Telkom share price plunges as it plans to spend R1.5bn on job cuts
First phase of retrenchment process will result in 3,000 jobs being lost
Shares in fixed-line operator Telkom dropped almost 17% on Friday after the company said job cuts will cost R1.5bn, which will have a negative effect on its full-year earnings.
The group has started the first phase of its retrenchment process that will result in a total 3,000 jobs being lost.
Telkom’s shares, which traded at almost R100 in June 2019, closed 16.93% down on Friday, its lowest level since October 2013, giving it a market capitalisation of R9.9bn.
Peter Takaendesa, a portfolio manager at Mergence Investment Managers, said the dramatic fall in Telkom’s share price was “probably an overreaction by the market”.
The market had likely reacted most negatively to the acceleration in the voice revenue declines. For Takaendesa, this would only have been a concern if the mobile business was not growing at all, to offset that decline.
In a market update, the company led by CEO Sipho Maseko said the restructuring is a result of the technological shift to fibre and LTE as new sources of revenue, “notwithstanding lower margins”. This has been “compounded by a rapid decline in our traditional high-margin, fixed-voice business, in line with global trends”.
Telkom said it will use its cash reserves to pay for the cost of the restructuring and to prevent increasing its debt, which stood at R11.8bn in September 2019.
Takaendesa said paying cash for the restructuring also indicates that Telkom is likely to have made good revenues so far in the second half of the financial year.
Rapid changes in technology remain a challenge for Telkom. It has made the necessary investments in new technologies and revenue streams, particularly in the fast-growing mobile business, but this has taken its toll on profitability, it said in January.
It has been competing in a mobile market in which the two largest players, Vodacom and MTN, have virtual control over voice and data prices, it said.
Telkom said growth in its new revenue streams has not been enough to offset the negative effect on its earnings, adding that earnings before interest, tax, depreciation and amortisation (ebitda) “continues to be under pressure”.
Telkom’s mobile business, which has 11.5-million customers, has sustained its growth into the second half of the current financial year and continued to drive the overall revenue growth for the group, offsetting the negative effect of the fixed-voice revenue.
Telkom’s fixed-voice revenue contribution has declined from 56% in the 2013 financial year to 22% in 2019, it said. “We have since seen an accelerated decline in fixed-voice revenue in the second-half of the financial year relative to the first.”
Takaendesa said the next phase of restructuring is likely to be at lower financial cost for Telkom as it will affect operations such as BCX. That company already underwent a round of retrenchments in November 2018 when it said it would cut 10% of its workforce, or about 700 employees.
He cautioned that “one can’t rule another round of retrenchments” in the next 12 to 18 months for the group that employs about 15,000 people, as units such as the voice business continue to contribute less to the bottom line.
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