Will Telkom’s turnaround work?

Leaking of recovery plan pushes share price up

IT SEEMS Telkom CEO Sipho Maseko has let slip its turnaround strategy — but the big question is whether it can work.

This week, Business Day quoted Maseko as saying it was seeking ways to cut fat in the business, a necessary step as this bulge has drained its profitability for years and led to a number of executives being axed when they couldn’t rescue the business.

Since he was appointed a year ago, Maseko and his executives in Pretoria have been quietly plotting ways to cut Telkom’s costs and haul the company back into the black.

He hopes to save as much as R1billion every year through cost cutting, a move that will inevitably include layoffs. Over five years, this means Telkom could save R5-billion — enough to regain its profitability, and provide shareholder value.

What is clear, however, is that the “painful steps” that Maseko is prepared to take will place him and the company on a collision course with the unions and to some extent the ANC, which is seeking to preserve and create new jobs. Given that government owns 38% of Telkom, it could be quite a dramatic run-in.

Immediately after his turnaround plan was leaked — it would seem it may have been a plan by Telkom’s spin doctors to test its acceptability in the market — Telkom’s share price gained 2.85%.

Finally, Telkom’s management seems to be talking up the market with real facts that it believes will turn around the ailing group, which has lost market share to mobile phone oper- ators Vodacom, MTN and Cell C.

Many analysts had been pretty negative on Telkom, pointing out that it wasn’t clear if it was acting for shareholders or to achieve government’s objectives. In a January 2013 report, JP Morgan said that “on fundamentals alone, we believe Telkom offers no upside with the potential for further earnings downside surprises”.

But investors who’ve stuck it out would have been nicely surprised, as Telkom’s shares have surged 167% in the last year alone.

This rise seems to be more on sentiment than concrete changes, as Maseko and chairman Jabu Mabuza have certainly talked the right talk.

Crucially, is a R5-billion cost saving over five years enough to make Telkom an agile and competitive entity that will deliver the sort of services it failed to produce for many years?

One of the major initiatives announced in the past year is that Telkom will do a deal with MTN, which will allow Telkom’s mobile arm to roam on the larger operator’s network.

But if this is the entire strategy that Maseko and his team of well-heeled consultants have come up with, Telkom is still in for a bumpy ride.

Telkom management still has to address the main regulatory elephant in the room — the way in which the regulator plans to force Telkom to sell off the last mile of copper cables that goes to people’s houses to new players, known as “local loop unbundling”.

If Telkom isn’t able to protect its turf, the company will lose large revenue streams from its fixed-line business, at a time when the mobile arm is already weak.

One of Telkom’s juicy advantages is that the 0800 toll-free numbers used by companies appear to be a secure source of revenue because companies can’t port these numbers anywhere else.

However, what would appear to make this strategy something of a farce is that, at the current rate, the R1billion annual “savings” will only cover Telkom Mobile’s cash burn. In 2012, the mobile arm lost between R3-billion and R1-billion in 2013.

What remains a big worry for investors is that Telkom’s main fixedline business continues to lose clients to mobile voice and internet service providers

In particular, Maseko has failed to explain how the company’s management will arrest the decline in fixedline telephone service.