Investors “wait and see” on Telkom
Due to a diverse range of potential outcomes for Telkom creating a great deal of uncertainty, investors are adopting a wait and see approach before committing to the group again.
Shares in Telkom have gathered some momentum in recent sessions, following a decision by the Competition Tribunal, on 7 August, to impose a penalty of R449 million on the group for abusing its dominance in the telecommunications market between 1999 and 2004.
At close of play on the JSE, on the day of the announcement, shares in Telkom rallied 4.38% to R18.84. It traded at a low of R16.02 on 22 July, amid delisting rumours, but has since climbed to a high of R19.66 on Tuesday (14 August) before ending the day at R19.12.
Nadim Mohamed, investment analyst and partner at First Avenue Investment Management told BusinessTech: “The share price gains are largely because the R449 million fine was lower than the R1.2 billion – R3.2 billion recommended by the Competition Commission.”
“The R449 million fine translates to approximately 85 cents per share, whereas a R3.2 billion fine would have translated into R6.10 per share roughly,” he said.
Ratings agency Moody’s warned on Monday that the fine would be credit negative for Telkom, as it would reduce cash flow and increase leverage for fiscal years ending March 2013 and 2014.
The Tribunal concluded that Telkom leveraged its upstream monopoly in the facilities market to advantage its own subsidiary in the competitive value added network market – Telkom’s conduct caused harm to both competitors and consumers alike and impeded competition and innovation in the dynamic VANS market.
“There is potential for a future civil law suit by VANS operators, but this would probably be a long, drawn-out affair as with the previous hearings. The fine will add significantly to the current pressure on liquidity as capex of R7.5 billion is planned this year. This is why Moody’s have sounded a warning,” Mohamed said.
Government
First Avenue Investment Management noted that government is currently investigating options which include delisting Telkom in order to better fulfil its development agenda and national objectives regarding connectivity and universal access.
“There is speculation that government may even look to consolidate its other investments in Sentech and Broadband Infraco with Telkom. In our view, the decision by government on whether to restructure the company or not is most critical from an investment perspective. ”
“The range of potential outcomes are very diverse and present great uncertainty for Telkom. We therefore prefer to wait and see how these decisions play out before investing in Telkom,” Mohamed said.
Operational performance
The analyst noted, however, that the low price relative to Telkom’s book value of R58 has attracted deep value and contrarian investors who are looking for a turnaround in the share. “We think the current discount to book value reflects the substantial uncertainty and liquidity challenges in Telkom and is justified at this stage.
“Even if the overhang of these issues can be eliminated, Telkom faces a huge challenge operationally to try and lower the rate of migration from fixed to wireless and also turn around the loss-making 8ta business,” Mohamed said.
To provide some perspective, the analyst noted further that Telkom’s current number of fixed line subscribers (3.995 million) is at its lowest level since 1996 and well below the peak of 5.5 million subs in 2000.
“We also think government does not necessarily need to delist Telkom as it already has a control of the company through its stake and the PIC’s stake – if this is the case, there will always be a tension between fulfilling government’s objectives and maximising profitability and shareholder returns.”
Government owns 38.9% of Telkom — 51% if the Public Investment Corporation’s stake is included.
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