Our opinion on the current state of TELKOM(TKG)Telkom (TKG) was historically the government-controlled provider of fixed-line telephone connectivity in South Africa. With the advent of cell phones, Telkom had to subsidize the development of its own competition in the form of Vodacom, MTN, and more recently, Cell-C. This subsidy was primarily through termination rates for calls, which are now being phased out. Over the past twenty years, Telkom's CEO, Sipho Maseko, has stated that Telkom has effectively subsidized other networks to the tune of R70bn.
Currently listed on the JSE, Telkom is still partially government-controlled, with the government owning 41% and the Government Employees Pension Fund (GEPF) owning 11.9%. Despite this, it operates as an independent organization divided into five divisions:
1. Open Serve: South Africa's primary supplier of wholesale connectivity with the country's largest network.
2. Telkom Consumer: 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: An ICT solutions company operating in Southern Africa.
5. Swiftnet: Formed in April 2018 to house Telkom's masts, towers, and property interests. Swiftnet owns a diverse portfolio of 1,330 properties, with 40 earmarked for development.
Telkom is also impacted by the rulings of the Independent Communications Authority of South Africa (ICASA) regarding "inter-connect" fees. However, Telkom has been well-managed, and its downsizing efforts are expected to improve profitability moving forward. The company is steadily transitioning from fixed-line to mobile services.
On 23rd July 2021, CEO Sipho Maseko announced his intention to step down, effective from 30th June 2022. On 22nd March 2024, the company announced the sale of Swiftnet for R6.75bn to a consortium of investors, with the cash intended to reduce Telkom's debt.
In its results for the year ending 31st March 2024, Telkom reported group revenue up 1.6% and headline earnings per share (HEPS) up 201.3%. The company stated, "Total headline earnings per share (HEPS) and basic earnings per share (BEPS) increased by more than 100% to 376.0 cents and 385.5 cents, respectively, driven by improved operational performance. Profit for the year also increased by more than 100% to R1.9 billion, 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."
In a trading update for the three months ending 30th June 2024, the company reported revenue up 3.9% and EBITDA up 24.1%. The company noted, "Telkom had a good start to the financial year with pleasing performance on the top line benefiting from our data-led strategy and compelling value propositions."
Technically, Telkom's share price fell from highs of around R98 in June 2019 to levels around R15.00 in March 2020 and 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. While the latest results are positive, Telkom is still battling to find a new direction in a very difficult economy and against stiff competition.
