Johannesburg, 22 Jul 2004
Moody`s yesterday upgraded Telkom`s senior unsecured long-term foreign currency debt rating to Baa1 from Baa3. The outlook is stable.
The upgrade reflects Telkom`s continuing operational progress. While revenue increased marginally within Telkom`s fixed-line operations in the year to March 2004, there was a 23% revenue increase at the 50% Telkom-owned Vodacom. This helped Telkom (which proportionately consolidates Vodacom) achieve an 8.8% increase in group revenues to R40.8 billion.
The main driver for the continuing strong improvement in operating cash flow, however, remains Telkom`s persistent attention to its cost base. Operating costs with the fixed segment fell by 3.5% in the year to March 2004.
The continued reduction of costs in the fixed-line business, together with the strong revenue growth in the mobile segment, significantly enhances Telkom`s operational free cash flow, as evidenced in the year to March 2004, when free cash flow prior to dividends increased from ZAR4 billion to ZAR9 billion. Moody`s believes that Telkom will continue to develop its operational cash flow in the medium-term.
The improvement in Telkom`s EBITDA margins (from less than 28% in 2000 to 40% for the year ending 31 March 2004) is, among other things, attributable to significant headcount reductions. Moody`s is of the opinion that despite benefits brought about by the decline in employee numbers, Telkom still has scope to continue benefiting from efficiency initiatives.
Telkom`s historically high capex levels (close to 57% of revenues in 1999), have been substantially reduced (13% of revenues during the year to March 2004), following the completion of a five-year programme of modernising, upgrading and extending the telecommunication network.
Telkom has a target capital structure of between 50% and 70% in terms of debt to equity. Moody`s estimates that Telkom is currently around 60%, with scope for future improvements.
Moody`s does not expect the soon-to-be-licensed second network operator to have an initial major competitive impact, although it may reduce Telkom`s market share and operating margin, particularly in segments such as business customers and data services. Moody`s, however, believes a combination of efficiency and service improvements strongly positions Telkom to meet new competition.
Currently the South African government owns 38.3% of Telkom, which government has agreed to hold until March 2005. Moody`s did not factor any government support into Telkom`s rating. Moody`s said it was unaware of any government plans to further sell down its stake, but should they decide to do so, such activity would be considered ratings neutral.
Ratings affected by the review are 500 million euro, 7.125% Eurobonds due on 12 April 2005.
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