Shareholder panic wipes R2.5bn off the value of Telkom

17 May 2023

Telkom will pencil in lower earnings and write down the value of its assets that are failing to keep pace with the market and technological developments. It is fighting problems on many fronts: intense Eskom blackouts, fierce competition and cash-strapped consumers.

As much as R2.5-billion was wiped off the value of Telkom on the JSE after the telecommunications company informed shareholders that a massive storm would soon hit its operations.

Telkom’s shares plunged and finished 15.6% lower on Wednesday, 17 May after it warned shareholders that it will pencil in a decline of at least 85% in its profits for the year ending March 2023.

That alone is enough to cause panic among shareholders, who will probably receive lower dividend payouts from Telkom. The company’s warning comes at a time when its telecommunications peers, MTN and Vodacom, are profitable.

Further sending Telkom shareholders into a tailspin was a chilling warning from the company that its board is mulling a write-down in the value of its assets by R13-billion.

A perfect storm has hit Telkom’s operations.

The rising cost of living has meant that many consumers are cutting back on telecommunications products and services offered by Telkom. Any revenue generated by Telkom is also eroded by the company’s additional expenditure on generators and backup batteries that run its cellphone towers during higher stages of Eskom blackouts. Without this additional expenditure, Telkom’s cellphone towers would fail to operate, potentially throwing its customers into a communications blackout situation.

Structural market changes are also negatively affecting Telkom’s operations, considering that consumers are moving away from its traditional business model of voice services, which is in decline, to newer technologies such as 5G connection and fibre. And because of this, the Telkom board is considering an impairment/write-down of various business operations/assets by about R13-billion. The assets include Telkom’s network operator Openserve, Telkom Consumer, property division Gyro and IT services business BCX. Essentially, the value of these assets has declined and their cash generation potential has diminished.

Ebitda reassurance

The write-down won’t impact Telkom’s earnings before interest, taxes, depreciation and amortisation (Ebidta) generated from operations, its cash position, or its compliance with debt covenants, the company reassured shareholders.

“Significant market changes and current economic conditions, including accelerated load-shedding, low anticipated economic growth rates, and a high-interest rate environment, coupled with evolving technological advancements have had an adverse effect on the group,” Telkom said in an alert to shareholders.

Telkom expects a sharp decline in its earnings. When Telkom publishes its annual results on 13 June, it is expected that the company will tell shareholders that its headline earnings per share — a measure of profits or earnings — will fall by between 85% and 105%. Telkom also said it expects its reported basic earnings per share to drop by 465% to 485%.

These are metrics that assess the core performance of a business, stripping off factors that might boost or inflate the earnings such as acquisitions or immediate cash realised from the sale of businesses.

To lower company costs and realise more earnings, Telkom announced in February that it would cut up to 15% of its workforce. Since then, Telkom has extended voluntary severance packages and voluntary early retirement packages to all employees in the group, adding that the payments of the restructuring will happen in its 2024 financial year.

Telkom’s rivals MTN and Vodacom are moving differently in the face of tough market conditions, as they continue to invest in their infrastructure and maintain growth. Meanwhile, Telkom has been in talks to sell off underperforming assets to speed up the move to newer technologies. MTN once even targeted to buy Telkom, but this deal collapsed.

Read more in Daily Maverick: MTN’s plan to buy Telkom collapses, market reaction harsh

MTN has arguably dodged a bullet as it would have bought into a company whose assets are in decline, and would have had to spend a lot of money to turn them around. Telkom’s vulnerability might still make it a target for a takeover, as a potential suitor might view the company as a discount and cheap buying opportunity.

Mergence Investment Managers’ head of equities, Peter Takaendesa, has always argued that Telkom continues to have great infrastructure assets, especially its fibre business, which could be used as a “good turnaround” story for the company if managed correctly. DM

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Ebitda reassurance