Our opinion on the current state of TELKOM(TKG)Historically, Telkom (TKG) was the government-controlled provider of fixed-line telephone connectivity in South Africa. With the advent of cell phones, Telkom was forced to subsidize the development of its own competition in the form of Vodacom, MTN, and more recently, Cell-C. This subsidy takes the form of termination rates for calls, which are now being phased out. Over the past twenty years, the CEO of Telkom, Sipho Maseko, says that Telkom has effectively subsidized other networks to the tune of R70bn.
Telkom is currently listed and is owned 41% by the government and 11.9% by the Government Employees Pension Fund (GEPF) - so it could still be considered to be government-controlled. In reality, it operates as an independent organization divided into 5 divisions. (1) Open Serve is South Africa's primary supplier of wholesale connectivity with the country's largest network. (2) Telkom Consumer is the largest supplier of broadband internet connectivity with a growing mobile phone network. (3) Yellow Pages provides advertising and marketing to local businesses. (4) BCX is an ICT solutions company operating in Southern Africa. (5) Swiftnet was formed in April 2018 to house Telkom's masts, towers, and property interests. Swiftnet owns a diverse portfolio of 1,330 properties and has 40 earmarked for development.
Of course, Telkom is impacted by the ruling of the Independent Communications Authority of South Africa's (ICASA) decisions regarding the so-called "inter-connect" fees. However, in our opinion, Telkom has been well managed, and its downsizing should result in improved profitability going forward. This company is steadily switching from fixed-line to mobile.
On 23rd July 2021, the CEO, Sipho Maseko, announced that he would be stepping down with effect from 30th June 2022. On 22nd March 2024, the company announced that they had sold Swiftnet for R6.75bn to a consortium of investors. The cash will be used to reduce Telkom's debt.
In its results for the year to 31st March 2024, the company reported group revenue up 1.6% and headline earnings per share (HEPS) up 201.3%. The company said, "Total headline earnings per share (HEPS)1,4,7,8 and basic earnings per share (BEPS)1,3 increased by more than 100% to 376.0 cents and 385.5 cents, respectively, driven by improved operational performance. From a loss position in the prior year, profit for the year also increased by more than 100% to R1.9 billion1,3, boosted by the non-recurrence of once-off restructuring costs and lower depreciation, while higher interest rates increased net finance costs compared to the prior year."
Technically, Telkom's share fell from highs of around R98 in June 2019 to levels around R15.00 in March 2020. It has been moving sideways and down since then. The company has high debt levels compared to its market capitalization, which makes it risky for investors. In our view, this company is battling to find a new direction in a very difficult economy and against stiff competition, but the latest results are positive.
