It’s time to buy Telkom shares. With a cash windfall looming for investors, and plans by the group to expand into fast growing markets north of the border, Telkom is looking like an attractive investment proposition again. <\/p>\n
The telecommunications group’s decision to sell 15% of its stake in cellular operator Vodacom to the UK’s Vodafone has paved the way for it to pay a special dividend of R10,5bn (less taxes) and has given it a cash pile with which to pursue acquisitions elsewhere in Africa. <\/p>\n
On the face of it, Telkom at R111\/share — the level it was trading at on Monday morning — looks like a screaming buy. Not only will investors receive the special dividend, but they’ll also receive a tranche of Vodacom shares — the ratio of Telkom shares to Vodacom shares will be revealed in a circular to be released in February. <\/p>\n
The transaction is still subject to shareholder approval but it’s unlikely that it will be blocked since the group’s fixed-line assets continue to attract a negative valuation. Vodafone’s R22,5bn offer for 15% of Vodacom — the offer is less Vodacom’s R1,55bn in attributable net debt — gives Vodacom an implied value of R150bn. Yet Telkom’s market cap is just R58bn, or R17bn less than the implied value of its 50% stake in Vodacom. This is in spite of the group reporting R8,1bn in operating profit from its fixed-line operations alone in the year to March 31 2008. <\/p>\n
Though Telkom’s profits have fallen in each of the past three years, the declines have not been sharp — 2008’s operating profit was 9,2% down over 2007’s — and it seems unlikely that they will fall off a cliff, at least in the short term. <\/p>\n
Of course, Vodafone has offered a premium for the stake — a very healthy one, some analysts say, given that financial markets have tumbled since the UK group first made its offer — but Telkom’s share price is clearly not reflecting the true value of its fixed-line assets. <\/p>\n
Telkom’s share price has fallen 35% year on year and, even if Vodacom’s real value is now only R100bn, Telkom’s fixed-line assets are valued at a paltry R8bn, R3,8bn less than the earnings before interest, tax, depreciation and amortisation generated by its fixed-line business in the 2008 financial year. <\/p>\n
“I believe the moment has arrived for us to unlock value for our shareholders and really position Telkom for the future,” says CEO Reuben September “The true value of Telkom will emerge. Both Vodacom and Telkom will be looked at through unfiltered glasses.” <\/p>\n
Irnest Kaplan, MD of Kaplan Equity Analysts, agrees that Telkom is a buy, if only because of the value that will be unlocked through the unbundling of Vodacom. “Even if you are fairly conservative, you can see Telkom getting to R160\/share,” he says. “Anything above that will depend on how well management can execute its strategy.” <\/p>\n
The challenge for both Telkom and Vodacom is that they are big businesses, so delivering impressive top-line growth is difficult. And both may have already missed out on the best opportunities to be had in the rest of the continent. <\/p>\n
September says Telkom wants to be one of the continent’s leading providers of fixed-mobile telephony and data services and will use acquisitions to achieve this goal. Mobile assets, in particular, could prove expensive, however. Vodacom, MTN, Zain\/Celtel, France Telecom and other operators are all chasing acquisitions, and this has inflated the value of African mobile operators. <\/p>\n
Investors may also be wary about buying shares in Telkom, whose management team has previously come under fire from analysts for lacking depth. <\/p>\n
Cautious investors may first want to know exactly what Telkom plans to do with the R10,5bn — less tax — it will inherit from the sale of 15% of Vodacom. <\/p>\n
September promises that Telkom will be disciplined with the money. “We will not spend for the sake of spending.” <\/p>\n
But there are plenty of things for Telkom to spend its newly found riches on. It is already itching to compete with Vodacom and MTN in mobile telephony, particularly using 3G cellular technology to provide wireless broadband and voice telephony services. But building a mobile network is an expensive proposition. <\/p>\n
September says it will not deploy a network that rivals the size of those operated by MTN and Vodacom, but will build base stations in areas where it makes sense — mainly in well-to-do neighbourhoods. In outlying areas, it will forge roaming agreements with one or more of the other cellular operators. <\/p>\n
Telkom is also keen to use some of the proceeds from the Vodacom sale to make acquisitions, especially north of the border. It has already acquired two companies, Multi-Links of Nigeria, which is quickly becoming a big moneyspinner for the group, and East African Internet service provider Africa Online. <\/p>\n
On Monday, it announced it would splash out a further US63m to buy MWeb Africa and 75% of MWeb Namibia from media group Naspers <\/p>\n
MWeb Africa has operations in Namibia, Nigeria, Kenya, Tanzania, Uganda and Zimbabwe, an agency arrangement in Botswana, and distributors in 26 sub-Saharan African countries. <\/p>\n
September also hasn’t ruled out buying an IT services company — disposing of Vodacom might make the competition authorities more agreeable to a deal — but he says it’s more likely that Telkom will instead seek to forge a close partnership with an IT firm. <\/p>\n
Telecom operators around the world have begun providing business IT services as profit margins on their traditional connectivity businesses have come under pressure. <\/p>\n
The competition commission blocked Telkom from acquiring JSE-listed Business Connexion last year. It had offered R2,4bn in cash for the IT services group.<\/p>\n