Telkom dividend juicy but worrying
Mobile business is the star performer after years of losses but core fixed-line business continues to be under pressure
Telkom’s share price has shed 14.95% since June 6 after the company reported its full-year financial results, which had a record dividend payout of 422c, up 56.3%.
Its full-year performance was average and lifted mainly by property sales. Stripping that out, earnings growth was actually negative.
"The dividend was very juicy but we think the market now questions whether this is sustainable, given the underlying operating performance," says Farai Mapfinya, chief investment officer at Falcon Crest Asset Managers.
The fixed-line group’s management has, however, done an impressive job in stopping the rot and renewing investor confidence — though they still have a tough journey ahead.
Management, led by CEO Sipho Maseko, managed to substantially reduce costs, which were a drain on the group. Telkom’s brand positioning within the market has also been improved. Its business-focused unit has been boosted by the purchase of BCX — which has already lifted its earnings from business clients and turned the lossmaking mobile network unit into a profitable business.
Telkom’s mobile business continued to be the star performer of the group and delivered earnings before interest, taxation, depreciation and amortisation (Ebitda) of R660m, after four years of losses. Despite these achievements, its core fixed-line business continues to be under pressure from more nimble mobile operators and new fibre-network providers.
Telkom continues to focus on defending its existing revenue base and also on positioning the business to be relevant for the future.
It is entering a new phase that it says could unlock shareholder value. In the new operating model, Telkom will add a new unit, called Gyro, which will house its multibillion-rand property portfolio — including vacant land, office blocks and mast towers.
Telkom will have five units: in addition to Gyro, there is the consumer business under the Telkom brand; BCX, the go-to market for the enterprise or business clients; Openserve, an open-access wholesale infrastructure unit which sells access to Telkom’s fixed-line network to other companies; and Trudon, whose objective is to drive a mobile advertising platform and e-commerce strategy.
Maseko says all units will have clear strategies, financial frameworks and execution paths. "There will be a relentless focus on performance," he says, adding that to adapt to a "shifting landscape we have to accelerate the total makeover of the business".
The decision to create standalone companies will make strategic sense if they are not directly dependent on each other and if a more accountable, standalone management structure can create more value for stakeholders.
"Our view is that the proposed new operating model is relevant for Telkom to improve accountability, relationships with their Internet services distributors and to avoid regulatory concerns in some areas," says Mergence Investment Managers portfolio manager Peter Takaendesa.
Separately listing some divisions is possible over the medium to long term as they gain scale and this also allows strategic shareholders to maintain control of the company by retaining their shareholding in those divisions, he says.
Mapfinya says there are undoubtedly entities within the group which are better off clustered together because of operating synergies, while others have business models or value proposals which are past their sell-by date and only survive because of cross subsidisation.
"The ultimate intention in our view is to ensure all entities are commercially competitive and value accretive to the group," he says.
The share price rode high going into full-year results as the market speculated that Telkom could announce a separate listing of those divisions. However, there is no clear indication that the company is moving in that direction. Earnings for the 2018 financial year are likely to decline due to the tax rate normalising higher as well as higher network maintenance costs, says Takaendesa.
According to Bloomberg, Investec analyst Niel Venter downgraded his recommendation on Telkom SA to "hold" from "buy". The news wire also reported that Citi analysts Michael Gresty and Preshendran Odayar stated in a report that Telkom’s earnings outlook was negative in the medium term, and cut the stock to "sell" from "neutral".
They noted that capital expenditure intensity was considerably higher than expected, as this was likely to continue higher as Telkom invests for the future.