Perhaps ‘struggling’ shouldn’t be the acceptable time period to describe the complete Telkom group’s efficiency between April and June this yr. There’s a single division that’s buying and selling effectively: Openserve, which operates its market-leading fibre community throughout the nation.
Households that join to Telkom’s fibre are doing so by Openserve and usually use web service suppliers like Afrihost, Cool Ideas, or Axxess.
Openserve now passes 890 000 households which have fibre companies, 415 000 of that are related and paying for its companies.
It is that this unit that MTN desperately wants for a future dominated by 5G cellular connectivity, fibre-to-the-home (and enterprise) and an insatiable demand for bandwidth from its prospects.
Openserve’s fibre community spans over 169 000km – roughly double that of a mixed Vodacom/Vumatel/Dark Fibre Africa (a transaction that was introduced at the finish of final yr).
Read: Why MTN desires, no, wants Telkom
As for the remainder of Telkom?
The future doesn’t look shiny.
And that’s the conundrum dealing with the group (and shareholders).
There is an immense quantity of worth trapped in the group, even after the 23% soar in the share worth in the practically three weeks since the MTN strategy was made public.
At Wednesday’s shut, the market valued Telkom at R21 billion.
That’s nonetheless far beneath the R50 billion-odd quantity proffered by former CEO Sipho Maseko in 2020.
But take away Openserve and the cellular enterprise from the group and there’s not an terrible lot left.
The different three items – Telkom Consumer and Small Business (excluding cellular), BCX and Swiftnet (the masts and towers unit) – should not valued by the market in any respect in the present scenario, however none are literally rising.
Revenue in all three declined in the quarter, and it’s unlikely there can be development of something larger than low single digits (if there’s any development in any respect) over the medium time period. One may argue that that is the very purpose the market shouldn’t be paying a lot consideration to any of those companies inside the Telkom construction (and why Maseko set in movement the plan to checklist Swiftnet individually).
One a part of the enterprise that’s rising is cellular, however Telkom Mobile stays sub-scale. Although worthwhile, margins are nowhere close to these of rivals.
Its earnings earlier than curiosity, tax, depreciation and amortisation (Ebitda) margin contracted by a fifth – 5.4 share factors – to 23% (half of the Ebitda decline was due to “specific initiatives” to get its post-paid/contract base rising once more – contract subscribers grew by 8% however income from them is down 8.8%).
Contrast this Ebitda margin to MTN (38.9% in South Africa) and Vodacom (39.3% in SA), and you may see the downside.
Despite subscriber development of seven.8%, cellular service income really declined in Q1 (down 3.6%), one thing that was moderately predictable a yr in the past already. This means not only is it including fewer and fewer worthwhile prospects (witness the margins), it has not been in a position to develop utilization (income) sufficient to offset the declines in pricing (for instance, efficient per megabyte knowledge costs are down 14.8% year-on-year). At 17.3 million subscribers, it’s arduous to see this base rising something shut to double digits anytime quickly.
Telkom has trimmed capex to simply R1 billion in the quarter – with most of its finances allotted to fibre (Openserve) and cellular. It argues that a lot funding was “front-loaded” in the final two years due to the non permanent spectrum allotted throughout the Covid-19 pandemic.
In its full-year outcomes, it reported unfavourable free money move of R2.1 billion – usually an enormous warning signal. It says roughly half of this quantity was invested in spectrum, with “underlying negative free cash flow” of R938 million. Sure, capex might have been entrance loaded and funds might have been rolled over from the prior ensuing on this place, however let’s see what the capex and money move figures take a look at the half-year mark …
Read: Telkom burning by money as warning indicators pile up
The group introduced that the authorized separation of Openserve was full and that efficient 1 September, it could function as a subsidiary of Telkom.
Might this timing be good for a far less complicated buyout by MTN?
Its far bigger rival would have the ability to cherry-pick the components of the enterprise it desires (primarily Openserve).
It is unlikely MTN would see any worth in Swiftnet – though it may on-sell this to IHS Towers at a revenue (it bought its South African towers to the NYSE-listed operator earlier this yr).
There could also be some considering round merging BCX into MTN Business to add scale.
And it’s certainly unlikely to need the shopper and cellular enterprise – it’s virtually an impossibility that regulator Icasa would approve this.
Would authorities (particularly the related ministers), as 40.5% shareholder, approve a transaction? Much would rely upon the deal’s construction.
If the deal was off tomorrow, the Telkom share worth would collapse – and due to the first quarter outcomes, doubtless development even decrease than the place it was earlier than the information broke.
What’s the different? A principally sub-scale enterprise battling alongside as margins proceed to decline, with the market affording zero worth to most of the group?
Listen as Simon Brown chats to FNB’s Thabiso Mamathuba about the regulatory hurdles the deal faces on this MoneywebNOW podcast:
