Telkom is like a big ship stuck in the rocks

by Gugu Lourie 0

Nearly a year after Telkom CEO Sipho Maseko submitted his turnaround plan to the board, which he quietly started implementing – there are signs the recovery efforts are bearing fruit.

The strategy has led to good progress in correcting market distortions and regulatory imbalances between government and the regulator, Icasa.

Furthermore, Africa’s leading fixed-line group has strengthened its balance sheet and looked at its capital programme, which led the company shaving off 1 billion rand.

Telkom also managed to curtail post-retirement medical aid liability for in-service staff, which was draining its balance sheet. The company is also de-risking its cash-guzzling mobile operation by signing a heads of agreement with [DATA MTN:MTN South Africa] to take over financial and operational responsibility for the roll-out and operation of its radio access network (RAN).  This move will help with reducing capex intensity at the mobile arm and manage costs. The company is also seeking to strengthen its enterprise business through acquisition of technology firm [DATA BCX:Business Connexion].

Speaking at a media dinner this week Maseko said: “I think the real opportunity about Telkom is such a big ship stuck in the rocks. I think if we can dislodge it, momentum will help us”.

The [DATA TKG:Telkom] CEO said: “It’s so big … if we get it moving in the right direction it is going to be such a machine. That once it starts going, that’s a good thing about big organisations … really light it up. It’s going to be unstoppable. It’s going to be awesome.”

This is a different analogy from the one Maseko used when he joined Telkom 14 months ago. At the time he likened the company to an aeroplane, which was losing altitude very fast with no one in control.

Telkom’s financial framework wasn’t working, revenues were in decline, and costs were rising faster than revenues. Matters were not helped by a demoralised staff.

What’s encouraging now is that Telkom’s headline earnings per share (EPS) is up 35 per cent to 388 cents per share. Headline EPS is a true major of profits in South Africa. Free cash flow remained strong at 1.2 billion rand, after capital investment of 6.5 billion rand.

The group is lowly geared, with year-on-year net debt decreasing 0.8 per cent to 2.1 billion rand, which provides Telkom with financial muscle to fund its capital expenditure programme.

 “I think we are now in control. We are still in a low altitude. But at least we still in control and (the plane) not going to crash into the water or buildings,” assures Maseko.

Telkom also confronted the reality of its financial woes. It took a 12 billion rand impairment.

“It was a huge disconnect to what we thought the firm was worth and what the market thought it was worth. We informed the board of a 20 billion rand impairment and our market value was 8 billion rand, but the book value was 30 billion rand,” explained Maseko.

He believes that this began the process to “turbo-charging” the turnaround process.

Telkom even took extreme decisions such as stopping the supply of bottle water. They talked to suppliers to give them discounts – some did and others didn’t.

It also confronted the ‘big elephant in the room’ which created disconnect between the company and the big shareholder, the government.

They started engaging transparently with the government: created good channels with the Presidency, department of communications and treasury.

The quality of board chaired by Jabu Mabuza also helped.

“They (government) haven’t interfered with us at all. None of them have asked us to do anything,” said Maseko.

This gave Maseko and his executive a chance to work strategically, where they wanted to see the business in 5, 10 and 15 years.

However, the company is still likely to be faced with continued pressure.

“The headwinds we’ll be confronting are going to be very strong. The economy is soft and disposable income is getting tight. People will be making very serious choice about how they spend their money, and what they need to spend it on. So, we are competing with a lot of things.”

Telkom still want market distortions to be corrected.

“We still want parity between fixed termination rates and mobile termination rates. It’s an outcome we seek. It will be difficult and we are engaging with the regulator on this.”

Local loop or last mile unbundling (LLU) is also one of the turbulences that Telkom has to confront. LLU is the telecoms infrastructure that delivers telephony services from Telkom’s infrastructure to a client’s premises.

“Our thesis is simple … let’s have a full debate about the local loop, not just the Telkom local loop. Let’s have a conversation about the DStv loop and the mobile loop,” said Maseko, adding that singling out Telkom in this debate was unfair.

“All local loops must be in the mix, not just the Telkom’s local loop. In that way, there must be an equitable approach. Try to anchor this debate in a right way. We are pushing very hard for that.”

With Telkom appearing to be moving forward in a right direction, executives anticipate the fixed-line operator may turn the corner a lot quicker and they are planning to reinstate the dividend in the 2015 financial year.

“It’s a great start – it’s like a boxing match, and we’ve just completed one round. We haven’t been knocked out, and not that we have won the round, but we’re still on our feet and still have to go 14 rounds. The energy is really coming back,” said Maseko.