Telkom progress lights way for sickly SOEs

It has been a torrid year so far for JSE-listed telecoms stocks. But with Telkom being the one notable exception, should the recovering semiprivate group be used as a case study as the state looks for private investors in South African Airways?

Declining voice revenues and regulatory risks on all fronts have taken their toll on the telecoms sector. Vodacom, MTN and Cell C-proxy Blue Label Telecoms have all slipped more than 10% in the year to date, with Blue Label giving up nearly 40%. Telkom, whose relatively new mobile business is showing signs of gaining traction, has bucked the trend and edged slightly higher.

Under CEO Sipho Maseko, it seems to be doing the right things. Its mobile unit offers highly competitive packages for heavy data users — a good space to play in considering that data consumption is soaring. As JPMorgan said in a recent report, Telkom probably offers “the most compelling risk-reward trade-off in SA telecoms”. The US bank said Telkom appeared to face less regulatory risk than incumbent mobile operators.

As SAA prepares to take on private investors, Telkom could be used as a perfect example of how private sector participation in state-owned enterprises (SOEs) can be beneficial. Telkom, which is about 40% owned by the state, operates nothing like your usual SOE. It’s lean, well run and is keeping itself relevant. Like SAA, it was also in trouble before the state took a more hands-off approach.

Trencor really is a case of well-intentioned governance, including accounting oversight, that’s got out of control. This is a holding company that oversees one large operation, Textainer, a smaller operation, TAC and some cash.

It doesn’t really have anything in the way of operating assets that need much direct oversight. And yet, because it is a JSE-listed company, it is required to have all manner of board committees. This means its seven directors including two executive directors, get the opportunity to serve on lots of committees. The entire board is on the risk committee. In addition, Roddy Sparks, Herman Wessels and David Nurek are on the nomination committee, the remuneration committee, the social and ethics committee and the governance committee.

Things will hopefully look different once the Trencor board has finalised its plans to unbundle the company’s 47% stake in US-listed Textainer, which is the former world leader in containers and is Trencor’s most significant asset. It accounts for 75% of Trencor’s net asset value.

The unbundling should also help to reduce Trencor’s audit fees, which have been its largest expense. In financial 2016 management attributed most of the R89m “other operating expenses” to auditing expenses. In financial 2017 “other operating expenses” increased to R129m, with audit fees again accounting for the largest chunk.

The audit fees are attributable to the painstaking amount of work that has to be done to convert Textainer’s GAAP-based accounts into the IFRS accounts required by the JSE. It is not only an expensive exercise, it is a time-consuming one. It explains why Trencor’s financial statements have been late enough to incur the wrath of the JSE and threats of suspension.