International ratings agency Moody's has downgraded Telkom's global scale issuer rating to the lowest investment grade rating, moving it a notch lower, from Baa2 to Baa3, as it lowers its expectation of state support for the operator.
The agency says its reassessment of Telkom was prompted by the weakening of the government's credit profile, as it recently lowered the state's bond rating to Baa1 from A3.
"Moody's has subsequently changed its assessment of the likelihood of support for Telkom being forthcoming from the South African government in the case of need to 'moderate' from 'strong', while still maintaining the 'high dependence' assessment," it says.
As a result, it has downgraded Telkom's global scale issuer rating to Baa3, but says the outlook for Telkom's ratings remain stable, indicating that a further downward movement is not on the cards.
Telkom is 39.8% owned by government and 10.5% by the Public Investment Corporation, while 2% of the company is in treasury shares and the remaining 47.7% is in free float. The state has yet to tell the investor community what options it has to turn around the company, which expects to report lower earnings for the first half of the year in November.
Communications minister Dina Pule had until the end of August to report back to Cabinet on a way forward for Telkom, after government binned a proposed purchase by Korea-based KT Corporation of 20% of the fixed-line company's shares, for R3.3 billion.
However, the matter was not tabled at the latest regular Cabinet meeting and there is no indication when Pule's recommendation will be discussed. Communications indicates that she has presented her report into the Cabinet process.
Challenges
Moody's says Telkom's rating reflects that it is a leading telecommunications operator, with a leading market position in SA's fixed-line business and a growing presence in broadband and mobile offerings.
However, the rating also reflects that Telkom is facing execution challenges to grow its mobile arm offerings and stabilise its operating margins through its strategies to increase adoption of ICT among its business customers; customer service improvements; and network upgrades for its improved bundled offerings.
Telkom reported a profit from continuing operations of R179 million in its last set of annual results for the year to March. 8ta recorded an operating loss of R2.4 billion in the latest full-year results and turned over R1.2 billion.
For the six months to September, Telkom expects basic earnings per share from continuing operations to be at least 45% lower than in the first half of the previous financial year, while headline earnings per share from continuing operations are expected to be at least 56% lower.
The current rating is also based on Telkom's low leverage and overall strong credit metrics for the rating category. These aspects offset, to some degree, Telkom's operating and competitive challenges, as well as the larger capital investments it needs to make to deliver on its key strategies for the upcoming years, says the agency.
Moody's adds that Telkom will not experience any difficulties in terms of liquidity, refinancing or funding, and will be able to meet its financial and operating commitments. If it experiences challenges in these areas, more downward pressure would be placed on the rating or outlook, it notes.
Telkom will spend between R18 billion and R21 billion on its network over the next three years as it moves to an IP-enabled infrastructure to push fixed-to-mobile convergence and data.
CFO Jacques Schindehutte has said that Telkom will fund its expansion through cash flow and debt, and will look at alternatives to the capital injection.
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