Telkom under siege

Although Telkom reported a more positive set of annual results last week, it remains a company in deep financial trouble.

Its net debt continued to increase and now exceeds R16.9 billion, while Telkom has slashed its capital expenditure budget.

While its net debt only increased 0.9% year-on-year, this was after a 19.3% increase last year.

To further put this in perspective, in 2015, Telkom’s net debt was only R123 million. It has rapidly increased over the past eight years to where it is today, causing its net debt to EBITDA ratio to skyrocket from 0.02 to 1.7.

Some encouraging signs in the latest results included Telkom improving its free cash flow from -R2.7 billion to R424 million — a 115.6% increase.

This improvement occurred even with once-off R1.1 billion restructuring costs and a R972 million spectrum acquisition bill.

Telkom’s restructuring allowed it to cut 15% of its staff during the financial year, reducing its headcount from 11,624 to 9,877.

Another positive indication was the company’s net income increasing by a substantial 444% from R346 million to almost R1.9 billion.

Telkom also posted good subscriber growth for its fibre and mobile divisions.

However, while Telkom’s Openserve business reported that its homes passed by fibre grew 17% to 1.2 million, with 19.8% growth to 590,527 homes connected, it remains much smaller than Vumatel.

In September last year, Vumatel reported passing nearly 2 million homes, with almost 650,000 connected.

This is significant because Telkom slashed its capital expenditure by 17% to cut costs, curtailing its ability to catch up with Vumatel.

Its mobile capex was chopped 30% to R2.6 billion, while fibre investment was cut by 11% to R1.6 billion. Overall, Telkom’s capex for the year was R6.1 billion.

Last year, former Telkom chief financial officer Dirk Reyneke told staff in an internal memo that they were deferring 20% of the planned capex budgeted for the 2024 financial year to 2025.

Reyneke warned that Telkom was burning through cash at an unsustainable rate and announced several other restrictions to help contain costs.

These included limiting travel, suspending international conferences and seminars until further notice, and restricting overtime.

In addition to cutting capex, another concerning figure was Telkom’s debt servicing costs, which increased 58% from R1.5 billion to R2.3 billion due to higher interest rates.

Telkom has assured that it is prioritising fixing its debt and capital expenditure issues.

“Our short- to medium-term priorities are to strengthen our balance sheet by paying down debt in the prevailing ‘higher-for-longer’ interest rate environment and investing in capex to drive future growth,” it stated.

Telkom said a vital part of this strategy was selling some of its subsidiaries, such as Swiftnet, its masts and towers business.

The R6.75-billion deal to sell Swiftnet to UK-based investment firm Actis recently received shareholder approval.

Telkom said it would use the proceeds from the sale to pay down some of its debt.

Also related to its capex and debt issue, Telkom’s operational data revealed a company struggling to grow its fibre business faster than its legacy revenue was declining.

In its results presentation, Telkom showed that Openserve’s legacy and voice revenues plummeted over the past two years.

Overall legacy and voice revenue was down nearly 31% in the past year from R3.4 billion to R2.4 billion, while voice revenue alone was down 26.5% from R2.8 billion to R2.1 billion.

Telkom’s fixed broadband subscribers continued to decline, dropping 2.2% from 567,289 to 554,953.

Fixed access lines plummeted 23% during the year from 793,000 to 609,000.

While its Internet subscribers grew by a modest 2.5%, this was on the back of a 20% drop last year.

The table below summarises the key financial and operational data related to Telkom’s increasing net debt and declining fixed lines.