Red flags for Telkom’s money
CONCERN: IT IS RELYING ON DEBT TO FUND CAPEX
Mobile business is rocketing ahead keeping overall revenue stable.
In the past six months, Telkom finally reached tipping point. Despite adding 55 000 fibre connections, it lost a shocking 20% of its total fixed broadband base (including both DSL and fibre). The plan all along was to migrate customers away from its legacy copper network to fibre and fixed LTE (mobile), but one gets the sense that in its newfound rush to switch off its copper network, it is happy to lose customers at any cost.
Between September 2018 and September 2019, it lost 186 141 copper broadband lines but only gained 55 577 fibre connections. This has caused pressure on its revenue line. Fixed data revenue from “traditional products” (DSL) is down R400 million to R3.2 billion, while revenue from “new data products” is up R200 million to R1.5 billion.
Worryingly, it says investment in fibre to the home has been “rationalised” (down 36% year on year) as it focuses on areas “showing a propensity for higher connectivity rates”. An alternate interpretation is that, because of strong competition from other providers, it has simply run out of viable areas to rollout fibre to.
Of course, the mobile business is rocketing ahead and helping keep overall revenue stable. At this rate, however, Telkom is going to have very little fixed-line business left (In a year, it has lost 591 000 fixed line customers (23%), nearly 50 000 a month).
It’s difficult to compare numbers against last year due to the implementation of IFRS 16, but there are four red flags in the results to end-September.
Telkom burned through R426 million in cash during the six months. Net cash at the interim stage totalled R1.002 billion, less than half of the R2.1 billion it had a year ago.
In the six months, Telkom reported negative free cash flow of R1.267 billion. This is an “adjusted” figure, though. Add back costs paid as part of the group’s various employee restructuring programmes (R162 million), and negative free cash flow was R1.429 billion. Of concern is the fact that operating free cash flow before capex was down 17% to R2.774 billion. It wants to improve free cash flow by between R700m to R1 billion in the second half, through supply chain financing, handsets receivables financing, and the disposal of non-core assets.
Telkom is, increasingly, relying on debt to fund capex. Net debt (excluding the impact of IFRS 16) at the end of September was R11.775 billion. It raised a net R2.4 billion in new debt in the period, significantly more than the R702 million it did in the comparative period last year. More than R3.5 billion is repayable this financial year, so expect that number to increase as it refinances much of this. The group contends it has a “healthy balance sheet”. Net debt to Ebitda is at 1.2 times (pre IFRS 16), which is higher than its previous guidance of 1 times. Post IFRS 16, net debt/Ebitda is 1.4x. It has updated its guidance over FY2020/FY2021 to equal to or below 1.5 times.
Given the sharp increase in debt, cash flow is being impacted by soaring finance charges. These have nearly doubled to R646 million in the six months and it is difficult to see this scenario changing.
Hilton Tarrant works at YFM.
Lost 20% of its total fixed broadband base