Telkom Shares Make a Strong Comeback as Debt Reduction Efforts Intensify

In a robust market rebound, Telkom’s shares have risen significantly, marking a 35% increase in the past three months after bottoming out at R20.60 in October 2023. Trading at R30 on the Johannesburg Stock Exchange (JSE) as of Wednesday, the telecommunications giant has shown a flicker of resurgence since its peak in 2019 when shares soared at R100. The recovery may be in its nascent stage, yet it signifies investor confidence is gradually returning as the company takes bold steps to manage its debt.

From being a market favorite when it successfully pivoted towards mobile services and phased out its declining fixed-line business, Telkom has had to navigate through challenging times, marked by intense competition and an alarming debt profile. According to Nitrogen Fund Managers’ portfolio manager Willem Oldewage, concerns surrounding Telkom’s free cash flow and rising net debt, which stood at approximately R18.2 billion in the six months leading up to September 2023, have clouded the company's financial outlook.

With a net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 1.8 times, Telkom's capability to clear its debts has been questionable. This ratio is crucial as it provides a snapshot of the length of time a company would require, at its current operational level, to settle all its debt.

Against its R15.2 billion market cap, Telkom’s debt load is oppressive. The sale of its masts and towers division, which is currently at an advanced due diligence stage with an unidentified investor consortium, is seen as a pivotal step towards alleviating its debt woes. Serame Taukobong, Telkom's CEO, has been at the helm of this strategic shift to position the company as an infrastructure-centric enterprise, leveraging its extensive network – the longest in South Africa with over 170,000km of fibreoptic cables.

Patrick Mathidi, head of equities at Aluwani Capital, opined, “Telkom remains undervalued in absolute terms and relative to its peers." He highlighted that despite the possession of commendable assets, Telkom's performance has fallen short of its true potential due to internal issues, including high levels of debt. The group's history of acquisitions, such as BCX, has not yielded the expected return on investment, prompting a need to sell assets in order to deescalate their debt burden.

The telecommunications sector in South Africa is fiercely competitive. Dominant players invest billions in network improvements annually, intensifying the pressure on Telkom, which now operates in a milieu where both voice and data services’ costs are falling for consumers. This price drop, while beneficial to the end-user, poses a challenge for Telkom as it strives to generate substantial earnings to cover interest costs amidst this price war.

As Telkom takes strides towards restructuring and optimizing its assets, the burning question remains – can these changes put the company back on the path of sustainable growth and competitiveness?