Telkom shares up 35%, but still far from heights
Telkom’s share price appears to have found a base after a topsyturvy two years during which several companies at various stages tried unsuccessfully to lay their hands on its assets.
The value of its shares has rebounded 35% over the past three months to trade at R30 on the JSE on Wednesday, having bottomed out at R20.60 in October 2023.
However, it is a tiny fraction compared with the dizzy heights of R100 reached in 2019.
Telkom had been an unmistakable market darling between 2013 and 2019 when it transitioned its portfolio into a mobile business from the traditional fixed-line business, which has long been overtaken by Vodacom and MTN SA.
Nitrogen Fund Managers portfolio manager Willem Oldewage said market concerns about poor free cash flow generation and an escalating net debt to ebitda ratio clouds its outlook.
Net debt was just less than R18.2bn in the six months to end-September, up 8% year on year, leaving its net debt to ebitda ratio at 1.8 times.
The ratio measures a company’s ability to pay its debt and indicates how long a company would need to operate at its current level to pay off all its debt.
The partially state-owned telecom company has said it will use the proceeds from the imminent sale of its masts and towers business to relieve pressure on its debt burden, which dwarfed its market cap of R15.2bn.
Earlier in the week, the company announced that it had completed a due diligence that is part of a process to sell the masts and towers business to a consortium of investors that is yet to be identified..
Oldewage said the successful execution of this and other initiatives is pivotal for restoring investor confidence.
Under CEO Serame Taukobong, Telkom is styling itself as the infrastructure outfit given the mix of its assets, which it has said hold much potential.
Telkom operates SA’s longest network, with more than 170,000km of fibreoptic cables.
“Telkom remains undervalued in absolute terms and relative to its peers. It’s a business that has lots of good assets but is underperforming its true potential, mostly due to internal factors, especially high debt on the balance sheet,” said Patrick Mathidi, head of equities at Aluwani Capital.
“Looking back, some acquisitions did not prove value accretive, like BCX. In addition, the use of debt in an environment where the operating businesses were struggling to grow and generate sufficient earnings to cover interest costs has proven problematic for the group, to the point where it now has to sell assets to reduce debt.”
Telkom operates in a highly competitive environment in which the dominant players are spending billions of rand annually to continuously improve their network while voice and data costs have increasingly become cheaper for consumers.