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Telkom is getting killed - Here's why I'm leaving it aloneTelkom's CRASHED 54% since June! Here's why I'm leaving it alone… This is sad but you need to know. Today, I am taking yet another company off my trading watchlist. Telkom… Since June we've seen this telecommunications giant' share price crash from R100 down to R46.00 per share. That's a 54% sharp drop which signals MAJOR red flags when it comes to trading. In today's article, we'll go into four reasons why Telkom is getting killed, where it could go and why I'm leaving it alone… Reason #1: 50,000 subscribers are ditching Telkom’s fixed-line service a month! For the first time, the number of fixed lines in service have fallen from 3.5 million down to 2.3 million (23% down) compared to September 2018. And this trend is accelerating as around 299,000 subscribers have discontinued the service in the last six months alone. That’s over 50,000 subscribers that are ditching Telkom a month! What’s even more concerning is that there is a major decline in Telkom’s ADSL, VDSL and fibre customers, as new, smaller, lower-cost fibre companies have entered the market, we’ve seen a drop from 981,176 in March 2018 down to 847,650 in March 2019. This equates to losing over 21,000 customers every month. And you know what that means… A drop in revenue, trust and loyalty will lead to a further drop in the share price. Even Telkom warned its earnings per share is expected to drop by 30% to 40% compared to last year. Jean Pierre Verster, Protea Capital Management, mentioned Telkom’s free cash flow generation is negative and the decline in fixed-line revenue is severe. Reason #2: Telkom is losing the battle to acquire Cell C On 15 Nov 2019, Telkom advised its shareholders that it was in talks to potentially buy Cell C, which would create a business with about 22 million subscribers… However, the acquisition would require a financial restructuring as Cell C and its owners would try to restructure R8.7 billion ($591 million) of debt to ensure its gearing level is reduced to a sustainable level. All was said and done with regards to the due diligence, at the first stage, until the deal went off on a major detour when rival MTN Group came in. You see, the MTN Group had already signed an expanded roaming agreement with Cell C. In a statement on Tuesday, Cell C said the talks with both mobile companies are at an advanced stage. CEO of Cell C, Douglas Craigie Stevenson, said in a statement that the agreement with MTN will help Cell C manage its network capacity requirements in a more cost-effective manner. “The roaming agreement is transformative for Cell C.” This deal between MTN and Cell C is putting a dampener on Telkom’s proposed take over as analysts are now suggesting Telkom may have to pay a higher future price for the deal. And according to an email sent by Lester Davids, Johannesburg-based Unum Capital… “Telkom may not have the balance sheet capacity to take on the acquisition” This news of rivalry between the telecom companies continue to cause the Telkom’s share price to drop. In fact, since the statements were released, the investment community has lost trust as Telkom dropped over 11% in a week and then another 8% fall the following week. Reason #3: Both companies are heavily in debt! Telkom’s debt levels are worrying to stakeholders as things stand. Even though the Telkom’s mobile unit is growing, they are spending a huge amount of money and are taking on a lot of debt to fund it. In fact, its net debt has increased to R12 billion. Even Verster said, considering the saturation of the market, both mobile companies are not great businesses on their own. “When you put them together it is even worse,” “It is like having a concrete boot on the left foot, and then putting a concrete boot on the right foot as well.” Reason #4: Still major downside to come for the mobile giant Looking at the daily chart of Telkom, you can see the major crash that took place from R100 down to R46 in a matter of six months… With the sudden crash and with the ongoing problems, we could very easily see it drop to the next target at R30.00 per share and then even R15.00 per share. Then there’s the technicals! As if the reasons weren’t enough, there are technical reasons why I am taking Telkom off my watch list and leaving it alone. 1. High jumpiness When you see a share price drop 8% one week and 10% in another week, there is a high chance due to greed and fear that this will be ongoing until the market rectifies itself. But as a trader, I do not enjoy high volatility when it comes to trading, as very often you’ll find the trades will hit our stop losses or worse JUMP past our stop losses meaning you can lose more than you bargained on… 2. Potential warnings in the future With the extremely high debt, talks about acquisitions and with the investment community losing trust with the company, there is a higher chance of Cautionary Statements to be released on SENS (Stock Exchange News Service). I wouldn’t be surprised if the share is suspended or, dare I say liquidated, with what is going on with the company. For this reason, I’ll leave it alone and look for better more stable trading opportunities Trade Well, Timon Rossolimos Founder, MATI Trader
JSE:TKGShort
by Timonrosso
What are derivatives? and why they’re a revolution for traders Derivatives trading! What I believe has been the absolute market revolution since shares. Derivatives might sound complicated and something you would hear from a professor or a know-it-all businessman – but they're really not. I am no academic or even remotely one of the smartest guy’s in the world. And if I can grasp the idea and understanding of derivatives, I pretty much guarantee you will too. Also, if you want to take trading seriously and really make a living with it, you’ll need to understand derivatives trading sometime in your career. That’s where MATI Trader comes in… In the next few weeks, I’ll be sending you a series of articles on everything you’ll need to know about CFDs and Spread trading derivatives – Starting with this one… Make sure you add us to your email address book and set a reminder for every Monday at 7:30am. Let’s start at the very beginning. What is a derivative? – Collins English Dictionary – ‘A derivative is an investment that depends on the value of something else’ When it comes to trading, a derivative is a financial contract between two parties whose value is ‘derived’ from another (underlying) asset. Let’s break that down more simply: • A derivative is a • financial contract (CFDs, Spread Trading, Futures, Forwards, Options &Warrants) • Between two parties (the buyer and seller) • Whose value (the market’s price) • Is derived (depends on or comes from) • Another underlying asset (Share, index, commodity, currency, bond, interest-rate, crypto-currency etc…) You’ll find that the derivative’s market price mirrors that of the underlying asset’s price. NOTE: As there are a number of different derivatives you can trade nowadays, we will ONLY focus on CFDs and Spread trading in the next few weeks, as those are the only ones I trade with MATI Trader. Why trade using derivatives? The absolute beauty about trading derivatives is that they are a cheaper and a more profitable way to speculate on the future price movements of a market without buying the asset itself. You don’t get all the benefits with derivatives What’s probably important to note with derivatives, is this. When you buy a derivative’s contract, you’re not actually buying the physical asset. You’re simply making a bet on where you expect the price to go. EXAMPLE: When you buy actual shares of a company, means you’ll be able to attend AGMs (Annual General Meetings), Vote and claim dividends from a company. When you trade derivatives on the underlying share, means you’ll be exposed to the value of the shares and the price movements – and that’s it! As a trader, when you buy or sell a derivative, you’re not actually investing in the underlying asset but rather just making a bet (speculation) on where you believe the market’s price will head. This gives you the advantage and opportunity to: • Buy low (go long) a derivative of the underlying asset and sell it at a higher price for a profit or • Sell high (go short) a derivative of the underlying asset and buy it back at a lower price for a profit Remember when I said it was cheaper and more profitable? You can thank margin With derivatives, you’ll normally pay a fraction of the price of the total sum and still be exposed to the full value of the asset (share, index, currency etc…) The fraction of the price paid is called ‘margin’. EXAMPLE: To buy and own 10 Anglo shares at R390 per share will cost you R3,900 (R390 per share X 10 shares). To buy and be exposed to 10 Anglo shares using derivatives, and the margin of the contract is 10% per share, means you’ll only pay R390 (R390 per share X 10% margin per derivative X 10 shares). I’m sure you can see that with derivatives, you’ll be exposed to more and pay less which will gear up your potential profits or losses versus when trading shares. This is why we call derivatives, geared financial instruments. To understand this better, we’ll need to examine the very essence of how derivatives work through the function of gearing, which we’ll cover in more detail in the next coming weeks. Or if you’d like to watch a complete video I recorded earlier this year on how gearing and leverage works with live relatable derivative examples, click here to start watching… Until next time, Trade well... Timon Rossolimos Founder, MATI Trader
JSE:AGLEducation
by Timonrosso