Potential Telkom Investors Warned of Pitfalls ahead-Analysts

Telkom might have high-value assets, however, potential investors must be weary of risks associated with attempting to turn its fortunes around, according to analysts.

The telecommunication firm is looking to sell off parts of its assets, the news comes after the group faced difficult operating environment, evolving technological advancements and accelerated power outages.

Telkom group CEO Serame Taukobong said in its latest results that was released last month, that the company will continue with its “value unlock strategy” and will look for partners to support its requirements for scale across its subsidiaries.

Head of equities at Mergence Investment Managers, Peter Takaendesa, cautions, “We believe Telkom continues to have significant value hidden in its assets and this value can be realised if execution on the value unlock plans or strategies is timely and effective.

“However, any interested potential suitors for Telkom are unlikely to offer full valuation for the assets, given the high execution risk in turning around Telkom’s operational performance. Those risks include the additional investment that may be required to sustainably turn around Telkom’s investment case, and potential for stronger competition in the key growth areas of fibre and mobile data.”

Earlier this month the Telecommunications company reported growth in performance for its quarter to end-June results. The South African third mobile operator revenues went up by more than 3% on Monday morning, however, the company is still feeling pressure from load shedding, constrained consumers, and its legacy systems.

Telkom said its performance is driven by a strong performance by both its 5.2% increase in mobile and fibre interest resulting to group revenue up 3.8% to about R10.6 billion to end-June.

“Telkom has started the 2024 financial year with good momentum,” said group CEO Serame Taukobong. “Group performance was pleasing in the face of rolling power outages, muted economic growth, continuing inflationary pressures on consumers and an intensely competitive landscape.”

Despite the positive performance at the top line, however, Ebitda – a measure of operating profit – fell by 4.2% to R2.2-billion.

The group said the cost benefits from recent layoffs was “partially negated by the additional spend on diesel to mitigate the impact of load shedding, as well as a slight increase in direct costs, which were negatively impacted by the product mix for the quarter”.

“We also experienced an increase in the provision for bad debts, with consumers under increasing strain from the macroeconomic environment.”

The mobile operator is valued at over R15 billion on JSE, had a tough year after the company and Ramaphosa appeared at Pretoria High court where the proclamation was put aside after Telkom took the matter on review according to reports. And with the SIU investigation which obtained Telkom’s
documents. The company reported a fall in core profit of about a fifth, and revenue growth of less than 1%.

Derrick Chikanga, research manager for IT services at IDC, believes with government refusing to sell its shares, selling stakes across its subsidiaries could be a good starting point for Telkom.

“Telkom has been struggling for a while and some key reforms that include significant cost-cutting will need to be implemented to make the company profitable.

“It could take a gradual approach to disposing of its shareholding, while gauging the company’s financial performance during each disposal phase. Eventually, what will be critical is for it to raise enough cash from its disposal to invest in key aspects of its business, which include network infrastructure, increasing network coverage and quality, and attracting more customers to its network,” he said.

“Global players could potentially have the capabilities to implement the reforms to turn around the fortunes of the company. The relevant skills and expertise of such global players will be critical in implementing new ideas to make Telkom’s operations viable,” he added.