Our opinion on the current state of TKG

Historically, Telkom (TKG) was the government-controlled provider of fixed line telephone connectivity in South Africa. With the advent of cell phones, Telkom was forced to subsidise the development of its own competition in the form of Vodacom, MTN and more recently Cell-C. This subsidy takes the form of termination rates for calls which are now being phased out. Over the past twenty years, the CEO of Telkom, Sipho Maseko, says that Telkom has effectively subsidised other networks to the tune of R70bn. Telkom is currently listed and is owned 41% by the government and 11,9% by the Government Employees Pension Fund (GEPF) - so it could still be considered to be government-controlled. In reality, it operates as an independent organisation divided into 5 divisions. (1) Open Serve is South Africa's primary supplier of wholesale connectivity with the country's largest network. (2) Telkom Consumer is the largest supplier of broad-band internet connectivity with a growing mobile phone network. (3) Yellow Pages provides advertising and marketing to local businesses. (4) BCX is an ICT solutions company operating in Southern Africa. (5) Swiftnet" was formed in April 2018 to house Telkom's masts, towers, and property interests. Swiftnet owns a diverse portfolio of 1330 properties and has 40 ear-marked for development. Of course, Telkom is impacted by the ruling of the Independent Communications Authority of South Africa's (ICASA) decisions regarding the so-called "inter-connect" fees. However, in our opinion, Telkom has been well managed, and its downsizing should result in improved profitability going forward. This company is steadily switching from fixed-line to mobile. On 23rd July 2021 the CEO, Sipho Maseko, announced that he would be stepping down with effect from 30th June 2022. On 21st September 2021 the company announced that it intended to list its property and towers division separately as Swiftnet before the end of 2021. The separate listing is expected to release more than R6bn in shareholder value and will give Telkom the much-needed capital to continue its migration away from fixed line to cellular telephony. The company is looking to cut 1770 jobs and sell its device credit book for R1bn. The company has decided to postpone the listing of Swiftnet because of the war in Ukraine and other market developments. On 26th January 2022 the company announced that the Special Investigating Unit (SIU) had launched an investigation into the sales of Iway Africa and Africa Online. On 12th August 2022 the South African government received a R7bn offer for its 40,5% stake in Telkom from a consortium called Toto. On 30th May 2023 Business Day reported that the CEO, Sipho Maseko, had put together a consortium to buy as much as 35% of Telkom for R12bn. In its results for the year to 31st March 2023 the company reported revenue up 0,9% and headline earnings per share (HEPS) down 76,6%. The company said, "The year was characterised by unprecedented levels of loadshedding, constrained consumer spending, and dynamic competition against the backdrop of a sluggish economy with persistent inflationary pressures". The company recorded a loss of almost R10bn during the year which means that it has actually gone backwards since COVID-19. In a trading update for the months ending 30th June 2023 the company reported revenue up 3,8% and Group EBITDA down 4.2% to R2 235 million. In a trading statement for six months to 30th September 2023 the company estimated that HEPS would be between 35% and 45% higher. Technically, Telkom's share fell from highs of around R98 in June 2019 to levels around R15.00 in March 2020. It has been moving sideways and down since then. The company's has high debt levels compared to its market capitalisation - which makes it risky for investors. In our view this company is battling to find a new direction in a very difficult economy and against stiff competition.