Telemasters – tread with caution

Telemasters has faced a challenging financial period, and the data shows that potential investors should be cautious when trading in the share.

The company was founded by Mario Pretorius and J. M. Oelofse in 2006 and has been listed on the JSE Alt-x since 2007.

Telemasters started as a specialist tele-management and business communication strategy player that focussed exclusively on the corporate and SME market in South Africa.

It now describes itself as a technology-focused investment company with a “key focus on enhancing digital transformation, accelerating smart working environments and empowering the gig economy”.

The Telemasters Group consists of four entities:

• Catalytic, which provides connectivity, cloud services, and cyber security.
• Contineo Virtual Communications, which provides voice and contact centre services, analytics, and productivity tools.
• PerfectWorx, a networking systems integrator specialising in IP voice products.
• Ultra DC, which owns and operates data centres.

Despite its growing portfolio of companies and product offerings, Telemasters has struggled to grow its top line. Revenue declined from R121 million in 2016 to R76 million in 2021.

In the previous financial year ended 30 June 2021, the company faced additional headwinds and recorded its first loss in a decade.

The R3.9 million loss was its worst performance since listing on the JSE in 2007.

There were three reasons for the disappointing earnings:

1. Telemasters experienced a 4.6% – or R3.65 million – decline in revenue due to reduced demand for corporate voice minutes as more people worked from home.
2. Catalytic is involved with legal proceedings, which created a loss provision of R3.1 million.
3. A re-assessment of the companies’ assets triggered a reduction in the estimated useful lives, creating an additional depreciation expense of R1.9 million.

Despite the challenges in 2021, Telemasters remained upbeat about its prospects – especially its data centre business.

With all of this in mind, it raises the question of whether Telemasters are trading at realistic levels.

The company’s shares are very thinly traded, and the lack of liquidity means its share price is very volatile.

After its listing in 2007, Telemasters’ share price rose to R2.89 per share and then declined to a low point of R0.28 per share in 2015.

Over the last year, the share price ranged between R0.90 and R1.50.

One way to assess whether these levels offer a buying opportunity is to examine the company’s dividend history.

To determine an intrinsic value range for Telemasters, we used a dividend discount model with three assumptions:

1. A no-growth dividend into perpetuity.
2. A 5-year dividend growth at its fundamental growth rate of 3% followed by no growth into perpetuity.
3. Constant growth into perpetuity at the fundamental growth rate of 3%.

Telemasters’s intrinsic value from the valuation models ranges between R0.60 per share with a no-growth model to R0.87 per share with 3% growth into perpetuity.

With the financial challenges Telemasters faced last year, a share price range between R0.60 to R0.64 feels realistic.

It should be noted that these valuations can change dramatically should the telecommunications environment prove favourable for Telemaster.

Until then, these valuations suggest that Telemasters looks overvalued at current levels.