Despite Telkom's R12 billion impairment weighing heavily on its income statement and dragging it to a loss of R11.7 billion, the fixed-line operator performed better than a year ago when the non-cash number is stripped out.
Telkom recently accelerated the write-down of its network in a bid to bring its net asset value more in line with its share price, which slumped to an all-time low in May, before recovering to around R15. Currently, Telkom's net asset value is R34, about double its share price.
However, the write-down has been welcomed as an indicator that the group is starting to gain a dose of reality and will begin to turn around. The key indicator at the next reporting period will be whether the company is doing better operationally.
Behind the numbers
For the year to March, Telkom reported total revenue of R33.1 billion, lower than last year's R33.7 billion, as decreased voice revenue, which dropped 4.7%, weighed on income.
Operating expenses, which include the R12 billion write-down, leapt significantly from R31.3 billion to R44 billion, dragging Telkom to a comprehensive loss of R11.7 billion, as it has to take the non-cash charge through the income statement.
As a result, its basic and diluted loss per share came in at 2 276.2c, compared to last year's overall loss per share of 42.3c. However, stripping out the impairment, which did not affect cash flow, a better picture starts to emerge.
Stripping out the impairment, operating expenses increased at a lower level than inflation, at 2.2%, to R32 billion.
Headline earnings and diluted headline earnings per share declined 73.2%, to 87c, but the figure is still in positive territory, while, excluding the write-down, Telkom reported a post-tax profit of R501 million, an improvement on its continuing operations profit of R179 million last year.
Earnings before interest, tax, depreciation and amortisation came in R1.4 billion lower, at R7.1 billion. The results include a provision of R592 million to pay the long-standing dispute with the Competition Commission and other legal matters, and the cost of R434 million for voluntary severance packages.
Telkom decided in March to offer voluntary retrenchment and early retirement packages in a bid to trim staff costs. So far, 1 411 bargaining unit and 178 management employees have left.
Urgency required
Telkom says in the results commentary that the results "reaffirm the need to act with urgency to turn our group's performance around". Recently-appointed CEO Sipho Maseko said "despite the current financial performance, there is significant opportunity for Telkom to build a profitable and sustainable business that is able to support SA's economic development".
Maseko believes Telkom's "unique" fixed-line infrastructure and network are well positioned to facilitate the e-enablement of SA on a commercial basis and it is well capitalised, with a "strong" financial base to work from.
Telkom is still generating strong cash flows, with free cash flow of R2.1 billion for the year, while its net debt dropped to R2.1 billion at year-end.
However, Maseko says "success will require a complete transformation of the group". A full strategic review is currently under way, focusing on medium- and short-term interventions to unlock value, he says. "Tough decisions will have to be made, particularly regarding costs and the decommissioning of unprofitable services."
Maseko says "it is incumbent upon us as a team to rise to this occasion by ruthlessly focusing on execution and delivering results". Telkom notes that its board is committed to taking the necessary steps to address the major challenges that have impacted its financial performance in recent years.
Reality check
Absa Investments analyst Chris Gilmour says Telkom had no choice but to take the write-down as it had to make its asset value "reflect reality" and the move should have been done years ago. If the group gets its operations right, the picture could look better in six months, he adds.
Gilmour says it was time Telkom cleaned up and "stopped living in denial". Although the write-down looks "horrible" at first sight, it is a reality check. "There's a faint flicker of light at the end of the tunnel."
Telkom is doing the right thing, although it is a big and difficult ship to turn, notes Gilmour. He adds it will look much better in future, but the endorsement the market needs is an improvement at operating level.
Vestact CEO Paul Theron says although the picture does look better without the impairment, Telkom is drifting along like an "old car". He adds Maseko is a good CEO and did well at BP, and will be keen to do things a different way.
Yet, it remains to be seen if Cabinet is the real board of directors, although Telkom's chairman, Jabulane Mabuza, has made noises about the company being keen to do its own thing, says Theron.
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