Telkom is expecting a massive fall in earnings as a result its restructuring programme, decline in fixed voice revenue, as well as the impact of COVID-19 on the business.
The JSE-listed telecommunications company issued trading update this afternoon ahead if its annual results for the year ended 31 March 2020.
Telkom will announce its results on Monday 22 June.
In the update, the company says reported group headline earnings per share (HEPS) is expected to decrease by between 65% to 70%, while reported group basic earnings per share (BEPS) is expected to decrease by between 75% to 80% compared to the corresponding period in the prior year.
“This is mainly attributable to once-off costs in the current year, relating to the restructuring programme of R1.1 billion and the additional impairment of trade receivables and contract assets due to COVID-19 of R626 million,” says Telkom.
It notes that the once-off items are not deductible for taxation purposes in the current year and have consequently resulted in a reduction in group profit before tax and a significant increase in the effective tax rate to 37.6%.
In January, Telkom announced 3 000 jobs will be cut at the company. This is not the first time it will reduce staff numbers, as it has been offering voluntary retrenchment packages since 2015 in a bid to reduce its wage bill.
Pressure on consumers
In its market update, the firm says COVID-19 impacted the last two weeks of FY2020. In line with the JSE and South African Institute of Chartered Accountants (SAICA) guidance, COVID-19 has been concluded as an adjusting post balance sheet event for companies with a year end of 31 March 2020, the company says.
International Financial Reporting Standard (IFRS 9) requires that the impairment of trade receivables and contract assets be based on expected credit loss principles.
The company adds that the negative impact of COVID-19 on the South African economy is expected to put further pressure on consumers with studies predicting that a number of customers are likely to default on their obligations as they fall due.
“As a result, Telkom took a prudent approach in line with the SAICA guidance by estimating an increase in customer default rates for our customer base, and this has been incorporated in the calculation of the group’s expected credit losses.
“As a result, the group recognised a total provision of R1.1 billion, of which R626 million is an additional impairment of trade receivables and contract assets due to the expected impact of COVID-19. The additional impairment is significantly impacted by the forward-looking assumptions used in calculating the expected credit losses to cater for the depressed economy,” the company says.
Notwithstanding the expected economic challenges, the group has not seen a deterioration in its debtors’ book performance from March 2020 to May 2020.
Underlying performance excluding once off costs relating to voluntary severance packages and voluntary early retirement packages and the additional provision relating to the impairment of trade receivables and accounts receivables results in HEPS being expected to decrease by 30% to 35% and BEPS being expected to decrease by 35% to 40% compared to the year ended 31 March 2019, says the firm.
“This is mainly attributable to lower EBITDA [earnings before interest, taxes, depreciation and amortisation] due to the impact of fixed voice on group EBITDA, the increase in finance charges and fair value movements.”
Fixed voice revenue
Telkom points out that the challenge for the year was the impact of the fixed voice revenue decline on group EBITDA.
It adds that the decline in fixed voice revenue of approximately 22% was offset by the growth of more than 50% in mobile service revenue in FY2020.
From a cost perspective, says the company, management contained group operating expenses below inflation and optimised direct costs relating to mobile business.
However, it notes, the extent of the decline in fixed voice on group EBITDA was not offset as it has a higher margin than the mobile business, resulting in normalised Group EBITDA declining by 7-10% from R11.3 billion reported in the prior year.
Notwithstanding the increase in net borrowings, maintaining a flexible balance sheet remains critical, says Telkom.
“During the year, we strengthened our balance sheet by repaying R1.2 billion and refinanced debt at a competitive market interest rate. We have extended the maturity profile of our debt to reduce the refinancing risk of the debt book.”
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