Telkom’s big problem

Telkom was once the dominant force in the South African telecommunications market and a darling on the JSE.

However, a string of bad decisions and strategic blunders has caused the company to hit a wall, and it is now struggling to grow revenue and profit.

Telkom was founded on 1 October 1991, when the Department of Posts and Telecommunications (DPT) was divided into Telkom and the South African Post Office.

In 1991, with growing demand, Telkom had 3.5 million fixed telephone lines. Two years later, it entered a joint venture with Vodafone and the Rembrandt Group to form the Vodacom Group.

In the 1990s and early 2000s, Telkom was untouchable. It had a legally protected fixed-line monopoly, it owned half of Vodacom, and it was printing money.

If you wanted a telephone line, an Internet connection, or a data service, there was only one choice – Telkom. It could charge what it wanted.

This dominant position gave it a perfect opportunity to maximize shareholder value by listing on the JSE in 2003.

As a monopoly, Telkom quickly became a darling among investors. In less than three years, its share price climbed from R28 to R169.

With a 50% shareholding in Vodacom and the freedom to keep telecoms prices sky-high thanks to its monopoly, Telkom was in a situation that all companies dream about.

However, Telkom’s golden years did not last. In 2007, after the second national operator was licensed, Telkom started to face competition.

In 2008, the High Court ruled that existing value-added network services (VANS) licenses could be converted to individual electronic communications network service (I-ECNS) licenses.

This meant that all Internet service providers and other VANS license holders could now build and operate their own networks. This was the death knell of Telkom’s fixed-line monopoly.

To add to its woes, Telkom foolishly decided to sell its 50% stake in Vodacom and launch its own mobile operator.

Another big blow came in July 2009, when Seacom launched services in South Africa, offering an affordable alternative to Telkom’s SAT-3/SAFE undersea cable monopoly.

Bit by bit, Telkom’s monopoly was eroding, and the company struggled to adapt to a fast-evolving and increasingly competitive market.

Telkom scored another own goal by allowing companies like Vumatel and Frogfoot to steal market share in the fixed-line broadband market.

Telkom used to own 100% of the fixed broadband market. Today, its market share has been whittled down to only a small percentage.

Its other big ventures, like going into Nigeria, trying to launch media services, and buying BCX, also did not bring the riches it had hoped for.

Today, Telkom is a shadow of its former self. Its biggest challenge is growth. To date, it has failed to show that it can achieve top and bottom-line growth.

Telkom revenue

Telkom’s revenue has been flat for years. It has failed to show any meaningful growth over the last few years.

Telkom net profit

Telkom has also struggled to grow its net profit. From 2015 to 2019, it generated around R3 billion in net profits. In the last full year period, it only generated R1.9 billion.

BCX

BCX is an ICT company providing cloud services, cybersecurity, and other software solutions. Telkom purchased BCX in 2015 for R2.7 billion.

Telkom planned to transform itself from a telecommunications player to a diversified ICT company. However, it did not work out as planned.

Since Telkom bought BCX, its revenue has been on a downward spiral. When Telkom first acquired BCX, it generated around R19 billion.

In its latest annual report, Telkom reported that BCX generated R11.8 billion in revenue, indicating a decline of R7 billion.

Share price

Telkom’s share price has experienced a big decline. Over the last five years, it has fallen from around R100 per share to its current level of around R27 per share.

The share decline illustrates the lack of trust the market has in Telkom’s ability to show meaningful growth.

Telkom is currently valued at a price-to-earnings (P/E) ratio of around 7, which is lower than the average ratio since 2016 of around 10.4.

This is the same when considering its price-to-sales (PS) ratio, which currently stands at around 0.3 compared to its historical average of 0.6.

The decreasing valuation of Telkom is no surprise, considering that its net profit margin fell from over 12% to its current level of 4.4% over the same period.