Telkom’s growing debt problem

Telkom’s net debt increased by over 3,200% over the last decade. It has reached concerning levels as revenue growth has been sluggish.

On Tuesday, Telkom released its results for the interim period of its 2024 financial year. It increased revenue by 2.5% to R21.78 billion, while profit grew 52.3% to R976 million.

The market welcomed the results, and Telkom’s share price jumped by 10%. Investors were clearly happy with what they heard.

However, debt remains a challenge for the operator. Telkom is entering dangerous territory as its interest-bearing debt has reached R21.7 billion.

Subtracting Telkom’s cash and cash equivalents from its debt leaves investors with a net debt figure of R18.16 billion.

The rate at which Telkom’s debt has been increasing is alarming compared to its financial performance.

Telkom’s revenue has remained mostly flat. Over the past seven years, it only experienced an average annual revenue growth of 1.05%.

Its net debt, in comparison, has seen a significant increase over the same period, growing at an average annual rate of 30%.

Put another way, Telkom’s net debt increased by 3,232% over the last decade – from R545 million in 2014 to R18.16 billion in 2022.

When companies obtain additional debt funding, it must be employed to at least cover its financing costs.

Companies, therefore, need to generate growth from the debt that is employed. This has not happened at Telkom.

In Telkom’s case, the debt is a burden to shareholders as it continues to increase the company’s costs and put downward pressure on profits.

Telkom’s debt has been increasing much faster than its EBITDA (Earnings Before Interest Tax Depreciation and Amortisation).

In 2016, Telkom’s net debt was only 10% of its annual EBITDA. Today, it is 180% or 1.8 times the size of its EBITDA.

Telkom’s financing expenses are also starting to add up. It is now three times greater than in 2016, while revenue is only 7% higher.

In the interim period, Telkom borrowed R8.7 billion from committed facilities to repay maturing bonds and other maturing loans to the value of R8.3 billion.

Currently, Telkom’s performance is not justified by its debt levels, and the increasing debt levels are not delivering any real growth.

As such, Telkom must address its rising debt levels as it is currently destroying shareholder value.