Telkom pays the price for Multi-Links

The company is looking for other revenue sources, says Telkom CEO Reuben September.

This is the fourth report in which Multi-Links has trimmed Telkom's results, and the market is beginning to express concern over Telkom's broader growth strategy. In the year to March, the company wrote off R1.7 billion against the Nigerian operation.

Telkom acquired the remaining 25% shareholding in Multi-Links in January for $130 million (about R1.224 billion), after buying 75% of the company in May 2007 for $280 million (about R1.96 billion).

Impairing the Multi-Links deal led to basic earnings per share dropping sharply by 141.2% to a 150.2c. A year ago, the company reported basic earnings per share of 364.5c.

Headline earnings per share from continuing operations also took a knock, decreasing 37.9% to 242.2c off the back of higher operating expenditure, which included the higher-than-expected salary settlement earlier this year.

However, Telkom scored with its sale of 50% of Vodacom, which was spun off and listed on the JSE in May. The Vodacom transaction accounts for profit of R40.4 billion, which was more than double its operating revenue of R18.7 billion. Operating revenue excludes Vodacom, which is held as a discontinued operation under accounting rules.

Operating profit lost 12.2% to R5.1 billion, which resulted in a lower operating margin lower of 27.3% from a year ago, when it was 32.3%. Telkom says this is mainly due to Telkom SA having higher operating costs.

New strategies needed

“The impact of competition and the weaker economic environment are evident in the Telkom Group's financial results,” says CEO Reuben September.

“The negative effect of growing competition and fixed to mobile substitution is starkly highlighted in the 9% decrease in Telkom South Africa's traffic revenue. This continuing trend justifies the imperative for our group to enter the mobile market and particularly the mobile data market,” he adds.

Telkom's fixed-line penetration has continued to drop, and is now at 8.9% of the population from 9.3% a year ago. This means only 4.4 million South Africans have access to fixed-lines.

“Our strategy seeking to re-position the Telkom Group is imperative given the tough operating environment. Similar to the strategies of other leading operators in the world, we are focusing on growing other revenue streams to compensate for the decline in fixed voice revenues,” says September.

He explains that the company is expanding into other geographic markets and domestic markets; for example, the data centre operations and its mobile strategy.

However, not everyone is as confident as September. Chris Gilmour, an analyst with Absa Investments, says the numbers “endorse my long-held view that Telkom has a lot to do in convincing the investing public that life without Vodacom actually means something”.

The results sent Telkom's shares sharply down before they recovered somewhat to trade at R39 just before 3pm today, which was a 1.52% drop on the opening price of R39.60.

Related stories:

• Vodacom listing hits Telkom earnings

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