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Telkom share analysis |
2011-11-21 Telkom SA Ltd is a telecommunications provider in South Africa, offering residential, business, and payphone customers a range of voice and data services.
In 1993 Telkom changed from being a government department to having a company structure. At more or less the same time MTN & Vodacom started offering cellphone services.
Interest-bearing debt has been reduced from R8.2bn to R5.9bn
Consolidated operating profit reduced from R2.9bn to R1.7bn:
the profit comes from Telkom South Africa (R3.8bn)
Telkom Mobile is running at a R1.2bn loss (how long will Telkom Mobile be running at a loss)
Other operations are running at a R0.9bn loss
After allowing for a R0.4bn impairment, finance charges and investment income; we have profit from continuing operations of R1.1bn.
Profit from continuing operations reduced from R2.4bn to R1.1bn
Operating revenue decreased from R16.9bn to R16.4bn (due to the inclusion of FIFA data revenue in the prior period, reduced fixed-line voice traffic revenue and lower switched hubbing volumes)
R15.3bn Telkom South Africa (cash generated from operations before dividends actually increased from R1.9bn to R3.0bn)
R0.3bn Telkom Mobile
R0.9bn other (iWayAfrica Group, Trudon Group, Swiftnet, Data Centre Operations- Cybernest, the Group's Corporate Centre)
Operating expenses increased from R14.2bn to R15.4bn
Employee expenses reduced from R4.8bn to R4.5bn (due to savings of the voluntary employee severance packages offset by an average salary increase of 7%)
Selling, general & administrative expenses increased from R2.5bn to R3.1bn
Depreciation, amortisation, impairment & writeoffs increased from R2.4bn to R3.2bn (due to the scrapping of assets due to technical obsolescence)
Results from operating activities decreased from R3.0bn to R1.2bn
To what extent are MTN, Cell-C, Vodacom and Neotel going to take Telkom's business going forward? They can now provide the fixed lines between their towers. A convergence of data and voice services is taking place, with voice over internet protocol.
Excluding discontinued operations, a yield of some 2.5% was achieved. If 8ta breaks even, this yield increases to 16.1%
Voice traffic is reducing by some 5% p.a. on Telkom's fixed lines
With most of Telkom's value tied up in its tangible net asset value (R26bn), the question arises of how accurate the valuation of these assets are and by how much their value is expected to grow relative to inflation. The this end, the increase in writeoffs due to technical obsolescence is interesting - how much of this is still to come?
Tangible assets are listed as follows (in R'bn)
Property, plant & equipment |
37 |
Investments |
2 |
Inventories |
1 |
Trade & other receivables |
6 |
Cash & financial assets |
3 |
Other |
3 |
Is property, plant & equipment really worth R37bn?
"Telkom and KT Corporation have entered into discussions regarding a potential strategic venture that would, if implemented result in KT corporation acquiring a strategic equity shareholding of 20% in the post-issue ordinary share capital of Telkom and the Companies entering into long-term agreements to formalise the relationship and identified areas of mutual strategic and business cooperation."
I know Cosatu are opposing this, but this is particularly encouraging to me as a potential shareholder, as KT Corporation have been instrumental in developing Korea's broadband revolution. As a shareholder, KT corporation would have the bottom line in mind and assist Telkom in developing global best practice standards.
Telkom's yield of 3% is unattractive and it is facing plenty of competition which will continue threatening its margins. This isn't fully compensated by the discount to tangible net asset value it is trading at. I'd start becoming interested at a share price of R23 (it's currently trading it R29).
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