Papi Molotsane Bad week at the office
The bad news keeps piling up for Telkom — uninspiring performance in its core fixed-line business; a recommendation by the Competition Commission that the proposed acquisition of Business Connexion (BCX) be blocked; and an adverse appeal court ruling on its battle with Telcordia that could cost it hundreds of millions of rand.
Is it time to dump the share? That’s a difficult question to answer, though analysts polled by the FM think there is probably value at current levels.
The pressures on the company aren’t going to ease, though. There’s a good chance that the BCX deal will be blocked or that the BCX board, frustrated with the delays, will opt to walk away from Telkom. That would deal a big blow to CEO Papi Molotsane’s efforts to make Telkom a comprehensive supplier of information and communications technology solutions.
Molotsane, who has been in the job for about 18 months, may have to settle for a smaller acquisition, or the more difficult (some would argue impossible) task of building a meaningful IT business from scratch.
Worse news for Telkom is that competitive pressures are building quickly and these will force the company to reduce tariffs, especially for international bandwidth and for broadband access. This, coupled with the need to invest billions of rand in building a next-generation network (one based on the same communications protocol that underpins the Internet) will eat into its profit margins.
But that doesn’t necessarily mean investors should be exiting the share. Telkom is expanding into new (albeit risky) ventures, such as cable and satellite television. And the company’s 50% associate, cellphone group Vodacom, continues to grow at a phenomenal clip.
However, Telkom’s ongoing reliance on Vodacom is seen by some analysts as problematic. Indeed, much of Telkom’s valuation lies in Vodacom. Based on Vodafone’s R106bn valuation of Vodacom when it bought VenFin’s stake in the company last year (its value will have risen since), R53bn of Telkom’s R72bn market capitalisation is from its 50% stake in Vodacom. Is the fixed-line business worth only R19bn, or even less?
One IT analyst, who asks not to be named, believes Telkom’s share, at its current levels, offers good value. “I have been bearish on Telkom in the past but I think the market is discounting too much bad news at these prices,” he says.
“I don’t think it’s time to sell. Telkom has its problems and you can question issues around management and strategy and those sorts of things, but you reach a stage where the market is just overdiscounting the risks.”
In the past three weeks, Telkom has shed almost 10% of its value. After reaching R145 on November 10, the share closed at R132,50 on Monday, well off its record high of R171 set in February.
Trading at a historic price:earnings multiple of 7,3, the share looks cheap. The dividend yield of 3,8% is not unattractive either.
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