8ta drags down Telkom's earnings

Telkom's mobile arm, 8ta, has made an operating loss of R1.1 billion, which weighed on the telco's earnings for the year to March.

Telkom launched its mobile arm last October, attracting about 200 000 new subscribers in its first two months of operation. However, getting SA's fourth mobile operator off the ground has cost Telkom.

In a trading update published yesterday, the telco said normalised profit from continuing operations will be lower in the year to March, because of a R1.1 billion loss “relating to the start-up of the mobile business”.

WWW Strategy MD Steven Ambrose says the operating loss from 8ta is not unexpected as telcos are capital-intensive. Telkom may have legitimately expensed as much of the cost as possible through the income statement instead of depreciating assets over time, he explains.

Ambrose says the mobile operator is likely to run at a loss for the next two to three years as it builds a network and gains critical mass.

Telkom previously said it expects to spend about R6 million rolling out infrastructure over a five-year period. It has a five-year national roaming agreement with MTN SA, which gives it access to MTN's 2G and 3G network throughout SA.

Its voluntary retrenchment programme also weighed on earnings as it spent R739 million on severance packages. Telkom offered more than 1 650 permanent employees voluntary retrenchment packages, according to trade union Solidarity.

However, Telkom's expenses and 8ta's operating loss were partially offset by lower taxation, mostly because of lower profit levels and tax “concessions”.

The company says normalised earnings per share, which strips out once-off items, will be between 20% and 40% lower than last year's 639.5c. Normalised headline earnings per share will drop by between 25% and 45%, compared with 686.7c a year ago.

Telkom's shares closed 0.47%, or 17c, higher yesterday, at R36.40, after about two million shares changed hands.

Telkom also provided an update on the sale of the Multi-Links CDMA network, which has hit a stumbling block. Telkom sold the CDMA arm of the troubled operation to Visafone Communications for $52 million, or about R350 million, in April.

However, a Nigerian firm, backed by private equity group Helios Investment Partners and SA's Shanduka Group, is suing Telkom for around $251 million, according to Reuters.

The wire service reports that Helios Towers Nigeria, a firm that builds and rents towers to mobile operators, claims the telco cancelled a 10-year rental agreement after only three years.

Telkom says Multi-Links, in December last year, started a civil claim against Helios around the validity of the deal. It expects a decision on 7 June.

Helios counterclaimed, asking the court for an order to have the contract upheld for an interim period, which Telkom says has since expired.

Helios' damages claim has yet to be heard. Both parties are still performing in terms of the agreement and Telkom says Multi-Links has not breached the contact. It is, however, committed to getting out of the CDMA business.

Telkom has also been threatened with legal action from SA-based Blue Label for early termination of a contract. Telkom argues Blue Label breached its contract.