Telkom in trouble

Telkom’s interim results showed it is in trouble. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) were down 17.3%, HEPS declined by 51.9%, and BEPS was down 52.5%.

The biggest concern is rising debt. 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.

It was not just a bad six months. Telkom’s net debt increased by 2,896% over the last eight years – from R545 million in 2014 to R16.326 billion in 2022.

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

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.

Telkom CFO Dirk Reyneke downplayed these problems, saying 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 added that they are not close to their covenants – the limits at which they can no longer lend money – from banks and other lenders.

Not everyone is convinced. FNB Wealth and Investments’ Wayne McCurrie said Telkom is not a viable standalone business and that they should rekindle talks with MTN.

“They are not going to go bankrupt tomorrow, but the amount of capital investment needed – especially with 5G coming along – is beyond their reach,” he said.

Because Telkom does not have enough money to build and maintain a national mobile network, it carries a large portion of its traffic on Vodacom or MTN’s networks.

“There is no margin in that. You can see it in Telkom’s results which showed massive negative cashflows,” McCurrie said.

Standard Bank was also disappointed by Telkom’s results, especially with the decline in free cash flow, low post-paid subscriber growth, and weak fixed-line performance.

The bank said Telkom’s poor free cash flow generation and lower EBITDA are likely to increase debt.

It constrains Telkom’s ability to increase capital expenditure or raise investment in strategic initiatives if needed.

Standard Bank said that concerns about rising debt and poor cash flows would likely expedite Telkom’s value unlock strategy.

“We expect Telkom management to prioritise value unlock initiatives such as the sale-and-leaseback of towers and selling a strategic stake in Openserve to improve net debt,” it said.

“We believe that the reinstatement of a dividend is unlikely unless one or more of these initiatives are successfully finalised.”

Standard Bank maintained its sell rating on Telkom and lowered its target price from R35 per share to R27 per share.