Telkom bondholders pocket profits while government ponders future
TELKOM’S bondholders have reaped benchmark-beating returns since 2009 even as shareholders lost half their money after a failed Nigerian expansion and stake sale by the fixed-line phone company.
Telkom’s R2.5 billion of 6 percent notes due February 2020 have returned 14 percent annually over the past three years for a 52 percent total return, compared with a 13 percent annual return for similarmaturity government debt, according to data.
The JPMorgan Chase emerging markets bond index consumer sector returned 9 percent in the period, while Telkom’s shares slumped by 50 percent.
Bond investors are betting the government, which owns 39.8 percent of Telkom, will not allow the fixed-line operator to default on its R3.8bn of debt after increased competition and its foray into Nigeria cut profit every year since 2006. Telkom also faces a R449 million fine for abusing its market dominance. The government has provided guarantees for the debt of other state-owned companies, including the SA National Roads Agency.
“The concern about the company is its ability to provide returns for shareholders,” Michael Grobler, a fixedincome analyst at Afrifocus Securities, said.
“There’s no risk of Telkom being liquidated. Bondholders know that the government won’t let it go that way. They know there’s no risk of the company being unable to repay its bonds and coupons.”
Turnaround plan
Communications Minister Dina Pule was due to present her turnaround plan for Telkom to the cabinet yesterday, her spokesman, Siyabulela Qoza, said on Monday. He declined to comment on whether the government would guarantee Telkom’s debt.
In June, the government rejected a bid by South Korea’s KT Corporation to buy 20 percent of Telkom, saying the company was a “strategic asset” in its plans to expand broadband infrastructure to the nation’s population.
The company might sell stock or raise debt to help fund a return to profit growth, Pule said on June 6. The Public Investment Corporation, which invests government employees’ pensions, holds 10.6 percent of Telkom’s shares in addition to the government’s stake.
Telkom spent R9.8bn on a Nigerian acquisition and investment in Africa’s largest oil producing nation and then sold the business for $10m (R82.3m) five years later.
Last month the Competition Tribunal fined Telkom for abusing its market dominance following hearings into an eight-year-old complaint that it had charged excessive prices for internet services provided to other industry participants. The company has denied the charges and appealed them.
The penalty might increase as the Competition Commission had also appealed against the ruling, asking the Competition Appeal Court to impose a bigger fine, Business Report said on September 13, citing the Pretoria-based commission.
Telkom has asked the court to scrap the fine and overturn the guilty verdict.
The ANC was considering a push to end Telkom’s listing on the JSE and take the company private, treasurer-general Mathews Phosa said on August 3. The party wanted Telkom, which was listed on the bourse through an initial public offering in 2003, to expand services to the poor, he said.
Hard work
“Whatever strategy the government adopts will probably need a lot of hard work and time,” Craig Pheiffer, the general manager of investments at Absa Private Clients, said. “You can’t buy the shares even at this price. You can still probably buy the bonds and do well.”
MTN Group and Vodacom Group were increasing data revenue last year three times faster than Telkom, while rolling out their own fibre-optic cables in Johannesburg. Telkom started its 8.ta cellphone unit in 2010 after selling its 50 percent stake in Vodacom a year earlier.
The probability that Telkom would not honour its debt “has not increased”, Simon Howie, the head of South Africa and frontier market credit at Investec Asset Management, said. “It’s very different looking at Telkom as an investment from the credit side than from the equity side. Credit has a good contractual yield.”
The extra yield investors demand to hold South African dollar bonds rather than US treasuries dropped 15 basis points in the past month to 1.7 percentage points, according to JPMorgan emerging markets bond index global. That compares with an average yield spread of 2.9 percentage points for emerging markets.
The cost of protecting South African dollar-denominated sovereign debt against nonpayment for five years using credit default swaps rose 3 basis points on Tuesday to 138, down from a high of 219 on January 5, according to data.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if the government fails to adhere to its debt agreements. An increase in the price of the contracts signals a deterioration in risk perception.
Yields on Telkom’s 2020 debt have declined 260 basis points since June 2009, when Telkom sold its Vodacom stake. The company’s share price has retreated 46 percent in that time.
“You would have retained a lot of value if you bought the bonds rather than the shares,” Khulekani Dlamini, the head of research at Afena Capital, said last week. – Bloomberg Educational achievement was a more important indicator of why people were employed rather than race, the SA Institute of Race Relations said yesterday. “The proportion of people by race in professional positions closely mirrors the proportion of people by race with professional qualifications,” institute research manager Lucy Holborn said yesterday. The data challenged the view that showed that South African employers were resisting racial transformation in the workplace. According to the data, about 41 percent of people with degrees were black and black people comprised 36 percent of staff in professional positions. – Sapa