Telkom's profit has taken a knock amid plans by government to dispose of a portion of the telco's shares.
This morning, Telkom announced group interim results for the six months ended 30 September.
The group recorded profit after tax of R1.659 billion (September 2016: R1.76 billion) and a 1.9% decrease in earnings before interest, tax, depreciation and amortisation (EBITDA) of R5.2 billion (September 2016: R5.3 billion), resulting in a 7.4% decrease in headline earnings per share (HEPS).
Government, which holds a 39% shareholding in Telkom, will soon establish a task team to engage Telkom on the sale of a portion of its shares, to avoid a risk of an expenditure ceiling breach of R3.9 billion.
This was recently revealed by telecommunication and postal services minister Siyabonga Cwele. In his 2017 Medium-Term Budget Policy Statement, finance minister Malusi Gigaba also said a portion of government's 39% stake in the telco would be sold.
Increased competition
Operating revenue declined slightly by 0.6% to R20.1 billion mainly impacted by the weak operating environment, the company says, adding the negative revenue impact was higher than expected as a result of deferred corporate ICT spend, reduced spend in the public sector as well as pricing pressures in the wholesale environment.
Telkom Group CEO Sipho Maseko says the first half of the year was characterised by a tough economic environment and increased competition.
"We saw corporate businesses defer their spend on information, communication and technology (ICT) as a result of an uncertain political, economic and policy environment. Even though South Africa exited the technical recession in the second quarter of the year, business confidence remains very low, with a lack of appetite for investment by corporate businesses. Lower spend from government placed a further damper on ICT spend in the public sector."
According to Maseko, Telkom Group performance was negatively impacted by the challenging economic environment.
He explains that Telkom subsidiary BCX suffered due to is exposure to corporate businesses and the public sector, which are both under pressure.
"In the short-term, BCX has accelerated cross-selling opportunities across the customer base, ensuring that we retain our customers," he notes.
However, Telkom's mobile business growth trajectory continued in the period with strong growth in active customers and stable average revenue per users (ARPUs) resulting in an increase of 43.2% in mobile service revenue.
"The strong mobile growth which boosted the group's performance was underpinned by an expansion of our network, distribution and the launch of innovative products which were well received by our customers."
According to Maseko, Openserve continued its journey of transforming and modernising the network. "We expanded the fibre ecosystem with the purpose of stimulating the digital economy. Improved processes and efficiencies led to an increase in the connectivity rate of the homes passed.
"In the first half of the year, we connected more than 40% of homes passed, while the active connectivity rate for the entire base is 24.5%. With a strong focus on bringing value to our customers, Openserve has brought prices down in the past 12 to 18 months with the recent 25% price reduction in IP Connect in the first half of the year."
Investment priorities
Maseko says investment in key growth areas, such as fibre and mobile, remains imperative to ensure the company is focused on its medium- and long-term strategy.
To respond to the revenue headwinds, Telkom says it continued to aggressively drive its multiyear cost-efficiency initiatives as part of its ongoing business transformation, which included the rationalisation of vacancies and consolidation of positions to align with the new operating model.
These measures have had a positive impact on ensuring expenses are kept well below inflation, the company says.
HEPS decreased 7.4% to 303.9c mainly as a result of lower revenue, says Telkom. Basic earnings per share decreased 7% to 316.9c.
Capex increased 9.2% to R3.974 billion with capex to revenue of 19.8%. "We remain cognisant of revenue pressures and we are disciplined in extracting returns from our capital investment."
Mobile and fibre remain key capex focus areas and Telkom witnessed strong returns in the form of service revenue growth of 43.2% in mobile and an active connectivity rate of 24.5% for fibre.
The mobile business capital investment for the period increased 56.3% to R1.185 billion. The largest contributor to this spend was the roll-out of the mobile network, on 3G and FDD LTE for mobility-led services, as well as TDD LTE/LTE-Advanced for nomadic data services.
"To this end, we increased our sites by 24.1% to 3 445, of which 1 945 are TDD LTE-enabled and 114 are LTE-Advanced. Furthermore, we completed re-farming of the 1 800MHz spectrum to enable FDD LTE on the older sites," Maseko says.
Despite the increase in net debt, including financial assets and liabilities to R7.6 billion from R3.4 billion as at 30 September, Telkom says its group capital structure remains strong with a net debt to EBITDA ratio of 0.7 times.
The operator says the decline in fixed consumer broadband subscribers exhibited over the past few years has moderated, with the base stabilising in the last two months.
"We continue to see significant growth in fibre customers albeit from a low base, driven by an increase in new-to-franchise business as well as migration of DSL customers to fibre. Our packages are strengthened by the inclusion of uncapped data, which customers can use to download and stream rich media content," Telkom says.
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