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Telkom is facing a brutal revolt from investors. Shares in the partially state-owned company have dropped by more than a fifth in the past five days, wiping off tens of millions of rand of shareholder equity.

And here is why: Telkom issued a trading update on Wednesday that confirmed a hypothesis that it is a company that seems to have reached a dead end in gaining market share in the mobile phone market. The company warned investors that it would either report virtually no growth in annual profit, at best, or swing into a loss, at worst, mainly due to writedown charges worth R13bn. That is not an insignificant figure; it is more or less equal to its market capitalisation. 

It is a stunning fall from grace for the company, which had secured the backing of investors with a strategy that sought to transform it from a fixed-line phone operator into a modern telecom operator. Its share price went as high as R95 in 2019 as executives floated the mobile phone business as not only growing faster than anyone else but also being firmly in the black.   

The performance of the business, called Telkom Mobile, was held up as evidence that Telkom was a promising challenger to the dominant players in SA’s mobile phone market. It had been notching up more than 50% growth in revenue and boasted nearly 17-million customers. The mobile business’s core profit margin multiplied to nearly 30%, putting it closer to the 38%-45% bigger rivals MTN and Vodacom grind out every year.

What went wrong for Telkom? Steeply rising cost of living and interest rates are squeezing consumers in SA, where the debt to household income ratio sits at an uncomfortable 65% — potentially forcing millions of them to cut back on non-essential items or even miss monthly repayments on their phone bills.

It makes sense then that Telkom is struggling to maintain the spectacular growth rates that helped its share price peak at nearly R100 three years ago and prompted its executives in 2020 to proclaim that the company's underlying value was not fully reflected in the share price.   

But these factors are not unique to Telkom. They affect all telecom operators in the country. They expose the limits of the aggressive subscriber acquisition strategy for a company with the thinnest margins in the industry.

One of the reasons Telkom struggles to compete is its oversized workforce, which stems from its history as a state-owned strategic asset expected to create jobs. It has more than 12,000 employees and makes R43bn in annual revenue, which means each employee generates R2.8m on average. This is much lower than MTN and Vodacom, where each employee generates R7.3m and R11.7m respectively. This difference shows up in their profitability. While Vodacom and MTN have core profit margins of 35%-40%, Telkom barely manages to reach 20%.

It is a problem acknowledged by Telkom, which has already drawn up a punishing cost-cutting plan that slashes nearly 2,000 jobs, or 15% of its workforce, to calibrate the company in the fast-evolving competitive landscape. It may be hard to swallow but the reality is that Telkom’s place in the upper echelon of SA’s mobile phone industry is down to the government’s tardiness of more than a decade in allocating the radio-frequency spectrum. 

What this regulatory inefficiency meant is that Telkom, unhindered by the spectrum crunch, offered cut-price broadband deals as incumbents kept prices high to make up the cost of repurposing frequency bands used for voice calls to handle surging internet connectivity demand.

The allocation of a new radio frequency spectrum in 2022 has altered the environment, swinging the pendulum against holding shares in the least profitable company in the sector. So far this year, Telkom has fared worse than MTN and Vodacom in the stock market, falling more than 20% compared with losses of between 10% and 13% for its larger rivals.

Telkom still has a chance to turn things about. Investors are watching CEO Serame Taukobong closely for a strong sense of purpose to carry through a plan launched by his predecessor, Sipho Maseko, to release value trapped in the company’s sprawling structure.

Telkom has a large network footprint, a sought-after fibre business, Openserve, and a promising IT business, BCX. But it needs to act fast and decisively. If it fails to do so, it risks becoming irrelevant and obsolete in SA’s telecom industry.

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