Telkom H1 profits = down 62%, Outlook = clear as mud

Africa's largest land-line operator, Telkom SA's  first-half profits fell a staggering 62 percent. The company, following months of restructuring to cut costs, has also laid off 406 managers. Joining CNBC Africa to analyse these interim numbers is Richard Hurst, senior analyst at Ovum. It seems like a classic case of two-steps-backwards-and-one-step-forward. Despite a flurry of activity which has clearly bolstered the share price, the outlook is still…well…clear as mud. Watch this and you decide! – CP

ALEC HOGG: We did see expenses down two-point-four percent and of course, they're putting their focus on the EBITDA number, which was up by 12 percent. The company, following months of restructuring and cutting costs, laid off 406 managers. It did okay on the cellphone side but not well, as anticipated, on landlines. Joining us in the studio to analyse the numbers for us is Richard Hurst, Senior Analyst at Ovum. Earlier today, we spoke with our market watcher Sasha Naryshkine, who said he'd be selling if he were Government (who owned 39.38 percent of this business). He'd be selling in a heartbeat. After these numbers Richard, would you?

RICHARD HURST: As I said earlier before the break, it's not a good story. It's an okay story. It's not a 'shoot the lights out' and remember; we're looking at these numbers to validate the turnaround strategy that the executives have been touting all along. In a way, it is there but I think of concern is the costs and the profit loss. Of course, fixed line across the world, particularly fixed line voice, is in a decline so they're looking elsewhere for their revenue growth and they're looking at their managed data services, etcetera.

ALEC HOGG: But Richard, if it's an okay story, here we have a share price that in the last year, has gone from about R12.00 to R64.00.

RICHARD HURST: Yes.

ALEC HOGG: Or just over a year… I want more than an 'okay story' if I'm having that kind of a ride. Again, would you be selling in a heartbeat, like our Sasha?

RICHARD HURST: If I had to say it from my personal point of view, no, I wouldn't be selling – not right now. I still think that there's a lot more coming in terms of what Telkom will be delivering to the market. There's a lot of promising stuff – the BCX acquisition and that type of thing.

GUGULETHU MFUPHI: Doesn't it need a bigger player? I say this – thinking about the KT (Korea Telecoms) deal that could have taken place a few years ago – where that was the deal, which could really, have transformed Telkom.

RICHARD HURST: It probably will require some strategic investment/foreign investment but I think they've been around the table too many times now. There've been rumours that they're looking at the Indian sub-continent for partners of that nature, but yes, it would have been key for them to help propel them just a little bit further.

ALEC HOGG: No insight that you have on Government actually selling its stake because it's been telegraphed to us that they are looking to offload assets. Whether this is one of them…

RICHARD HURST: There've been rumours or speculation that Telkom could be one of them, but the sense that I get when you speak to people within Government is that they'd prefer to hold onto it. They might sell off a portion, but they're really like to hold more onto Telkom than anything else.

ALEC HOGG: They need the money and they need…this would raise about 15-billion. That would be either a one percent increase in VAT and rue the chaos that would occur from COSATU or sell your Telkom stake.

RICHARD HURST: For me, I think Government's more concerned about its broadband objectives within the country and they regard their shareholding in Telkom as one of the ways of achieving that objective.

ALEC HOGG: Is that sensible?

RICHARD HURST: No, but as with all other Governments across the region and emerging markets, we tend to see that Government likes to hold onto their positions in the National Telecommunications entity.

GUGULETHU MFUPHI: What about its mobile arm?

RICHARD HURST: Again, they were damned if they did and damned if they didn't, and I think they're proving that they needed this mobile arm to deliver on its fixed mobile convergence objective. Look, it's nowhere near the size of the other giants but it's showing some promise, particularly in the mobile data space.

ALEC HOGG: And their losses are down a little bit there. Over the period, how much have they actually lost on their mobile operations?

RICHARD HURST: That, I don't know.

ALEC HOGG: Its run into billions.

RICHARD HURST: Yes. I know that the numbers today… They said that for the first time, they are making money on their mobile operation.

ALEC HOGG: I read it as 'they'd cut their losses by 50 percent'. Maybe that's the difference. They can always play with these numbers, can't they – what they capitalise and what they don't capitalise, EBITDA, etcetera…

RICHARD HURST: Yes, but they're being very smart about it in going into this duel with MTN on their radio access network, which will cut their costs further.

ALEC HOGG: What does that mean? Just unpack that for us and tell us why that's so relevant.

RICHARD HURST: It's basically, a roaming agreement and managed service agreement where MTN will look after their towers, and so they'll be able to start shifting that CAPEX to an OPEX, trying to make them just a little bit leaner on the mobile side, which is something they'll need to compete in this market.

ALEC HOGG: So they wouldn't have to build their own towers, in future. They'll ride on MTN's back.

RICHARD HURST: Yes, and MTN will build more towers, and they can use those towers.

ALEC HOGG: What's in it for MTN?

RICHARD HURST: Traffic on their network. It's a bit like more plumbing and more water going over the plumbing (if that's the analogy we'll use).

GUGULETHU MFUPHI: That's interesting because clearly, there's a financial benefit for them there, then. What now for Sipho Maseko and his management team?

RICHARD HURST: I think that for now, it's going to be a focus on what they're doing right and looking closely at their cost cutting initiatives. We've seen all kinds of things – what they're going to invest in the network – and you can see that CAPEX is going to be down, but I think that's because they've thrown a lot into their next generation network and they're just going to sweat that a little bit.

ALEC HOGG: It wasn't long ago that we had the Head of the Union in the studio, telling us how they were going to sort Telkom out. Surely, this is a big challenge for the management team.

RICHARD HURST: The unions?

ALEC HOGG: Well, the labour issues.

RICHARD HURST: Yes, the labour issues are a major challenge and you can see that's one of the costs, which has hit them in terms of the retrenchment costs and the medical aid costs, etcetera. You can see that its part of their turnaround strategy – that they're going to be cutting more jobs – and you can see that it's likely the costs are going to be the same over the next six months.

ALEC HOGG: But then surely, if they have this huge challenge waiting, i.e. potentially, a strike (and we've seen how that can damage a company)… To be buying the shares at five times the price that you would have been paying 18 months ago… You have to be brave.

RICHARD HURST: Is it luck or bravery? Which is better? I don't know. They key here is that from the trajectory it's on, I would say that given what the management are outlining in their future, it should pan out on a more upward trajectory.

GUGULETHU MFUPHI: Richard, we'll have to leave it there for now. Thank you so much for joining us today. That was Richard Hurst, Senior Analyst at Ovum.