The Competition Commission wants Telkom to cut the cost of IPConnect

Telkom warned on Monday that its full-year headline earnings per share will fall by as much as 70% as a collapsing fixed-voice business, fallout from the Covid-19 pandemic and costs associated with job cuts hit hard. Basic earnings per share will fall by as much as 80%.

The partially state-owned telecommunications operator said the steep decline in earnings is the result of a R1.2-billion restructuring programme as well as the additional impairment of trade receivables and contract assets due to Covid-19 of R626-million.

The once-off items are not deductible for taxation purposes in the current year and have therefore resulted in a reduction in group profit before tax and a significant increase in the effective tax rate to 37.6%, Telkom said in a trading statement on the JSE’s stock exchange news service.

Although Covid-19 impacted only the last two weeks of the group’s 2020 financial year, accounting rules require that the impairment of trade receivables and contract assets be based on expected credit loss principles. “This requires that we take a forward-looking view of macroeconomic impact on debtors’ behaviour,” Telkom explained.

“The negative impact of Covid-19 on the South African economy is expected to put further pressure on consumers, with studies predicting that a number of customers are likely to default on their obligations as they fall due. As a result, Telkom took a prudent approach … by estimating an increase in customer default rates for our customer base, and this has been incorporated in the calculation of the group’s expected credit losses.”

‘Significantly impacted’

“As a result, the group recognised a total provision of R1.14-billion, of which R626-million is an additional impairment of trade receivables and contract assets due to the expected impact of Covid-19. The additional impairment is significantly impacted by the forward-looking assumptions used in calculating the expected credit losses to cater for the depressed economy.”

Notwithstanding the expected economic challenges, Telkom has not seen a deterioration in its debtors’ book performance from March 2020 to May 2020, it said.

The job-cutting costs and Covid-19 provisions aside, Telkom said full-year headline earnings per share will fall by 30% to 35% and basic earnings per share by between 35% and 40%. This is the result of falling fixed-voice revenues on group operational earnings as well as the increase in finance charges and fair-value movements.

“The challenge for the year was the impact of the fixed-voice revenue decline on group Ebitda,” Telkom said. Ebitda is earnings before interest, tax, depreciation and amortisation and is a measure of underlying operational profitability.

The decline in fixed-voice revenue of about 22% was, however, offset by the growth of more than 50% in mobile service revenue in the 2020 financial year, Telkom said.

Management contained group operating expenses to below inflation and optimised direct costs in the mobile business. However, the extent of the decline in fixed voice on group Ebitda was not offset as it has a higher margin than the mobile business, it said.