Wayne McCurrie, portfolio manager at Momentum Wealth says that, despite Telkom’s recent rally on the Johannesburg Stock Exchange, “essentially nothing has changed” to justify the share hike.
Telkom advanced more than 5% in trade on Wednesday (2 April), and added an additional 60 cents on Thursday after a court ruling on mobile interconnection rates earlier in the week, appeared to favour the group in the short term.
Shares in the group show a one-year return of 152%, up to R36.92 from its 52-week worst level of R11.34, reached in May 2013, and giving it a market cap of just over R19 billion.
Speaking on Business Day TV, McCurrie said that “8ta [Telkom Mobile] is never going to make a profit. It is never going to make a profit in its life”.
“I have the greatest empathy with Telkom management – your primary business is in the decline. It is hard to stem that,” said McCurrie. “They have tried on how many occasions now to find other ways [to make money].”
“Maybe the worst thing they ever did was to unbundle [sell] Vodacom – they should have kept it,” he said. To replicate Vodacom through Telkom Mobile, he added, is very difficult and costs lots of money, the analyst said.
McCurrie said that being a quasi-state owned enterprise means that it is unable to retrench people, cut back or rationalise to contain costs.
“I would not buy Telkom shares. Essentially nothing has changed yet the share price has more than doubled,” he said.
David Shapiro from Sasfin Securities weighed in, saying that Telkom still faces many challenges, which will need to be solved before he considers it a solid investment.
“There is still so much work that they have to do. I just don’t think they are in the right area of the market,” he said.
Shapiro noted that the recent mobile termination rate ruling will help Telkom. “Is it big enough to make a big difference?” he asked.
“I know they are trying to turn this company around, but I think this is a massive, massive ask.”
According to McCurrie, Cell C and Telkom Mobile will either have to increase their prices or throw in the towel. “You cannot continue losing billions and billions of rands,” he said.
In March, Telkom advised that it expects headline earnings per share for the year ending March 2014 to be at least 20% higher than in 2013.
It also signed an agreement with MTN which will see MTN take over financial and operational responsibility for the roll-out and operation of Telkom’s radio access network (RAN).
The agreement will enable each party to be able to roam on either party’s network.
Telkom expects to publish its annual results on about 13 June 2014.
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