Here is why Telkom’s share price got hammered

Telkom’s share price dropped to a five-year low, declining from R99.50 on 11 June to just over R40 per share this week.
This raises the question as to what is behind this rapid share price decline, and whether there is more downside risk associated with Telkom.
To answer these questions, MyBroadband contacted prominent South African analysts who have a strong knowledge of Telkom and the local telecoms market.
Here is what these analysts had to say about the Telkom share price and what to expect in future.
Reuben Beelders – Gryphon Asset Management
Reuben Beelders, portfolio manager at Gryphon Asset Management, told MyBroadband that one should consider Telkom’s share price rise before June to fully understand the decline in the second half of the year.
“So, if one considers the price at the commencement of 2018, roughly R45.00 per share, we are not all that far away at the current price of R42.00,” said Beelders.
He explained that Telkom’s share price was ramped up as investors believed that there were assets within Telkom that were not recorded by the market, including its property portfolio, which could be realized.
Beelders added that some investors also got overly excited about Telkom’s cellphone business, which helped the share price’s increase.
He noted that while Telkom currently trades at a discount to its net asset value (NAV), he will not be investing in the company.
“Telkom does not deliver a great return on equity (less than 10%), so I would not be rushing to buy the stock,” said Beelders.
Adrian Saville – Cannon Asset Managers
Cannon Asset Managers CE Adrian Saville, who picked Telkom as a good investment for 2019, achieved an excellent return by investing in the company.
“We entered at R45.00 per share in June 2018 and exited at R95.00 per share in mid-2019,” said Saville.
He added that Telkom is starting to look attractive at current levels, with the share price having been pushed all the way back to R42.00 on concerns relating to corporate action, debt to build the mobile business, weak cash flow, and pressure on data prices.
“The concerns are valid and need to be addressed to make the investment case. But at these prices, the concerns have been more than discounted and Telkom is attractive at this level,” said Saville.
He previously explained that Telkom’s underlying property portfolio held through an entity called Gyro is often discounted (or even ignored).
“We anticipate that this will be unbundled, and this event would offer a material gain on the current share price,” said Saville.
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.
Casparus Treurnicht – Gryphon Asset Management
Casparus Treurnicht, who is also a portfolio manager at Gryphon Asset Management, agreed with Beelders, saying the Telkom share price is simply giving back what it made before.
“I think investors forget how capital intensive the telecoms industry is. If you are taking market share it also means you need to upgrade infrastructure to handle the additional volumes,” Treurnicht said.
He said although Telkom is expanding margin due to the fixed cost element decreasing, sustainable margins in the industry seem to be under tremendous pressure.
“The net margin is lower than investor’s previous trajectory,” said Treurnicht.