Telkom, which is reviewing its options in the mobile space, has put a lid on capital spending, and is targeting a return to growth that will see its dividend policy reinstated in the 2015 financial year.
Telkom has set three-year targets for growing revenue and earnings before interest, tax, depreciation and amortisation. In what is left of this financial year, it aims to stabilise revenue with a bid to put its top line on a growth path by 2015.
However, its traditional fixed-line voice base continues to come under pressure, a move that was not offset by gains in other areas of its business in the first half.
Earnings before interest, tax, depreciation and amortisation are predicted to gain between one and two percentage points in 2014, 2015 and 2016. As Telkom moves towards these growth targets, it will reinstate its dividend in the next financial year.
The operator paused dividend payouts after a tumultuous 2010 financial year, which saw it report a R179 million gain from continuing operations. This was offset by a loss from discontinued operations of R296 million.
Fixed voice drag
In the six months to September, Telkom reported a substantially improved bottom line, but this was thanks to a once-off change in the way it treats post-retirement benefits. Net profit, stripping out this amendment, gained 41.1%, to R773 million, off flat revenue of R16.2 billion.
Operating revenue was boosted slightly, by 0.3%, thanks to higher mobile and IT business services revenue, but was partially offset by lower fixed-line voice revenue. Headline earnings, stripping out the once-off gain, grew to 224.2c a share, from 101.1c a share.
The bottom line improvement was mostly thanks to lower termination rates, which trimmed payments to other mobile operators, and gains on the back of a weaker rand. Telkom has also stripped out last year's provision for the R389 million Competition Tribunal fine from the first half of last year.
Opportunity beckons
Group CEO Sipho Maseko says its results are indicative of a "challenging industry environment" as underlying operational earnings remain "under pressure".
However, he says: "There is a window of opportunity for Telkom to become the leader in data transmission, but we must act with speed and determination to commercialise our competitive advantage."
Thanks to its people, technology and infrastructure, Telkom has the "unique opportunity to meet the needs of all its stakeholders: our shareholders, customers, employees and the broader society in which we operate", says Maseko.
To achieve this aim, it must become financially healthy, deliver "superior" customer service and "drive execution capability and connectivity to own the home", says Maseko. Telkom must also invest in the right technologies, and achieve the support of all its stakeholders, he notes.
Maseko says the board has already resolved several long-term issues, such as its previous R12 billion write-down of legacy assets, settling Competition Commission matters and reviewing its post-retirement medical aid liability.
Careful spending
Maseko adds Telkom is "instilling a disciplined approach to capital allocation". It will invest in areas where it leads, and place more emphasis on productivity and returns, he adds.
Capital spending for the full year will be capped at a "prudent" R6.5 billion, while Telkom reviews its options, particularly in mobile, says Maseko. Telkom's guidance for capital spending shows it will drop from the current level of between 18% and 21% of revenue to between 14% and 17% in the 2015 and 2016 financial years.
During the first half, capital spending gained 49.5%, to R3.2 billion, of which R815 million went into its mobile operation, and another R1 billion into its network evolution. Telkom says the first half of the year was a "repositioning" period for its mobile operation.
Some R1 billion was also spent on "baseline" items, which was mostly to roll out technologies to support the growing data services business, links to the mobile cellular operators, and access-line deployment in selected high-growth commercial and business areas.
"Telkom has the most extensive infrastructure network in the country. We need to monetise that advantage and drive the take-up in high-speed broadband services enabled by the new-generation network. The National Broadband Plan is an opportunity for Telkom to improve the scale and efficiency of its network."
Maseko says Telkom's capital structure is sound, despite paying severance packages, the due portion of competition fines, and an increase in its capital spending. "We continue to invest in modernising our network to provide high-speed, quality and reliable broadband to South Africans."
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