Newly appointed Telkom CEO Serame Taukobong

Telkom’s quarterly update for the three months to end-December 2021 shows that its new CEO, Serame Taukobong, who took the reins from Sipho Maseko on 1 January, has a challenge on his hands: the mobile growth story that underpinned the business in recent years appears to be ending.

Telkom on Monday revealed that annual growth in its mobile subscribers in the period ended 31 December had slowed markedly: from 18.3% in the September quarter to just 10% in its latest report. And that slowdown came in what should be a robust period for mobile operators: the run-up to Christmas. Its shares slumped 8%.

That Telkom’s growth slowed so substantially in this period points to two possible causes: macroeconomic conditions deteriorated markedly, or its value proposition is no longer as attractive to consumers, relative to rivals Vodacom and MTN, as it once was. It’s probably a bit of both, but I’d hazard a guess that it’s more the latter than the former, especially given that South Africa’s two biggest mobile operators have aggressively cut their prices in the past 18 months. Telkom’s FreeMe plans, especially those aimed at contract customers, are simply no longer as appealing to consumers relative to what else is on offer in the market.

To be fair, Telkom is still growing its mobile base faster than its rivals. But at 10%, it’s a far cry from the growth numbers it was achieving until recently. And service revenue growth was just 2.3% year on year.

By contrast, in the 2020 financial year (before Covid hit), Telkom grew its mobile base by 23.9%, leading to a 54.4% increase in mobile service revenue. So, in less than two years, subscriber growth has slumped by 58% and service revenue growth by 96%!

It’s no wonder than investors dumped Telkom shares on Monday – they were trading more than 8% lower shortly after 10.30am in Johannesburg.

The problem is, mobile was the business saving Telkom’s bacon. If the current trend continues, mobile subscriber growth risks slipping into single digits in the final quarter of its financial year — and beyond, into FY2023. And with service revenue growth now in line – if not below – the industry average, the question becomes: what is Telkom’s next growth story? Does it have one? And if it doesn’t, then what?

The Cell C option

Telkom could make another go at acquiring Cell C (and its 12 million customers), though its efforts there have been roundly rebuffed – and there’s little indication of a change in attitude by Cell C’s management team to a deal. It may be too late, anyway, given the long-term contracts Cell C has signed for roaming on the Vodacom and MTN networks.

Blue Label Telecoms, Cell C’s largest shareholder, and other stakeholders, including Investec, continue to work towards a recapitalisation of the operator (to fix its legacy debt problem), and finalisation of that may come in time for Blue’s interim results on 23 February. After all that work – the recap has been years in the making – will the shareholders want to turn around and sell it Telkom? (If the price is right, anything is, of course, possible – but Telkom also won’t want to overpay.)

So, let’s assume nothing happens on that front as a deal seems implausible right now. Where else might Telkom’s growth come from?

The author, Duncan McLeod, argues that Telkom is going to struggle to grow meaningfully in the years ahead

It certainly won’t be from BCX, which, like the rest of the IT services market (to a greater or lesser degree), is struggling in the weak economic environment. Telkom said it is hopeful that with a slight uptick in GDP growth, it’s corporate client base may resume spending after big projects were delayed due to Covid-19. But any growth, if it comes, is unlikely to shoot the lights out.

Openserve, Telkom’s wholesale business, is ticking along. It’s made good progress in rolling out fibre and taking the fight to its biggest rival in that space, Remgro-controlled Vumatel, but it’s a tough old business – manpower-heavy and competitive, with low margins. Still, a plan to list Openserve separately, announced by former CEO Maseko in September, could unlock some value for shareholders given its extensive fibre footprint.

That leaves Gyro, which manages Telkom’s extensive property portfolio, and Swiftnet, a newish company that houses Gyro’s masts and towers business. Telkom plans to list Swiftnet, which owns 6 225 telecommunications towers, on the JSE, probably this year.

Valuable assets

“A separate listing of Swiftnet will affirm the valuation of the masts and towers business and its contribution to the overall valuation of the Telkom business, thereby unlocking further value for Telkom,” Maseko said in an interview with TechCentral last September.

Gyro itself has many property assets it can sell to raise money and improve Telkom’s cash flows. But as for revenue growth opportunities, it’s difficult to see where they’ll come from in the next few years. After a disastrous international foray (the fallout of which is now being probed by the Special Investigating Unit), it’s unlikely Telkom will want to go adventuring in the rest of Africa again anytime soon.

Read: Why Cyril is going after Telkom

So perhaps the best outcome is for new CEO Taukobong to manage the ship as tightly as he can (keeping spending under control; building a healthier balance sheet), see through the listing of Swiftnet (and Openserve?), sell assets like properties that aren’t core, and wait for an opportunity to play a role in any future consolidation that might present itself in the local telecoms industry.