Stay away from Telkom – analysts

Prominent analysts have warned investors to stay away from Telkom as the company is hamstrung by legacy technology and a lack of scale.

Telkom’s financial results for the year ended 31 March 2023 showed that the company is in deep financial trouble.

Its net debt increased by 19.3%, free cash flow declined by 30.9%, and net debt to EBITDA increased from 1.2 to 1.8.

Apart from Telkom’s mobile and fibre divisions, there was a sea of red in the operators’ latest financial results.

Its Internet subscribers declined by 20%, fixed access lines declined by 21%, and fixed-line voice traffic is down 18%.

Telkom’s legacy copper business is essentially dead, which prompted an impairment of R13.017 billion on Openserve and Telkom Consumer.

Many investors hoped an acquisition of some sort would bolster Telkom’s share price, but those hopes have been scuppered.

In early July, Telkom announced that it terminated discussions with a consortium headed by former CEO Sipho Maseko.

“It is the board’s view that the indicative proposal is not in the best interest of shareholders and that the current strategy will yield better value for shareholders,” Telkom said.

More recently, Communications and Digital Technologies Minister Mondli Gungubele said the government isn’t interested in selling its 40% stake in Telkom.

Instead, Telkom and the government are in talks to partner in rolling out broadband products across South Africa.

The partnership will involve Telkom’s businesses, including Openserve fibre unit, state-owned Broadband Infraco, and broadcast transmission services provider Sentech.

Analysts warn investors against Telkom

Prominent analysts, including FNB Wealth & Investments’ Wayne McCurrie and Sasfin Securities’ David Shapiro, warned investors to stay away from Telkom.

McCurrie told Business Day TV that he is worried about Telkom because it does not have the scale to effectively compete against Vodacom and MTN.

“In telecommunications, you must be a big gorilla. Otherwise, you stand no chance,” McCurrie said.

“The capital expenditure to maintain your own network and keep up with the latest technology is too large for smaller players to afford.”

He highlighted that Telkom’s legacy business, especially its voice revenue, is under severe strain.

Although there is good mobile growth, Telkom still relies on roaming agreements with Vodacom and MTN for good coverage.

McCurrie said the government’s plan to partner with Broadband Infraco and Sentech is from 20 years ago.

“We all know about the government’s track record in implementing things. Lots of talk, action plans, and good ideas, but no implementation,” he said.

Shapiro said Telkom has an albatross around their neck in the form of its legacy copper landline network.

“They have to keep servicing these clients and keep the business going, which is costing them millions,” he said.

Telkom is also not growing its other business units fast enough to discontinue its legacy business completely.

“Stay away from Telkom. If you want to buy a telecommunications company, choose between Vodacom and MTN,” he said.