by selling “qualifying device receivables” to financial institutions.
The partially state-owned company announced the plan in a quarterly trading update published on Tuesday.
“The working capital investment in mobile handsets and post-paid cost of sales are immediate costs, with corresponding revenues recognised over 24 to 36 months and thereby do not immediately offset the upfront costs associated with growing our post-paid subscriber base,” Telkom stated.
“This, in turn, has also put pressure on margins and cash generation in the short term.”
In response to this, Telkom said it embarked on cost-saving initiatives hoping to return to a blended group EBITDA margin of 25% over the next six to eighteen months.
“A number of initiatives are already in progress to address the Group cost base. These are aimed at rebasing our cost structures,” Telkom said.
“The benefits of these initiatives are expected to be visible in the medium term from FY2024 onwards.”
Telkom warned it would have to invest in exiting and reducing certain direct and operating costs in the coming 6–18 months.
A substantial portion of these costs will reflect in FY2023.
“In addition, in order to mitigate the impact of frontloaded investment in working capital as well as ongoing pressure on free cash flow (FCF), the Group plans to raise a further R1 billion by the end of FY2023 through the sale of qualifying device receivables to external financial institutions to mitigate the impact on FCF,” it said.
For the quarter ended 31 December 2023, Telkom reported a slight uptick in revenue to R11 billion (2.3%).
Earnings before interest, taxation, depreciation, and amortisation (EBITDA) was down 13.5% to R2.5 billion.
Telkom Mobile revenue was up 7% to R5.7 billion, with mobile data traffic up 25.6% year-on-year to 309 petabytes (PB). Mobile data subscribers increased 12.9% to 18.6 million.
BCX reported an 8.8% increase in IT business revenue to R1.5 billion.
Openserve reported a 15% fixed data traffic increase to 492PB.
Telkom warned that shareholders should expect to see declining profitability next quarter.
“While the group saw an uplift in Q3 FY2023 revenue, the annual trend of declining profitability is expected to continue into the fourth quarter,” it said.
“We expect an overall weaker Q4 FY2023 relative to Q3 FY2023 impacted by the ongoing upfront investment in working capital, continued accelerated load-shedding and inflationary cost pressures.”
It said up-front costs related to its cost-cutting initiatives would put further pressure on group profitability and free cash flow for the financial year.
Telkom said the related benefits would only materialise in future years.
Telkom’s share price rose 6% since markets opened on Tuesday, trading at R36.20.