On Monday (8 February), Telkom published an update for the first 9 months (to end December 2020) of its current financial year (FY20). Judging by its share price rally over the past week or so (the share is up c. 27% from 2 February to 8 February’s close), we think there was significant expectation heading into this update, that Telkom was going to say something interesting about its progress on unlocking shareholder value (it has not previously published an update like this).
However, on the value unlock story, the company only said that “management remains firmly on course with the value unlock strategy having recently concluded a successful market sounding exercise to gauge interest on Gyro Masts and Towers. Unlocking value from our portfolio of businesses is a key component of our capital allocation framework and will afford management flexibility to rebase the balance sheet and reinvest in the business.” This is very much unchanged from Telkom’s comments when it announced its interim (1H20) results in November, so there was nothing new on this front. The lack of apparent progress since the release of its interim results was a little disappointing, although the strong rally in the share price, following the announcement, suggests the strong operational performance, relative to market expectation, was more than enough to offset this. On its progress with steps to unlock value, focus will now be on the next update which is likely to be when Telkom reports FY20 results on 24 May 2021.
On the operational side, we highlight the following:
- Revenue rose 0.9% vs a decline of 0.4% at the interim stage. This implies a decent rebound in 3Q21 and, while not exactly stellar in absolute terms, for Telkom which is managing the rapid decline of its legacy fixed voice business, managing to grow revenue at all is a good outcome.
- A 26.2% decline in fixed voice and interconnection revenue weighed on the results.
- EBITDA growth of 8.5% YoY, implies good cost control, and significant headcount reduction driving positive operating leverage.
- Capital expenditure was down from R5.5bn to R5.1bn, although Telkom said that there was an acceleration in capex in the company’s 3Q20.
- Free cash flow generation of R1.6bn, inclusive of a staff restructuring charge of R1.3bn, was pleasing and is significantly up on last year. This should lay to rest any lingering doubts that Telkom might be forced to come to market to raise capital to fund the upcoming purchase of spectrum.
- The firm’s mobile business continued to sustain impressive growth momentum off what is now becoming a sizeable base – service revenue was up 40.7% YoY.
- Active subscribers grew by 25.9% to 14.9mn, with a 23.9% rise in blended average revenue per user (ARPU) to R108. Telkom did highlight that the post-paid market remains challenging in terms of new connections due to local consumers being under pressure. However, the company also said that the prepaid market “remains the driver of new connections” – prepaid customers grew 30.8% to 12.3mn.
As for the Group’s divisional performances, it looks like a continuation of past trends, although Telkom did note in the update that SA’s macro situation was slightly better in 3Q20. In terms of business segments, we highlight the following:
- The Consumer business, which houses mobile, continues to be the growth driver due to increased demand for connectivity as more South Africans work and study from home because of the COVID-19 lockdowns. Telkom recently overtook Cell C to become SA’s third-biggest mobile network.
- BCX’s performance remained weak due to pressure on corporates – its YTD revenue was down 9% to R11.9bn.
- Openserve (its wholesale networks business) came under pressure due to a decline in fixed voice usage and despite a demand increase for fixed connectivity. Its YTD revenue was down 12% to R10.2bn.
Considering that Telkom trades on an extremely undemanding rating of <4x EV/EBITDA, we think that this is a very solid operational result. However, given the time that has elapsed since management began talking about the potential to unlock value through possible corporate action, pressure is likely to build for Telkom to show more tangible progress in this regard.
