Telkom’s big debt problem

Telkom’s net debt to EBITDA ratio increased 2,654% over the last eight years, and is getting worse.

Telkom’s interim results for the six months ended 30 September 2022 revealed that revenue declined 0.7% from R21.3 billion to R21.2 billion.

Earnings before interest, taxes, depreciation, and amortisation (EBITDA) were down 17.3% from R5.978 billion to R4.942 billion.

Headline earnings per share (HEPS) was down 51.9%, and basic earnings per share (BEPS) declined by 52.5%.

Delving deeper into Telkom’s interim results revealed a company with a rapidly increasing debt burden without the necessary growth to support it.

Telkom’s net debt increased from R14.1 billion in September 2021 to R16.3 billion in September 2022.

With Telkom’s lower EBITDA, the company’s net debt to EBITDA ratio increased from 1.1 to 1.7 over the last year.

As Telkom struggled to service its debt from earnings, it raised loans of R3.3 billion to fund the settlement of maturing debt.

These figures, although concerning, only tell part of Telkom’s debt story.

Telkom’s net debt increased by 2,896% over the last eight years – from R545 million in 2014 to R16.326 billion in 2022.

Over the same period, Telkom’s EBITDA only increased 13% – from R4.4 billion to R4.9 billion.

The result is that Telkom’s net debt to EBITDA ratio increased 2,654% between September 2014 and September 2022.

Telkom’s current net debt to EBITDA ratio of 1.7 is significantly higher than the company’s medium-term guidance of less than 1.2.

Another problem for the telecommunications operator is the decline in free cash flow (FCF).

Telkom’s FCF declined from -R839 million for the six months to September 2021 to -R1.887 billion for the six months to September 2022.

The situation looks even more dire when you go back to 2014. Over the last eight years, Telkom’s free cash flow decreased from R1.785 billion to -R1.887 billion – a 206% decline.

Without an increase in revenue and EBITDA, and with a rapid increase in debt, it is not clear what Telkom’s plan is to turn the situation around.

Telkom CFO Dirk Reyneke said although their gearing is the highest it has been in recent years, it is no cause for concern.

“We believe with R2.5 billion in cash and R2.3 billion in unused facilities, there is enough headroom to fund and invest in strategic initiatives,” he said.

He added that their debt levels remain within acceptable limits and that Telkom’s balance sheet is strong despite its increasing debt.

Reyneke added that they are not close to their covenants – the limits at which they can no longer lend money – from banks and other lenders.

The charts below show Telkom’s deteriorating financial situation over the last eight years.

Telkom’s net debt (lower is better)

Telkom’s EBITDA (higher is better)

Telkom’s net debt to EBITDA ratio (lower is better)