SA’s biggest fixed-line operator, Telkom says it may review its dividend payout policy as it ramps up spending on its mobile phone network.
Telkom is focusing heavily on a strategy to take on bigger established rivals MTN, Vodacom and Cell C. This paid off in the six months to end-September when its mobile subscriber base surged 75% to 11.5-million.
Shaun Murison, senior market analyst at IG Markets, said the group had been able to increase its market share in a saturated environment.
The group spent more than half of its R4.23bn in capital expenditure during the period on its mobile operations. Capital expenditure rose 66% against the prior comparative period. As a result, its net debt rose to 1.4 times earnings before interest, tax, depreciation and amortisation (ebitda), above its medium-term guidance.
Telkom said this ratio will rise further and the company needs to consider it capital investment policy, cash position and investment-grade credit rating.
The current policy is to pay an annual dividend of 60% of headline earnings, and 40% of headline earnings during its interim period. In line with this policy, the group paid an interim dividend of 71.52c, down 36% from the prior comparative period.
As part of a growing trend in the industry to diversify away from basic telecom services, group CEO Sipho Maseko said Telkom would unveil a suite of financial services products, including insurance, in the first quarter of 2020.
Competitors MTN and Vodacom have been investing heavily in financial services products like mobile money wallets and insurance.
Philip Short, an equities analyst at Old Mutual, said there is a good opportunity for Telkom to grow its business in financial services but it would be better placed if it concentrated on growing its subscriber base.
In a saturated market, getting one new subscriber is harder than keeping that subscriber. With larger scale, new financial service products would have a bigger market within Telkom, he said.
In its six months to end-September, headline earnings fell 35.9% to R914m, with headline earnings per share falling 40.7% to 194.3c. Telkom’s share price slumped 7.46% earlier in November when it warned that headline earnings per share would fall steeply, partly due to the increase in borrowing to support its mobile business.
During the period under review, mobile service revenue jumped 56.6% to R5.6bn, with consumer data revenue rising 27% to R5.29bn. At a group level operating revenue rose 4.7% to R21.47bn, with fixed voice and interconnect revenue falling 19.1% as customers switch to newer technologies.
Telkom sparked speculation that it is seeking to buy debt-laden rival Cell C as part of its plan to break the stranglehold of mobile giants MTN and Vodacom after making a vague announcement to the market on Tuesday that it is in talks for a major acquisition.
Telkom CFO Tsholofelo Molefe said the group’s margins had been squeezed by switching customers over to new technologies such as LTE (wireless) and fibre, which carry lower margins compared with copper-based services such as traditional fixed voice and asymmetric digital subscriber line (ADSL) internet access.
Telkom said that for every ADSL customer, an operator needs two or three LTE customers to make the same margins.
Profits were hit by a one-off roaming expense, with the group recently switching to roaming on Vodacom’s network, having previously used MTN’s infrastructure. Telkom started 2019 roaming on MTN and Vodacom at the same time, which set it back R132m, Molefe said.
Maseko said the company has performed well in a difficult trading environment, with SA narrowly avoiding a recession in the first half of the year.
“Notwithstanding the significant decline in traditional voice and interconnection revenue of 19.1%, the ongoing investment in new revenue streams continues to drive the overall growth of the group, despite the weak economy, intense competition and significant pressure from the traditional fixed business.”
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