Telkom sheds R7bn

Johannesburg, 07 Apr 2006

Jitters over Telkom`s R30 billion spending plan wiped almost R7 billion off the fixed-line operator`s market capitalisation yesterday.

Dealers say Telkom`s announcement to analysts yesterday that by 2010 it would spend up to R30 billion on infrastructure upgrades dampened hopes for large dividend payouts in the future.

This was the main factor in the share`s 7.7% fall from R160.65 to R148.30. Telkom, which started the day with a market value of R87.55 billion, ended with an R80.8 billion market capitalisation.

About 8.9 million shares changed hands in 3 477 deals.

Reacting to yesterday`s share price slide, Telkom`s acting investor relations manager Ian Timmerman says the group is "disappointed".

"We are disappointed, we don`t like to see our shareholders lose value, but this [the infrastructure upgrade] is something that needs to be done," he says, adding that the investment would create value and help Telkom defend its margins in an increasingly competitive market.

Confident of returns

Timmerman states the company is confident the capital expenditure would yield robust returns in the long-term and is hoping for a swift share price recovery.

The group has paid substantial dividends in past years. Most recently, shareholders received an annual dividend of R4 a share and a special dividend of R5 a share after Telkom grew headline earnings per share 47.5% to R12.74 in the year to March 2005.

"Our dividend policy has not changed [following the announcement of the R30 billion spend]. Of course, it will depend on our cash position and our gearing level whether there will be additional money to pay out," Timmerman explains.

An analyst says another likely contributor to the share price decline was Telkom`s revision of its EBITDA (earnings before interest, tax, depreciation and amortisation) margin forecast to between 37% and 40%. The EBITDA margin for the year to March 2007 was previously predicted to be between 40% and 44%.

"Things are changing in the telecoms space and Telkom is starting to feel the effects of losing its monopoly position," the analyst comments. "Competition is starting to bite into margins."

He says shareholders hoping for more bumper dividends were spooked by the spending plans and baled out of the Telkom share, mostly in favour of MTN.

Market overreacted

"If you look at the trades in MTN yesterday, it was something like 28 million shares, which is way above the average, so it looks like investors who want to stay in telecoms moved there because they believe their returns will be better," says the analyst.

MTN closed at R60.09 yesterday, 14c or 0.23% up on Wednesday`s close. About 28.7 million shares were traded, against an average daily volume of 6.2 million for MTN.

Another analyst says the market probably overreacted, as shareholders should have been aware for some time that a more competitive landscape would have an impact.

"The positive thing is that Telkom is actually doing something about it. We`ll still have to look at the strategy to see what its outcome will be, but the main thing is Telkom is not just sitting around while the landscape changes."

Timmerman described the current telecoms environment as a "broadband explosion", saying that, while the entry onto the market of the second national operator is a factor, technology advancements are also forcing the fixed-line utility to move towards a next-generation network.

Telkom has realised it needs to invest in bandwidth network elements to be able to support "bandwidth-hungry" services and products, he says.

The share was trading at R149.30 early this morning, up R1 or 0.67% after 150 584 shares changed hands in 152 deals.

Related story:
Telkom unveils R30bn network plan

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