EDITORIAL: Sipho Maseko owes shareholders who refuse to hang up on Telkom
Investors show faith in plan to transform the company as stock price edges up after shock announcement
Investors were understandably unimpressed by Telkom’s painful announcement on Monday about suspending dividends that sent its shares tumbling more than 7%, its biggest one-day drop in more than two months.
Telkom, which counts the government and its R2-trillion employee pensions investor, the Public Investment Corporation, as its biggest shareholders, posted a 66% drop in annual earnings. It blamed the costs of buying out more than 2,200 workers it no longer needs.
The company, which has been led by former Vodacom executive Sipho Maseko since 2013, is also bracing for the rolling coronavirus-induced economic tsunami. It has set aside more than R1bn to cover potential losses from customers who may be unable to pay their phone bills as companies countrywide lay off workers or impose deep pay cuts.
As a result, Maseko pulled the company’s three-year growth targets, which included mid-single-digit core earnings growth and mid-single-digit revenue growth. Except for its spending guidance of 16%-20% of revenue, it missed these targets in the second year.
Telkom’s decision to suspend dividend payouts for the next three years was perhaps the most agonising piece of news for investors, who are used to the company dishing out more than half of its annual earnings as dividends. They were presumably already out of pocket as dozens of other companies have either slashed rewards or scrapped them entirely.
Investors could have fled such a horror show in larger numbers. But in perhaps a sign that they believe in Maseko’s plan to transform the company built on fixed-line phone technology into a major modern telecommunications player, shares in Telkom were slightly higher on Tuesday as investors looked past the bad news and focused on what Maseko and his team are doing to grow their wealth. The nearly 30% drop in its share price so far in 2020 reflects wider fears about the economic downturn and its impact on consumers.
To those still holding on to their shares, the CEO can hold up Telkom’s mobile phone business as not only being firmly in the black but maintaining its admirable spot as SA’s fastest-growing cellphone company, notching up more than 50% growth in revenue to almost R13bn, and boasting 12-million customers in the year to end-March.
The mobile business’s earnings before interest, taxes, depreciation and amortisation (ebitda) — the percentage of revenue converted into income — has grown more than ten-fold to almost 15%, a rate of growth, if maintained, that should make MTN and Vodacom uncomfortable.
Telkom’s balance sheet has room to effectively compete for the spectrum and continue to roll out network infrastructure
For now, the duo is still miles more profitable, boasting margins of 35%-40%. Maseko acknowledges that it would take much more than just counting on the pace of growth at the mobile business, which was written off as doomed to fail when it launched more than a decade after executives in 1990s dismissed the idea that mobile phones would become mainstream.
He has retrenched more than 2,200 workers, further freeing up much-needed cash to withstand the economic shock and invest in network infrastructure as the industry regulator, the Independent Communications Authority of SA (Icasa), prepares to auction off radio frequency spectrum for the superfast 5G mobile network. The spectrum could be allocated by year-end, Bloomberg reported on Thursday, citing communications minister Stella Ndabeni-Abrahams.
With a R2bn cash pile, alongside lower borrowing levels — which stood at 0.7 times net debt to ebitda, well below its medium-term target of 1.5 times — Telkom’s balance sheet has room to effectively compete for the spectrum and continue to roll out network infrastructure.
That said, it’s not unreasonable to imagine that investors would be sceptical of Maseko’s promise to spin off or sell a portion of its masts and towers business. Two years ago, he promised to create a mega property fund from Telkom’s vast real estate portfolio, which at the time was valued at R24bn.
To repay the faith shown in him by shareholders still holding on to the company’s stock, Maseko should show meaningful progress in unlocking value trapped in the R12bn masts and towers business fairly soon.
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