Telkom fell as much as 30% in Johannesburg trading last Wednesday after the JSE-listed company said it was considering writing down the value of its assets by about R13-billion. It warned, too, of a sharp decline in earnings for its financial year ended 31 March 2023.

“Shareholders are advised that the board is currently considering an impairment-of-assets charge in respect of the group’s cash-generating units, namely Openserve, Telkom Consumer, Gyro and BCX, in the amount of approximately R13-billion (excluding tax effects). This follows Telkom’s strategy to accelerate its migration to newer technologies,” it said.

The profit warning sent Telkom’s shares plunging lower, and they have yet to recover. As of 2.20pm on Tuesday, they were changing hands at R26.38 each, a decline over one year of more than 42%. Since their peak in 2019 at R100/share, they have slumped by almost 75%.

What’s gone wrong at the partially state-owned telecommunications operator? And will the write-downs entice rival MTN, which previously expressed an interest in buying Telkom, back to the negotiating table? In July 2022, MTN and Telkom disclosed to investors that they were in talks about a deal that would see the former buy the entire issued share capital of the latter – including government’s 40.5% direct stake. But MTN walked away after Telkom agreed to engage with wireless broadband operator Rain about a counterproposal (those talks led nowhere).

Some of the challenges facing Telkom aren’t unique to it: load shedding and high inflation, for example. Besides the costs of batteries and diesel needed because of the unreliability of Eskom’s electricity supply, Telkom also needs to pay additional roaming costs when its own network isn’t available, meaning it is arguably more exposed to load shedding than Vodacom or MTN. It is also investing upfront in handsets and equipment, necessitating an immediate cash outflow – impacting its balance sheet.

Retrenchments

In February, Telkom announced plans to let up to 15% of its workforce go, which will attract retrenchment costs of R1-billion, although lessening payroll costs in the long term.

Dobek Pater, business development director at Africa Analysis, believes Telkom has great assets but is not using them to their full potential.

“Telkom also oscillates in its strategy, changing it frequently – depending on where it thinks it may obtain a better return on its investment. Unfortunately, a set course needs to be followed through for a longer period of time to bear fruit,” Pater said. “This is particularly true in the telecoms infrastructure market where return on investment may take five to seven years (or even longer).

Read: Telkom hires US bank for sale of Openserve stake

“One of the key assets of any infrastructure company is people. Over the past decade or more, Telkom has gone through a number of voluntary retrenchments. Unfortunately in such cases, the company always risks losing valuable employees. Over the years, Telkom has lost many good employees who formed the backbone of the company.”

Pater noted that Telkom is in the process of restructuring, so it is difficult to say where it will end up. This uncertainty has a negative impact on its shares. “It will certainly engage in M&A activity along the way. MTN will very likely approach Telkom again regarding a tie-up or acquisition of Openserve. It will want to do that to counter the creation of infrastructure company Maziv (between Vodacom and Remgro’s CIVH). Whether Telkom will seek to merge its mobile operations with another mobile operator remains open to question.”

Telkom will take a big hit to full-year earnings due to the impairment charge. Reported headline earnings per share (Heps) will be as much as 105% lower, it warned in last week’s trading statement. Basic earnings per share, or Beps, will fall by as much as 485% to a loss of around R20/share.

Sasfin equities strategist David Shapiro believes the sharp decline in Telkom’s share price was inevitable. “If you look globally, it’s the same everywhere. It’s very difficult for operators in the mobile industry and only one or two players dominate. Even in the US there are really only three: Verizon, AT&T and T-Mobile.

“It’s a very cut-throat business and it’s tough going at the moment. Real problems like load shedding and inflation are biting into every business, so anyone who expected Telkom to perform well was being a bit ambitious. It’s also being dragged down by its legacy fixed-line business. The market is quick, it values assets at what they’re worth, so all that’s happening is the balance sheet is bringing into line what’s already happened,” he said.

Read: Perfect storm hits Telkom

“As for MTN, what happens now?” Shapiro asked. “Telkom is on the back foot. I don’t know why they turned down the MTN offer, but MTN can afford to wait. It will be able to choose its price now.”

Irnest Kaplan of Kaplan Equity Analysts doubts MTN is interested in Telkom, even at a lower price. He said the discount MTN would be getting is in the region of only about R3-billion. Telkom had a market cap at the time of writing of just R13.3-billion.

“What MTN might be very interested in is Telkom’s fibre network (owned by Openserve), which is extensive. They won’t be interested in its legacy fixed-line assets. That’s not growing. And their mobile market is struggling compared to MTN’s and Vodacom’s.” — © 2023 NewsCentral Media