Telkom's Nigeria operation, Multi-Links, is again dragging down earnings as the fixed-line operator is forced to write down the asset.
Telkom is wrapping up its results for the year to March, and expects to announce these on 21 June. It says its results are skewed by the profit made on the Vodacom sale, another impairment of Multi-Links and a loss of R15 million on revaluing its Vodacom shares at market prices.
In its trading update released on Friday, Telkom notes that normalised headline earnings per share, which exclude once-off items relating to the Vodacom transaction and impairment of Multi-Links that impacted earnings, are expected to be between 5% and 15% lower than last year's 506.1c.
Headline earnings per share, which includes the a special dividend tax and a fair value loss on Vodacom shares, are expected to be between 80% and 100% lower than the reported the 606.7c reported last year.
Basic earnings per share, including the profit on sale and gain on unbundling of Vodacom and all expenses related to the transaction, are expected to be 1 505% to 1 525% higher than the 457.4c reported last year.
Normalised earnings per share, which exclude the profit on sale and gain on unbundling of Vodacom, should be between 5% higher and 15% lower than the 456.6c of a year ago.
Tough times
Telkom says its SA operations were battered by operating costs increasing ahead of revenue, and Multi-Links was weighed down by tough “economic and competitive conditions”.
As a result, it says, Multi-Links will report earnings before interest, tax depreciation and amortisation (EBITDA) losses higher than those in the previous year. EBITDA is a measure of a company's operating cash flow.
Telkom expects to write down goodwill in Multi-Links Nigeria by R2.1 billion and impair its assets by about R3.2 billion.
This is “a result of the continuing poor performance of Multi-Links attributable to the local and global economic factors, intensely competitive mobile market, and the relative disadvantaged scale of these operations”.
Last year, Telkom wrote off R2.14 billion of Multi-Links' value in the half-year to September. Telkom's full-year results will be the fifth report in which Multi-Links has trimmed Telkom's results. In the year to March 2009, the company wrote off R1.7 billion against the Nigerian operation.
Telkom acquired the remaining 25% shareholding in Multi-Links in January last year, for $130 million (about R1.224 billion), after buying 75% of the company in May 2007 for $280 million (about R1.96 billion).
The fixed-line operator's last set of annual results said it wants the Nigerian company to be EBITDA positive by 2010/11 and become cash flow positive by 2011/12.
Hang on
Imara SP Reid analyst Steve Meintjes says the trading update must not come as a surprise. “The group is under increasing competitive pressure in SA, where it is facing higher costs, and the Nigerian Multi-Links is still bleeding,” he says.
Meintjes adds the cut in mobile termination rates does, however, favour Telkom over other operators. “The reduced rates do strengthen Telkom's position against least cost routing and we still expect it will begin winning traffic back,” he says.
However, Meintjes cautions that “it remains to be seen, however, whether the restructuring programme bears fruit sooner rather than later”.
As a result, Meintjes says, shareholders should hang onto their stock until Telkom's results are out next month. On Friday, its shares closed at R34.50, a drop of almost 2%.
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