Telkom shines

Following Telkom’s latest results, prominent analysts believe the company could give investors good returns if it continues executing its successful strategy.

On Monday, 18 November 2024, Telkom released its financial results for the six months ended 30 September 2024.

Group revenue grew by 1.9% to R21.4 billion, primarily driven by mobile data revenue, which increased by 12.7%, and fibre data service revenue, which rose by 15.5%.

The company’s adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) increased by 18.3% to R5.6 billion.

Telkom’s adjusted EBITDA margin improved to 26.2%, 3.6 percentage points up on the prior period.

It has significantly strengthened the balance sheet, and free cash flow turned positive at R768 million, compared to negative R478 million in the previous period.

Interest-bearing debt was reduced by R885 million, and the net debt to adjusted EBITDA ratio improved to 1.3x from 1.8x at year-end.

Mobile subscribers exceeded 22.7 million, growing by 24.6% year-on-year, and mobile data subscribers increased by 19.6% to 14.6 million.

The results were well received by the market, and Telkom’s share price has increased by 8% this week.

Commenting on Telkom’s investment case, Rowan Williams from Nitrogen Fund Managers said the operator’s sum of the parts has always been higher than its market cap.

However, the company has struggled to unlock shareholder value and has rolled back plans to sell part of Openserve.

Despite its challenges, Telkom has successfully transformed the company from a fixed-line player to a largely data-driven mobile operator.

Apart from the growing mobile business division, Openserve, with its fibre assets, is another valuable part of the company.

“The latest set of results reflects the transformation and some of the benefits, including improved free cashflow,” Williams said.

“It looks like Telkom is winning market share in the mobile space. Their numbers were much better than Vodacom and MTN’s.”

Other positives include the improved performance of BCX and Openserve, which are moving to next-generation products.

Earlier this year, Telkom also successfully sold its mast and tower business, housed inside Swiftnet, for R6.75 billion.

“Telkom is busy executing on their strategy, and the share price is starting to reflect the value of the sum of the parts,” he said.

Williams added that Telkom, which is trading at a price-to-earnings (P/E) ratio of 7, can provide value at these levels.

“If they can continue to execute and unlock value, there will be returns for shareholders,” he said.

Devin Shutte from The Robert Group added that Telkom should be credited with successfully executing its strategy.

This includes growing its mobile operator division and improving the financial performance of its struggling divisions.

Telkom’s capital expenditure and debt

Telkom CFO Nonkululeko Dlamini said they continued with a smart capital spend of R2.5 billion invested in infrastructure.

“The capital intensity ratio of 11.9% remains efficient and in line with our forecast of 12% to 15%,” she said.

Capital intensity refers to the proportion of revenue a company allocates to capital expenditure.

Capital expenditure is important for telecommunication companies as it indicates how much the company invests back into its network to keep it competitive and up to date.

Telkom has seen a general reduction in its capital intensity over the past few years, dropping from over 20% to 11.9% in its newly released interim results.

Dlamini said their improved cash generation and strengthened balance sheet position them well to continue investing for future growth.

Telkom reported a 10% reduction in its interest-bearing debt from R14.8 billion on September 2023 to its current R13.3 billion.

This has reversed the trend of accelerating debt within the group since 2022. Reducing debt, in conjunction with lowering interest rates, will have a positive impact on the group’s bottom line.

Telkom’s net interest expense represented 34% of its operating profit. In the previous interim results, Telkom’s net interest expense represented 50% of its total operating profit.

This reduction in debt has, therefore, contributed to Telkom’s reporting a higher net profit margin of 7.7% compared to the prior year’s 4.7% net profit margin.