Under-pressure telecommunications operator Telkom has decided to hit pause on dividend pay-outs for longer than expected as it battles difficult market conditions.

Telkom published its annual financial results on Tuesday that showed high levels of load shedding, constrained customer spending, robust competition and high inflation are having a serious impact on the company.

Telkom suspended dividends three years ago to preserve cash as market conditions became more difficult.

“The board has concluded that, in light of the group’s cash position and the current economic environment, the resumption of a dividend should be postponed for at least another year,” it said on Tuesday.

“While we are committed to returning cash to shareholders in the medium term, we consider it prudent to first strengthen our cash position as we navigate the Telkom cost transformation journey along with market and economic conditions.”

R13-billion in asset write-downs involving Openserve and the consumer business have also stained Telkom’s full-year income statement with red ink. The impairment is a non-cash adjustment and does not impact the group’s operating earnings, has no impact on Telkom’s cash position, and affects neither its compliance with debt covenants nor its ability to fund its capital expenditure programme, it said.

One area of concern for investors is the fact that growth in mobile service revenue – a big driver of Telkom’s performance over the past decade – has slowed to a crawl. Mobile revenue was R17.8-billion, up just 1.8% from a year ago. Mobile subscribers climbed by 7.8% to 18.3 million. Telkom now says it expects its mobile business to grow only in line with the market.

Ebitda slumps

Group revenue was flat (up less than 1%) to R43.1-billion, while normalised earnings before interest, tax, depreciation and amortisation (Ebitda) fell by 19.8%, excluding R1.1-billion in restructuring costs. Normalised headline earnings per share fell by 76.6%.

“As we continued to manage the transition to next-generation technologies, group performance was under pressure from a pronounced reduction in legacy revenues for the year. Despite this, revenue grew marginally,” Telkom said. “However, the incremental costs of load shedding reduced overall profitability, notwithstanding our efforts to manage operating costs.”

It also blamed intensifying competition in mobile, fibre and IT services for its woes. “In response, we have embarked on a group-wide cost transformation journey to return the group’s profitability to above 25% in the medium term while driving revenue growth in ever-evolving markets.”

Here’s how Telkom’s main businesses performed in the 2023 financial year:

Mobile subscribers reached 18.3 million at an average revenue per user of R86. Prepaid Arpu was R201 and prepaid was R64. “We continued to extend our network footprint, launching our 5G services and effectively utilising the newly procured spectrum, with a particular emphasis on the low-frequency band (800MHz) to enhance coverage of our LTE services,” Telkom said. “This benefited our mobile broadband subscriber base, which grew 9.2% to 11.6 million, representing 63.7% of our total mobile base now using wireless broadband.”
Openserve saw growth across its next-generation data-led products, now representing almost 70% of its revenue base. Fixed-data next-generation revenue grew by 10.2% driven by increased roll-out of fibre and “healthy growth” in carrier services and enterprise services. Performance was, however, limited by pricing gaps between new-generation business and legacy business, as declines in fixed-voice and legacy revenues accelerated during the year, it said. Openserve revenue declined by 4% to R12.9-billion. “Although costs were well managed and grew by less than inflation, significant increases in backup power due to unreliable energy supply put pressure on profitability. Openserve has now passed a million homes served with fibre. Homes connected advanced by 26.7% to 47.4%
Overall revenue for Telkom Consumer was stable at R25.7-billion. Revenue growth of 4% for mobile operations and a 14.8% upswing in handset and equipment sales revenue were offset by the planned decline in traditional copper-based voice services, which now represent 5.8% of total external revenues.”
BCX had a challenging year but managed to maintain stable revenue levels at R14.3-billion. Performance was driven by 9.1% growth in the IT business, which was offset by declines in the Converged Communications business. The IT business growth was largely due to double-digit revenue growth in the hardware and software business, albeit at lower margins, Telkom said.
Swiftnet, its masts and towers business, continued commercialising its portfolio and saw marginal revenue growth of 0.9% to R1.3-billion, driven by construction of 66 additional towers and eight new in-building sites. Swiftnet’s Ebitda margin is a strong 68.8%.
Gyro advanced property development planning activity for select development opportunities. This attracted interest, which resulted in the business concluding non-binding agreements with property development investment partners. “The intent is to commence construction for some projects during the new financial year.”

A worry for investors will be Telkom’s free cash flow, which deteriorated significantly in the 2023 financial year, and particularly in the first half. Free cash flow weakened to a negative R2.7-billion (FY2022: negative R2.1-billion), mainly because of a 45% decrease in cash generated from operations before dividends paid, impacted by a R3.2-billion decline in profit before tax. This was partially offset by a 17.6% decrease in cash spent on the network. – © 2023 NewsCentral Media