Profit warning sends Telkom shares sliding
Future in flux as state weighs plans
TELKOM’S latest warning of a slide in first-half profit adds to perceptions that the fixed-line phone operator is stuck between a rock and a hard place.
Telkom’s poor performance is progressively moving from bad to worse, with little sign that its fortunes will turn around any time soon. Its share price slid 5.5 percent to close at R19.37 yesterday after it said interim profit would fall by half.
Uncertainty hangs over the fate of the state’s control of the company and its future.
The imminent departure of chairman Lazarus Zim after the annual general meeting next month – while his contract still has a year to go – has added to the uncertainty and raised questions about a potential exodus in its executive ranks.
Telkom announced yesterday that Mmathoto Lephadi would resign as company secretary on December 31.
Analysts are unwilling to speculate on the staying power of Telkom chief executive Nombulelo Moholi amid the turbulence, but questions about her continued loyalty persist as investors look for clarity on who is meant to articulate the company’s strategy.
Thus far, Communications Minister Dina Pule has taken centre stage in pronouncing the likely outcome.
How soon Telkom can regain its strength depends on the government, which holds 39.8 percent of the company.
Pule is juggling investigations into her potential conflict of interest in the spending of sponsorships for the information and communications technology indaba. Another problem child taking up her time is the SABC, which is experiencing infighting on its board.
Telkom said basic earnings a share for the six months to September would be at least 45 percent lower than the earnings a share for the same period last year.
Headline earnings a share were expected to be at least 65 percent lower than the R1.91 reported for the half year to September 2011.
Lower earnings were as a result of the increase in the provision for penalties relating to Telkom’s anticompetitive behaviour nearly a decade ago.
Telkom is appealing the R449 million penalty, but the Competition Commission has filed a cross-appeal and wants the Competition Appeal Court to increase the fine.
Farai Mapfinya, an equity analyst with Sanlam Private Investments, said Telkom’s fullyear results were expected to disappoint and earnings visibility would be poor. Between now and the publishing of interim results in November, earnings downgrades of Telkom by the market were expected.
“The fixed-line business revenue is in… decline and that leaves 8ta [Telkom’s cellphone subsidiary] as the primary potential revenue driver going forward.”
However, Mapfinya said, as the fourth-biggest cellphone company, the odds were still stacked against 8ta.
Bloomberg reported that bondholders had gained more from Telkom than its shareholders during the past three years and reaped “bench mark beating returns since 2009”.
Mapfinya said existing debt covenants were not onerous and Telkom was “still way off their target of a net debt to earnings before interest, tax, depreciation and amortisation of 1.5 times”. Any new debt would be expensive, but Telkom’s management had provided for this by suspending the dividend.
Spiwe Chireka, International Data Corporation’s programme manager for telecoms in Africa, said flat revenue and rising operating costs at Telkom were “nothing new”.
She said Telkom’s unique problem, compared with fixedline providers globally, was that its cost base kept expanding at a rate faster than its revenue generation. “We would like to hear a bit more from Telkom on what they are going to do to sort this out.”
Chireka said while Moholi inherited “a system that is a mess”, Telkom’s downfall had always been implementation.
“In terms of ideas and infrastructure… the only area where we are seeing aggression is in Telkom enterprise headed by Brian Armstrong.”