Despite Telkom’s tough talk about learning from its mistakes, taking hard decisions and rising like a phoenix from the ashes, investors are simply indifferent to the promises made by Africa’s largest integrated communications company.
The news of a R12bn write-down in assets in Telkom’s results announcement on 14 June resulted in its share price dipping a bit on the day, but quickly returning to an approximate R16 level, about the same price as earlier in the month; the share failed to respond to a reported profit after tax of R501m (excluding the impairment) as well as assurances by the group’s CEO, Sipho Maseko, that there was a renewed and determined urgency to turn the company around.
It may well be too little too late, following five years of steady decline in its share price, down from a near R80/share in 2008, the same period in which five CEOs have come and gone. Years of mismanagement, growing costs and missed opportunities have come to a head for the company.
Maseko said the company’s shares, trading at a much lower net asset value for a considerable period of time, had led to a write-down of legacy assets.
Bloomberg reported the net loss was the biggest of any companies traded on the JSE since AngloGold Ashanti reported a R16,1bn loss in 2008.
Telkom said its 2013 financial results reaffirmed the need to act with urgency to turn the group’s performance around and Maseko assured shareholders that the company was reviewing its costs and might sell some property assets and reduce staff, particularly at management level.
Furthermore, a settlement between the Competition Commission and Telkom will result in the company separating its wholesale and retail divisions (among other measures) in response to accusations of abusing its dominance.
This has prompted speculation in the industry that it may result in lower prices. But investors are simply not buying into the hype.
“The market has clearly written this company off,” said Nic Norman-Smith, the chief investment officer at Lentus Asset Management.
This is despite a major advantage Telkom has over all competitors — a fibre-optic network of 145 000km. It is the largest in the country and the combined network of all other industry players does not come close to having that kind of reach.
While the telephone portion of the business is dying, “the existing infrastructure is pretty phenomenal”, said Smith. But he noted that Telkom clearly needed to leverage this infrastructure to transfer data and had been too slow on the uptake.
“Other providers came in and ate their lunch… Telkom has a great set of assets, but it hasn’t used them to their maximum potential.”
Analysts agree that Telkom needs to move into the next generation and needs to do it fast. It is widely thought that the only way to do that, and subsequently ensure the future sustainability of the company, is to push high-speed broadband forward, and to do so quickly.
Despite this, no details of such a plan has been publicised by Maseko or the new board.
Said Telkom’s head of strategy, Miriam Altman: “Telkom is in the process of redefining its commercial and broadband strategy, with significant commitment to making a meaningful contribution to the nation’s social and economic objectives.”
Faster broadband has positive implications for productivity and could create massive government savings and efficiencies.
“And, in countries which have done it, it can offer a GDP lift, so it’s well worth the investment,” an industry source said.
Telkom’s performance not only means the destruction of the company’s value, it also destroys South Africa’s credit rating.
“It is a question of losing tens of billions [of rand] of real value and much more on opportunity costs — it is tens and tens of billions lost stupidly,” the source said.
Despite its troubles, analysts say Telkom should not yet be written off. BMI-TechKnowledge MD Denis Smit said anybody who underestimated Telkom did so at their own peril.
The company, he claimed, was simply too big to fail, although he warned that now may not be the time to invest either.
“I think Telkom will bounce back, but what is critical is that the government makes up its mind on its strategic requirements and Telkom’s role in the national broadband strategy.”
With its vast network hosting most of the banking and mobile networks and undoubtedly having the furthest reach around the country, if Telkom were to close its doors, the effects would be felt by millions of people.
“The national payment system would collapse, some of the banks would collapse,” Smit said. “It is a critical asset because so much goes on in the background. If Telkom gets sick, everybody is going to get pneumonia.”
Experts say Telkom has a number of obvious advantages which it needs to leverage. Its network is one of these, but its technology is also considered fairly good, and it also has an impressive number of existing client relationships and an existing billing system.
Democratic Alliance communications spokesman Marian Shinn said Telkom also had a fair amount of human-resource assets. “Its technicians are extremely well-skilled.”
Smit said a strong board and a chief executive in the form of Maseko also bodes well for the company’s future management.
But there is general consensus that Telkom’s huge wage bill may be its biggest cost problem and the main obstacle standing in the way of it lowering prices.
“There are far too many people… It’s a symptom of it being a bloated monopoly for so long,” Smit said.
While Telkom has hinted at the possibility of job losses, with government owning a near 40% stake in the communications company, significant job cuts are “unlikely”, the industry source said. — (c) 2013 Mail & Guardian
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