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Finweek English Edition - - INVESTMENT - Pa­trick Nt­shal­intshali, Port­fo­lio Man­ager: Eq­ui­ties, Vunani Fund Man­agers

The Telkom share price bot­tomed at R12 in May this year. It has since al­most dou­bled from that level. This is a sign that fi­nan­cial mar­kets have de­vel­oped a rea­son­able level of con­fi­dence in the new lead­er­ship (Chair­man Jabu Mabuza and CEO Sipho Maseko) to de­liver a new strat­egy to stop the bleed­ing and claim back its share of the grow­ing telecom­mu­ni­ca­tions sec­tor, which is largely dom­i­nated by the mo­bile play­ers in South Africa. The com­pany has been fac­ing sig­nif­i­cant chal­lenges, such as: 1. Nu­mer­ous strate­gic fail­ures

2. De­clin­ing fixed-line rev­enues

3. Es­ca­lat­ing costs

4. Mar­ket share losses

5. Sub-scale mo­bile busi­ness, which re­quires a lot of in­vest­ment in a very com­pet­i­tive mar­ket

6. Slow progress in New Gen­er­a­tion Net­works (NGN) strat­egy

7. Mas­sive poor ser­vice is­sues with cus­tomers At their re­cent re­sults pre­sen­ta­tion, the CEO broadly out­lined their re­newed fo­cus on im­prov­ing op­er­at­ing and fi­nan­cial ef­fi­cien­cies in the short-to-medium term. He also un­veiled that man­age­ment is in the process of re­view­ing the fu­ture op­er­at­ing model, and that this would clearly define the mid-to-long term strat­egy.

OP­ER­A­TIONAL EFFECIENCIES IN­CLUDE:

Op­er­a­tional ef­fi­cien­cies in­clude:

Max­imis­ing NGNs and re­turns.

Ef­fec­tive man­age­ment of 3rd party spend.

Cus­tomer ser­vice ef­fec­tive­ness, in­te­gra­tion and in­no­va­tion.

Hu­man Re­sources op­ti­mi­sa­tion and ca­pac­ity build­ing.

FU­TURE OP­ER­AT­ING MODEL IN­CLUDES:

Defin­ing the mid-to-long term strat­egy.

Whole­sale vs re­tail struc­tural op­tions.

Par­tic­i­pa­tion in the National Broad­band Plan.

Ef­fec­tive man­age­ment of reg­u­la­tory and pol­icy frame­work.

Mo­bile/con­sumer busi­ness op­tions.

Telkom Busi­ness (Govern­ment and SMME value propo­si­tions).

OUR VIEWS BASED ON OUR MEET­ING WITH THE COM­PANY AND DIS­CUS­SIONS WITH KEY IN­DUS­TRY PLAY­ERS ARE:

1. Trends:

Voice rev­enue (which is a sig­nif­i­cant part of the busi­ness) is still un­der pres­sure. · Good and strin­gent cost man­age­ment is nec­es­sary.

2. Lead­er­ship (new board):

There is ev­i­dence of a rein­vig­o­rated en­ergy brought about by the newly con­sti­tuted board.

· Chair­man and CEO are busi­ness and po­lit­i­cally savvy, mean­ing that they are also able to con­sult ef­fec­tively with the key peo­ple in Govern­ment and other rel­e­vant stake­hold­ers (e.g. ICASA and Unions).

· The CEO is a tough ne­go­tia­tor and strong busi­ness­man, who has been able to ne­go­ti­ate bet­ter ser­vice con­tracts in pro­cure­ment with some of the big­ger con­tracts up for re­newal so far.

QUICK SUC­CESSES UN­DER THE TEN­URE OF NEW MAN­AGE­MENT IN­CLUDE:

· Set­tle­ment of the com­pe­ti­tion com­mis­sion fine.

· Pass­ing of the im­pair­ment ear­lier in the year.

· Averted labour strikes by reach­ing set­tle­ment with the labour unions.

· Roll­out of the vol­un­tary re­trench­ment pack­ages to ad­dress the em­ployee costs.

OP­ER­A­TIONAL MAT­TERS:

Wage set­tle­ment of 6.8% in­crease, which is good bear­ing in mind that it in­cludes clos­ing the legacy of un­fair wage gaps.

· Room to im­prove top-heavy man­age­ment struc­ture and en­hance a per­for­mance driven and re­sults-ori­en­tated cul­ture.

· Im­proved in­cen­tivi­sa­tion of staff – share own­er­ship and per­for­mance mea­sure­ment scores for each em­ployee.

· Bet­ter align­ment and re­port­ing of Call Cen­tre and Field Force Man­age­ment.

GOVERN­MENT:

Chair­man and CEO are work­ing hard on the com­pany’s re­la­tion­ship with Govern­ment in or­der to achieve align­ment.

· Telkom in­sists that they will be a part of dis­cus­sions re­gard­ing national broad­band plans by the Govern­ment and this plan must make com­mer­cial sense as well.

· Telkom will en­sure a ro­bust reg­u­la­tion/ com­pli­ance depart­ment to min­imise the risk of forced in­ter­ven­tion by the Govern­ment, and also to min­imise the im­pact of the role changes in the Depart­ment of Com­mu­ni­ca­tion.

MO­BILE:

This op­er­a­tion is sub-scale and we think man­age­ment is recog­nis­ing this prob­lem. · There is an op­por­tu­nity to part­ner with one of the sta­ble play­ers like MTN. Vo­da­com, how­ever, could be too far ahead in terms of the im­ple­men­ta­tion of its com­pet­i­tive strate­gies. · In our view, huge sav­ings could come out of this for Telkom – po­ten­tially add more than R7 to the share price and boost free cash f lows. · Telkom has a good en­ter­prise busi­ness, MTN needs this busi­ness so if there would be a part­ner­ship, it could be a winwin for both MTN and Telkom.

STRAT­EGY;

A new de­tailed strat­egy will be com­mu­ni­cated to the mar­ket later this year, but we like the good noises so far. Data is a key tenet in the strat­egy

Fixed line is the fu­ture for data – you may » re­call Telkom has more fi­bre ca­bles on the ground than all its com­peti­tors com­bined. Telkom has a more re­li­able net­work and » the best in­fra­struc­ture in the coun­try. The chal­lenge is how Telkom mon­e­tises » this in­fra­struc­ture. Per­haps it could have a part­ner­ship with MTN/ Vo­da­com? Some­thing needs to hap­pen here. Du­pli­ca­tion is bad for the in­dus­try.

There seems to be a big fo­cus on what can be ad­dressed NOW – i.e. quick wins.

Th­ese de­vel­op­ments make sense to us and we view them as very pos­i­tive, bar­ring the ex­e­cu­tion risks, more specif­i­cally when ex­it­ing the mo­bile busi­ness and also in deal­ing with the reg­u­la­tor.

We have a sense of com­fort that man­age­ment has a han­dle on the prob­lems and un­der­stands the mat­ters that need to be dealt with. The rep­u­ta­tions of the board mem­bers is on the l ine to t urn the com­pany around, we view this as a plus. Clearly, there is still some value to be un­locked in Telkom; this will un­fold as the strat­egy is com­mu­ni­cated to the mar­ket later in the year.

SOURCE: McGre­gor BFA

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