Our opinion on the current state of TELKOM(TKG)Telkom (TKG) historically served as the government-controlled provider of fixed-line telephone services in South Africa. With the rise of mobile networks, Telkom was compelled to subsidize competitors like Vodacom, MTN, and Cell-C through termination rates, which have since been phased out. Over two decades, Telkom CEO Sipho Maseko estimated that these subsidies amounted to R70 billion. Today, Telkom remains 41% government-owned, with an additional 11.9% held by the Government Employees Pension Fund (GEPF), though it operates as an independent entity divided into five divisions:
1. **Open Serve**: South Africa's largest wholesale connectivity provider.
2. **Telkom Consumer**: The leading supplier of broadband internet, with a growing mobile network.
3. **Yellow Pages**: Advertising and marketing services for local businesses.
4. **BCX**: An ICT solutions company operating in Southern Africa.
5. **Swiftnet**: Formed in 2018 to house Telkom's masts, towers, and property interests. In March 2024, Telkom sold Swiftnet for R6.75 billion to reduce debt.
Telkom's shift from fixed-line to mobile connectivity is a central aspect of its restructuring efforts. In its results for the six months to 30th September 2024, Telkom reported a 1.9% increase in revenue but a 1.8% decline in headline earnings per share (HEPS). The company attributed its performance to "next-generation broadband offerings," supported by continued investment in its networks.
Technically, Telkom's share price fell from highs of around R98 in June 2019 to approximately R15.00 in March 2020. Since then, it has been moving sideways and downwards, but the latest results have triggered a new upward trend. However, the company carries high debt levels relative to its market capitalization, which poses a risk for investors.
In our view, while Telkom faces challenges in navigating a difficult economic environment and stiff competition, its strategic investments in broadband and the sale of non-core assets like Swiftnet are positive steps. The company is gradually finding a new direction, but it remains a risky investment due to its debt and competitive pressures.