Telkom leaders in promise to improve fortunes

Financial results for the year ended March show a 1.7% decline in operating revenue to R32.5bn as the landline business comes under further pressure. Headline earnings slipped by 73%. The headline earnings decline was largely attributable to the cost of voluntary severance packages and a provision for the Competition Tribunal fine and other legal matters.

The new Telkom team said these results show an urgent need to stem the tide of slipping earnings base. A few decisions taken during their short tenure at the state controlled operation suggest that Jabu Mabuza and Sipho Maseko mean business. They seem to have resolved to bite the bullet to prepare for a fresh start.

Mabuza was appointed chairperson of the board last year following mass exodus of board members followed by the resignation of the CEO. Sibeko took over as CEO at the beginning of April.

Telkom has reached a settlement with the Competition Commission on the case against Internet Service Providers (ISPs). Telkom has admitted guilt to allegations that it abused its dominance and will bear a R200m penalty. The company has also been ordered to undertake a functional separation between its retail and wholesale divisions along with a transparent transfer pricing programme to ensure non-discriminatory service provision. It has also agreed to wholesale and retail pricing commitments for the next five years estimated to yield R875m savings to customers.

The new Telkom team has also taken a decision to ring up an impairment of Telkom’s legacy assets to the tune of R12bn bringing down the group’s net asset value (NAV) per share from R57 to R34. This was long overdue as the market seems to have written a large chunk of Telkom’s NAV.

Telkom’s share price has been on a free fall for a while. A five years graph shows it was trading close to the R80 per share mark five years ago and has over the years fallen to be trapped at levels below the R20 mark. Telkom shares were quoted at R16 on Friday last week on the JSE.

As such the board was on point in ordering that deep impairment and in its explanation. “The impairment review was prompted by the considerable period of time that Telkom’s shares have been trading at significantly lower value compared to its net asset value”.

The board said “The impairment takes into account the impact on the financial returns of the Group in light of technology changes, competition from mobile operators and evolving regulatory landscape over more than a decade. These factors have eroded the returns from legacy assets.”

It seems like more tough decisions are on the cards judging by the following statement. “The Board is committed to taking the necessary steps to address the major challenges that have impacted the financial

performance of the Group in recent years. To this end, management aims to strengthen customer relationships, improve operational efficiency and settle the outstanding Competition Commission claims”.

The company added that “The Board is also currently reviewing the strategy and execution plans of the Group with a view to improving the return on invested capital. Shareholders will be informed of progress on these matters in due course”.

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