Too early to ring the bells for Telkom
Gutsy CEO warns one dividend does not a turnaround make
TELKOM might be paying dividends to its shareholders again, but CEO Sipho Maseko warns that the company remains fragile and the threat of it going backwards is still high.
Maseko, a former MD at Vodacom, who is now two years into his term as CEO, did not mince his words this week.
“The company is still very fragile. The possibility of a relapse will be there. We will continue to review all our costs,” he said on Tuesday, a day after the company reported a 1.2% gain in revenue to R31.7-billion for the 12 months to March.
Earnings jumped 60% to 533c a share, but perhaps more importantly, shareholders who had gritted their teeth through the bad times were rewarded for their loyalty when the majority state-owned company paid its first dividend since 2011, of R2.45 per share.
Maseko was appointed CEO in March 2013, when Telkom’s share price was on the skids at R14.20. Two years later, its stock has quadrupled, to R60 a share.
But he is reluctant to declare the battle won, saying Telkom’s turnaround was a “book with many chapters”— and it was nearing the end of only the first of these.
“We’re not going to try and box six rounds into one round. We’ll take it one round at a time.”
Although the share price rise over the past two years is commendable, the perception that Maseko’s job is only half done is borne out by the fact that after the results this week, Telkom’s share price fell 8%, underscoring the trend that has seen it fall 13.3% this year.
The problems: falling fixed-line revenue, a mobile cellular business that’s battling to gain traction as the fourth entrant, and a structure put in place when it was making far more money.
This is partly why sentiment is mixed. Eight of the 18 analysts who cover Telkom rate it a “sell”, four rate it a “buy” and the rest remain on the fence. On average, the analysts expect the stock to climb about 10% from its current levels to about R66.68 in a year.
But what is clear is that it is a much healthier business.
When Maseko took over, Telkom was battling three consecutive years of revenue decline, struggling to fund its broadband and cellphone services expansion and facing a R449-million penalty for market dominance abuse. Maseko brokered a settlement with competition authorities and set about rebuilding the new Telkom.
News of the improved financial performance is bittersweet for Telkom’s workforce, which faces another chop as the company aims for a staff-cost-to-revenue ratio of 25% from 29% for its 18 333 staff over the next four years. This means that about 7 800 jobs are on the line.
Trade unions, Solidarity in particular, have vowed to contest the job cuts, but Maseko said “what is most important is that Telkom itself will be able to survive”.
Cutting a bloated workforce has been a big focus, which is partly why Telkom’s operating expenses, which includes staff, adminstration, service fees and leases, fell 1.2% to R17.7-billion, and its free cash flow grew 240% to R3.9-billion.
Until Maseko’s appointment, the government’s presence loomed large over the company, as it would given that it is 39.8% owned directly by the government, and 12% by the state-owned Public Investment Corporation. This meant analysts were unconvinced that Telkom was doing what was best for shareholders, rather than fulfilling the government’s mandate of connecting households.
But Maseko has placed investors’ interests first — as the retrenchment issue, which flies in the face of the government’s plea to business, starkly illustrates.
Under him, Telkom has recently changed its operating model and separated its operations into three stand-alone business units: a consumer business focusing on home connectivity and services for customers; an enterprise division that will focus on connectivity solutions for businesses; and an infrastructure wholesale business, which runs the network and provides information technology and field services.
Brian Armstrong, Telkom’s chief operating officer, said the reorgan- isation would make Telkom more competitive. “The razor-sharp focus on Telkom Business is very important. It is a big contributor to the company’s performance,” he said.
But if this week’s results show anything, it is that revenue from voice calls is plummeting — falling 13.5% in the past year to nearly R6.9-billion.
Telkom has had to become more deft and creative.
It is now aiming to offer valueadded services such as IPTV (internet TV, essentially), new payment solutions, e-commerce and education technology services.
Maseko said one of Telkom’s big priorities was to revitalise its network by replacing copper cables with fibre. There was also a chunky investment in the new high-speed mobile network, LTE.
Telkom is scoring from the fact that South Africans are hungry for data. Its fixed-line data revenue increased 1.5% to R10.4-billion and ADSL subscribers rose 7.9% to just over a million.
And its mobile business is at least showing signs of promise. Telkom Mobile, which was previously bleeding cash, is set to deliver a profit next year. Subscriber numbers grew 21% to 2.2 million, and net revenue grew 174% to R988-million.
Soon after his appointment, Maseko impaired the legacy assets by R12-billion to better reflect the company’s net asset value, sold off non-core property and businesses and reviewed supplier contracts.
And if Telkom has not fully recovered, this week’s results show that it is at least back in the game.
Sibonginkosi Nyanga, an analyst at Imara SP Reid, said: “The numbers are looking good considering that most people in the market had already discounted Telkom.”
Nyanga said, refering to Telkom’s mobile business, “no one thought they would be this competitive”.
This week, JP Morgan analyst Ziyad Joosub said in a research note that Telkom Mobile’s performance was the key highlight of the results, while the dividend was quite conservative at equal to only about 52% of its normalised earnings.
“We believe this caution represents the uncertainty Telkom has in achieving certain [operational expenditure] savings, for example, head count, property sales et cetera, as well as the revenue risk of accelerated declines in fixed-line voice and or wholesale.”
Joosub highlighted Telkom’s “high operating leverage where small moves in revenue can have meaningful implications for earnings or free cash flow”.