Telkom was recently downgraded by the big stockbroking firms because of its high share price and the struggle it faces with its legacy business.
This is the view of Nick Crail, senior fund manager at Ashburton Investments, who explained that Telkom is “pricey”.
Speaking to Business Day TV, Crail said Telkom has a forward earnings price which is greater than Vodacom and MTN, which does not make sense when looking at its financial performance.
He said relative to its market share and its legacy-type business, Telkom should not be trading at its current levels.
Crail gave credit to Telkom for growing its share price from around R12.50 in 2013 to the current level of around R72.00, but said this growth is not sustainable.
“Telkom’s price is vaguely crazy. That is why it has been downgraded and I will be cutting some money from Telkom,” he said.
A different view
Cannon Asset Managers CEO Adrian Saville has a different view and picked Telkom as a good investment for 2019.
Saville argues that Telkom’s share price in 2018, where the stock traded as low as R46 per share, did not reflect the value it offered and could be regarded as extremely attractive.
“Since then, the price has marched steadily higher to R77 per share. At this level, the earnings stream looks to be priced fairly, on an earnings’ multiple of 13x and a dividend yield of 4.5%.”
“We regard this as fair value for a utility business with a return on assets of 9.2% and return on equity of 11.7%.”
Telkom’s share price rise
Saville said Telkom displays utility-like attributes in terms of performance, with a return on assets of 9.2% per annum and return on equity of 11.7% per annum.
Of specific interest is Telkom’s underlying property portfolio held through an entity called Gyro.
Gyro’s subsidiaries manage Telkom’s portfolio of 1,332 properties, which includes offices, client-service centres, residential dwellings, land parcels, and 6,500 masts and towers.
Effectively, Gyro is a “mega” real estate investment trust (REIT) that has a market value of R24 billion – equal to three-quarters of Telkom’s market cap of R31.6 billion.
“We expect this portfolio to be separately listed through the course of the next year or so,” said Saville.
“This spin off would represent a substantial capital recognition for shareholders, releasing R45 in property assets to add to the current market price of R64.”
“There is no indication from Telkom regarding the prospect of corporate action, but our view is that this is a possibility based on the nature and extent of the property portfolio. On this basis, the stock remains attractive.”
Telkom share price
The graph below shows Telkom’s share price growth over the last six years.