South Africa: Telkom results reflect a company at the crossroads

Telkom SA SOC Limited today reported its 2013 annual results with  an increase in profit after tax, excluding a R12 billion impairment, of R501 million from R179 million in the prior period. The impairment was taken to bring the net asset value of the Group in line with current market realities.

Sipho Maseko, group chief executive officer at Telkom. (Image source: Telkom)

Executive management reiterated the company’s push to focus on data, on its next generation network and on customer service to strengthen operations and address challenges.

Sipho Maseko, group chief executive officer at Telkom, was forthright in his overview of challenges the company faces and mentioned specifically financial performance (revenue poerformance and its decline of 2% per annum), costs and the ability to cement and leverage off its mobile strategy.

Revenue declined 1.7% to R32.5 billion largely as a result of continued pressure on the Group’s fixed line operations. Data revenue, which constituted 33% of total revenue, increased 5.5% as a result of a 5.2% increase in the number of ADSL subscribers to 870,505.

Operating expenses increased 2.2% to R32.0 billion for the year. This was primarily due to increased cost of procurement, provisions for voluntary severance packages, a Competition Tribunal fine and other legal matters.

Lower revenue and higher operating costs placed strain on EBITDA, which declined 16.8% to R7,109 million. Notably, however, free cash flow remained strong at R2,132 million after capital investment of R5,738 million, which increased 20% year-on-year. This can be largely attributed to the substantial investment in the upgrade of the Group’s network.

Telkom remains lowly geared, with net debt decreasing 46.0% to R2.1 billion from the prior period. Strong cash flow from operations and low gearing places the Group in a solid position to fund its capital expenditure programme.

The Group reported a basic earnings loss of 2,276.2 cps as a result of the inclusion of the impairment. Headline earnings per share was 87.0cps, which is a 73.2% decrease from the prior period.

“Our results reaffirm the need to take bold action to turn around the Group’s financial trajectory,” said Maseko. “Despite the current financial performance, there is significant opportunity for Telkom to build a profitable and sustainable business that is able to support South Africa’s economic development.”

“Success will require a complete transformation of the Group. A full strategic review is currently underway focusing on medium and short-term interventions to unlock value. Tough decisions will have to be made, particularly regarding costs.  In this regard our immediate focus will be reviewing our staff numbers, optimising our property portfolio and decommissioning of unprofitable services. Furthermore, it is critical for us to put our customers at the centre of what we do to improve our service delivery and enhance their experience. The upgrade of Telkom’s network, which will accelerate over the medium-term, is essential to achieve this objective,” he continued.

Telkom management says the company is well positioned through its unique fixed line infrastructure and network to play a vital role in the rollout of broadband on a commercial basis.

As part of its bid to placate what the company’s management acknowledges to be frustrated shareholders and partners, going forward the company plans to adopt a ruthless approach to the execution of its intervention strategy. In the short term, this strategy involves returns, costs and customer service.

Chris Tredger, Online Editor