An investment case for Telkom

Sipho Maseko, Group CEO at Telkom says that the group will look to re-instate its dividend policy in the financial year 2015, having last delivered a dividend in 2011.

Shares in Telkom closed 1.5% firmer on the JSE, to R27.10, having reached a best 52 week figure of R29.44 in October.

On Monday (18 November) Telkom reported a marginal increase (0.3%) in operating revenue for the six months ended September 2013, to R16.2 billion.

The group pointed to headline earnings per share of 224.2 cents from 101.1 cents in the prior reporting period.

Profit after tax increased 41.1% to R773 million, but EBITDA decreased 0.4% to R3.9 billion.

“Stabilization is a very important word for us. In the last few years, our revenues have actually been declining, so we are looking to move from a period of decline, to stabilizing,” Maseko said at the group’s headquarters in Pretoria.

“For the financial year of 2015, we are looking to lay the right platform in order for us to grow, so part stabilisation, part growth.”

“Its a big ship”, Maseko said of Telkom. “We want to make sure that once we turn it, we turn it properly.”

He said, from 2016, the group would look to grow, adding that over the next three years, the group would need to see growth in its top line in order to meet its dividend ambitions.

“It probably won’t be at high yields,” Maseko admitted.

F2014 F2015 F2016
Revenue Stabilise Stabilise to Grow Grow
EBITDA margin Increase 1%-2% Increase 1%-2% Increase 1%-2%
Capex to revenue 18% -21% 14% -17% 14% -17%
Net debt to EBITDA ≤ 1 ≤ 1 ≤ 1
Reinstate dividend Reinstated Reinstated

Analysts speak

Nadim Mohamed, investment analyst and partner at First Avenue Investment Management noted that Telkom’s top line growth was a bit muted, “therefore, the investment case for Telkom relies a lot on how they streamline operational expenses and increase free cash flow”.

“I think one of the easiest ways to do this is to de-risk the mobile business by increasing its scale or perhaps reducing/sharing capex with a partner.  A tie up with a Cell C or another party could well enable such a value unlock,” the analyst said.

Telkom’s Maseko admitted that the group’s mobile business is going through “a very difficult time”, and is in discussions with parties over a way forward.

“The mobile business is unfortunately sub-scale and a tie-up would enable greater efficiency and a better platform to utilize the game-changing LTE spectrum available to Telkom,” Mohamed said.

“From my perspective, Telkom is a clear turnaround story and, while this is the best management team we’ve seen at Telkom for a while, and it appears that there will be more disciplined capital allocation, I’d prefer to wait a bit to see more evidence of the turnaround strategy unfolding before considering adding the stock to our portfolio.”

Business consulting firm, Frost & Sullivan noted that, while the growth in headline earnings per share was substantial, this was largely driven by external forces rather than notable improvements in company performance.

“In addition, the recent suspension of CFO Jacques Schindehutte, and ongoing investigation into the reasons behind it, continues to cast a cloud over the business. The glow that surrounded the release of a trading statement from the company on the 8th of October has faded considerably and a speedy resolution of the investigation will be hugely valuable,” said Gareth Mellon, senior industry analyst for ICT at Frost & Sullivan Africa.

“However, the results also provide continued evidence of Telkom’s improved direction with major investment in several technologies and services (e.g. fibre, Wi-Fi, ADSL products) key to driving longer-term transformation.”

More on Telkom

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Telkom to review options in mobile

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An investment case for Telkom