International credit ratings agency Moody’s has placed Telkom on review for a possible downgrade due to increased concerns about the company’s operating challenges.
Moody’s senior analyst Soummo Mukherjee says the agency is worried about Telkom’s ability to “stem its revenue losses and margin compression in the face of intensifying competition, continued migration of its higher-margin fixed-line traffic to mobile and regulatory changes”.
“Telkom operations, strategies and market image have furthermore been impacted by a series of management changes in the past two years which, in addition to the substantial costs Telkom faces to successfully stabilise its start-up mobile operations that are only expected to reach breakeven Ebitda margins in 2014, are contributing factors to the decision to review the current rating positioning,” he says.
Ebitda refers to earnings before interest, tax, depreciation and amortisation.
Moody’s last downgraded Telkom in 2009. But the company has “suffered more than originally anticipated following [the last downgrade] … due to its loss-making Nigerian operation, Multi-Links, where Moody’s nevertheless acknowledged substantial execution risk existed”.
Telkom last week announced it had finally reached an agreement to sell Multi-Links to an affiliate of Helios Towers Nigeria for US$10m. It had invested almost R10bn in the operation. “Despite these losses, a sale, once concluded, will at least avoid further cash drains for Telkom,” Mukherjee says.
Moody’s says its review ahead of a possible downgrade will focus on Telkom’s strategic plan to bundle its service offerings in order to minimise revenue losses and margin compression; its most current financial plan for the next two to three years; its business profile and credit metrics compared to similarly rated peers; and its expected level of government support and dependence.
“Telkom’s current global rating … includes a one-notch uplift based on Moody’s assumptions of high levels of support from the SA government and the correlation (dependence) between the company’s and government’s credit parameters,” the ratings agency says.
“During our review process we will re-evaluate our current assumptions and, in the event of downward adjustments, Telkom’s rating might be lowered by one notch on that basis alone. Should the company’s standalone rating also be lowered, Telkom’s rating could be downgraded by more than one notch at the conclusion of the review.”
Telkom’s share price was trading down 5,1% at lunchtime on Monday. However, the share went “ex-dividend”, which probably contributed to most of the fall. — Staff reporter, TechCentral