Telkom’s share price has been hammered over the last six months, and it closed at R40.10 on Tuesday – its lowest in five years.
Telkom shares peaked at R99.50 on 11 June, but since then they have more than halved in value as investors lost confidence in the company.
There are many reasons for this lack of confidence, including a rapid decline in fixed-line customers, lower enterprise revenue, and increasing debt.
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 has 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.
Struggling to grow revenue
Telkom CEO Sipho Maseko said the company will increasingly focus on its mobile services – a strategy which is not sitting well with all analysts.
FNB Wealth and Investments’s Wayne McCurrie questioned Telkom’s strategy, saying the company is trying to compete in a saturated mobile market.
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 will be downgraded.
Another challenge for Telkom is regulatory pressure. The recently released Competition Commission Data Services Market Inquiry Final Report is a good example.
The Commission said Telkom’s infrastructure division, Openserve, must substantially reduce the price of its IP Connect product within the next two months.
“Telkom Openserve must reach agreement with the Commission on substantial reductions in the price of IP Connect to remove excessive pricing concerns within two months,” the Commission said.
Telkom’s mobile division is also collateral damage in the Commission’s report which requires mobile operators to give free data to consumers.
Maseko criticized the Competition Commission’s report, arguing that price regulation is not the answer.
“It is an ineffective instrument and may ultimately have unintended and deleterious consequences on employment and future levels of investment,” said Maseko.
He added that the Commissions’ recommendations related to price and free data may ultimately “even push smaller players out of the market completely”.