Moody’s Investors Service on Monday downgraded Telkom following the sale and unbundling of its 50% stake in cellular network operator Vodacom.
“The downgrade reflects Telkom’s weakened credit risk profile as result of the company’s decision to sell its stake in Vodacom,” the ratings agency says. “Moody’s believes Telkom’s former stake in Vodacom was a key operational and financial asset of Telkom, underpinning the company’s growth prospects and cash flow generation potential.”
Moody’s says its downgrade considered Telkom’s aggressive transformation programme. This carries “significant execution risk and may take some time to deliver results”. It also considered the increasingly competitive environment, with the fixed-line business already under price and volume pressure.
There is also an expectation of weakening credit metrics over the next 12-24 months as Telkom rolls out its substantial five-year capex investment programme. “In addition, a turnaround of Nigerian mobile subsidiary Multi-Links is imperative to management’s cash preservation strategy.”
Moody’s says its negative outlook “reflects concerns about the challenges that Telkom’s management is facing and their ability to successfully refocus the business and deliver its transformation plan. Moody’s is especially concerned about the success of the fixed-to-mobile convergence initiative, the impact of the proposed cost-cutting measures and management’s refocus on Telkom’s overall cash flow generation capacity.
“Moody’s notes that Telkom’s failure to deliver its transformational strategy and achieve substantial efficiency savings, coupled with a continued performance decline in Multi-Links, particularly in the current difficult environment, could put further pressure on [its] ratings. Conversely, the outlook could be stabilised once operational uncertainties subside and execution risk is mitigated, with some visibility on results of the transformational strategy, assuming no emerging liquidity risk.”
Telkom’s share price closed down 1,2% on Monday. — Staff reporter, TechCentral
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