Last Wednesday, Telkom’s shares fell by as much as 30% in Johannesburg trading after the JSE-listed company announced that it was considering writing down the value of its assets by about R13-billion. The company also warned of a sharp decline in earnings for its financial year that ended on 31 March 2023.
Telkom’s board is considering an impairment-of-assets charge for the group’s cash-generating units, namely Openserve, Telkom Consumer, Gyro and BCX, in the amount of approximately R13-billion (excluding tax effects). This decision follows Telkom’s strategy to accelerate its migration to newer technologies. The profit warning caused Telkom’s shares to plunge lower, and they have yet to recover. As of 2.20 pm on Tuesday, they were trading at R26.38 each, representing a more than 42% decline over one year.
Since their peak in 2019 at R100/share, they have slumped by almost 75%. Some of the challenges facing Telkom are not unique to the company and include load shedding and high inflation.
The question remains: what has gone wrong at the partially state-owned telecommunications operator? And will the write-downs entice rival MTN back to the negotiating table? In July 2022, MTN and Telkom disclosed to investors that they were discussing a deal to see MTN buy Telkom’s entire share capital–including the government’s 40.5% direct stake. However, MTN walked away after Telkom agreed to engage with wireless broadband operator Rain about a counterproposal (those talks led nowhere).
Telkom is facing several challenges that are not unique to the company, such as load shedding and high inflation. Due to the unreliability of Eskom’s electricity supply, Telkom has to bear the costs of batteries and diesel. Additionally, when its own network is unavailable, Telkom has to pay additional roaming costs, making it arguably more exposed to load shedding than its competitors, Vodacom or MTN. Telkom is also investing upfront in handsets and equipment, which requires an immediate cash outflow and impacts its balance sheet.
In February, Telkom announced its plans to reduce its workforce by up to 15%, which will result in retrenchment costs of R1-billion. However, this move is expected to lessen payroll costs in the long term. Dobek Pater, the business development director at Africa Analysis, believes that Telkom has great assets but is not utilizing them to their full potential.
“Telkom also oscillates in its strategy, changing it frequently – depending on where it thinks it may obtain a better return on its investment. Unfortunately, a set course needs to be followed through for a longer period of time to bear fruit,” Pater said. “This is particularly true in the telecoms infrastructure market where the return on investment may take five to seven years (or even longer).
“One of the key assets of any infrastructure company is people. Over the past decade or more, Telkom has undergone several voluntary retrenchments. Unfortunately, in such cases, the company always risks losing valuable employees. Over the years, Telkom has lost many good employees who formed the backbone of the company.”
Pater noted that Telkom is in the process of restructuring, so it is difficult to say where it will end up. This uncertainty has a negative impact on its shares. “It will certainly engage in M&A activity along the way. MTN will likely approach Telkom again regarding a tie-up or acquisition of Openserve. It will want to do that to counter the creation of the infrastructure company Maziv (between Vodacom and Remgro’s CIVH). Whether Telkom will seek to merge its mobile operations with another mobile operator remains open to question.”
Due to the impairment charge, Telkom will experience a significant hit to its full-year earnings. The company warned in last week’s trading statement that reported headline earnings per share (Heps) could be as much as 105% lower. Basic earnings per share (Beps) could fall by as much as 485% to a loss of around R20/share. Sasfin equities strategist David Shapiro believes the sharp decline in Telkom’s share price was inevitable. He points out that globally, it is very difficult for operators in the mobile industry, and only one or two players dominate. For example, in the US, there are really only three major players: Verizon, AT&T and T-Mobile.
“It’s a very cut-throat business, and it’s tough going. Real problems like load shedding and inflation are biting into every business, so anyone who expected Telkom to perform well was being a bit ambitious. Its legacy fixed-line business is also dragging it down. The market is quick; it values assets at what they’re worth, so all that’s happening is the balance sheet is bringing into line what’s already happened,” he said.
“As for MTN, what happens now?” Shapiro asked. “Telkom is on the back foot. I don’t know why they turned down the MTN offer, but MTN can afford to wait. It will be able to choose its price now.”
Irnest Kaplan of Kaplan Equity Analysts doubts that MTN is interested in Telkom, even at a lower price. He stated that the discount MTN would be getting is only in the region of about R3-billion. At the time of writing, Telkom had a market cap of just R13.3-billion.
“What MTN might be very interested in is Telkom’s fibre network (owned by Openserve), which is extensive. They won’t be interested in its legacy fixed-line assets. That’s not growing. And their mobile market is struggling compared to MTN’s and Vodacom’s.”