No respite for battered Telkom

The fixed-line incumbent’s share price fell by as much as 8,8% on Friday, with analysts saying there’s unlikely to be a respite for the beleaguered company any time soon. By Craig Wilson.

It hasn’t been a good year for Telkom, or a good decade for that matter.

The JSE-listed company’s share price is down by almost 40% since January. Cabinet has put paid to management’s plan to sell 20% of its equity to Korea’s KT Corp. The price of mobile services is falling, eroding its market share. And if that wasn’t enough, it continues to be plagued by copper theft and other problems.

Unfortunately, the rest of the year isn’t looking much brighter for a company that, despite its woes, still has the largest telecommunications network in SA.

The falling share price and cancellation of the KT deal put Telkom in a difficult position. It’s going to get more expensive for it to raise debt to finance the capital it needs to pour into its network to remain relevant. Without careful management and a supportive government, its financial position could deteriorate perilously and in a short space of time.

On one hand, Telkom needs to build and maintain a world-class network — requiring billions of rand in annual investment — and on the other hand it needs to drive prices down so as to not only keep its existing customers from abandoning it for mobile solutions, but also to attract new clients.

On Friday, Telkom’s share price dropped by as much as 8,8% before recovering some lost ground in afternoon trading. Analysts say there is little support underpinning the share, especially because of uncertainty and worry surrounding government’s plans for the company.

With a market capitalisation of less than R9bn, Telkom is fast becoming a small cap. Compare its market value to the colossal R292bn of mobile operator MTN or the almost R140bn of Vodacom and it becomes clear that the market has just about lost all faith in a turnaround story materialising at the fixed-line operator.

There wasn’t any specific news in the market on Friday that may have pushed the operator’s share price to another all-time low. However, equities analyst Irnest Kaplan says part of the reason may be that hedge funds and other investors have taken short positions on Telkom, that is, they’re betting against it.

Another reason could be that investors are switching into other telecoms shares, especially MTN, which they may believe will deliver better returns. MTN’s share price has run up hard in recent weeks ahead of its interim results, which will be published on 8 August.

Another analyst, who asks not to be named, warns that without the KT equity injection to shore up Telkom’s balance sheet, the company could find itself in further distress and could even become loss-making in the near term.

Telkom’s chief financial officer, Jacques Schindehütte, said in June that the money Telkom would have received from KT Corp, even though it was far lower than the original offer, would have covered Telkom’s capital requirements for the next three years.

But the KT deal wasn’t solely about cash. It was also about the skills the Korean firm would have brought to Telkom. KT has been through many of the challenges Telkom must still face and the company is recognised as being one the world leaders in delivering ultra-fast and affordable broadband. Korea is one of the world’s most connected nations.

One has to ask what hope there is of Telkom CEO Nombulelo Moholi and her management team turning around the company’s fortunes — or at least saving it from financial ruin — if its biggest shareholder appears determined to undermine its strategy.

This situation has the real potential to turn into tragedy, not only for Telkom but for SA’s broader economy, which needs a strong, profitable and growing fixed-line incumbent providing the high-speed broadband underpinnings needed for growth.  — (c) 2012 NewsCentral Media

• Craig Wilson is deputy editor at TechCentral