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:
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.
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.
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.
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.
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.