Telkom has confirmed it will impair the carrying value of its assets by R12 billion, in a move that will see the company's net asset value (NAV) per share drop to about R34.
This follows a statement by the company last week that its board was considering impairing the carrying value of its legacy network. Telkom noted that, when the carrying value of an entity's net assets is more than the market capitalisation, it is an indication that the carrying value of the assets may be impaired.
Recently appointed CEO Sipho Maseko says the impairment is in a bid to transform Telkom's financial performance. "This will require bold and decisive action. Tough and urgent decisions will have to be made, particularly regarding costs and the decommissioning of unprofitable services."
At the same time, says Maseko, Telkom needs to maximise potential profit opportunities. "The upgrade of our network, which we will accelerate over the medium term, will be essential for improving our service delivery, efficiency and competitiveness."
Telkom's share price has taken a beating over the past year due to several factors, including lacklustre results, the binning of the KT Corporation deal and top-level changes.
Deliberation details
Telkom says its board considered, among other factors, the following:
* The considerable period of time that Telkom's shares have been trading at a significantly lower value relative to its NAV.
* The returns from some of the company's legacy assets, which are below commercial norms as a consequence of technology changes, competition from mobile operators and an evolving regulatory landscape.
* The migration of services from legacy assets to assets that are based on new technologies that are set to escalate rapidly over the next few years and further reduce the returns from some of the noted legacy assets.
A non-cash impairment will not affect cash flow, but is rather akin to an accelerated depreciation charge.
However, says Telkom, basic earnings per share from continuing operations has been adversely impacted by the once off non-cash impairment charge and is, therefore, expected to be 2.229c per share (cps) to 2.343cps lower than the previous corresponding period for the year ended 31 March.
The non-cash impairment charge is excluded from headline earnings per share from continuing operations, which is expected to be between 232cps and 244cps lower than the previous corresponding period.
Telkom says the decline in headline earnings is largely as a result of the cost of voluntary severance packages, of approximately R430 million, and a provision of approximately R592 million for the Competition Tribunal fine and other legal matters.
"The board is committed to taking the necessary steps to address the major challenges that have impacted the financial performance of [Telkom] in recent years."
The company says, to this end, it commits to strengthening customer relationships, improving operational efficiency and settling the outstanding Competition Commission claims.
"The board is also focused on ensuring that the group's execution plans can deliver an increased return on invested capital. Shareholders will be informed of progress on these matters in due course."
Maseko said last week that the decision to impair the carrying value of its legacy network would send a "clear message" to stakeholders that the company is prepared to take bold action to ensure it can succeed.
Telkom will release its results for the year ended 31 March on 14 June.
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