Despite more than three years without having returned money to shareholders in dividends, Telkom’s management is confident that the fixed-line group can fund its development of telecoms infrastructure.
Telkom is working to capitalise on its vast trove of telecoms assets through a plan similar to that of former CEO Sipho Maseko, who made a bid to take control of the state-affiliated telecoms group earlier in 2023.
In July, Telkom rejected Maseko's bid, for which he had amassed a R12bn war chest together with Mauritius-based telecoms company Axian Telecom. Telkom expressed doubts about the investment consortium’s ability to execute and fund a proposal that would see Telkom’s fibre, cellphone towers and data centre assets combined with those of Axian to create a pan-African telecom infrastructure group.
CEO Serame Taukobong and his team appear to have taken a page out of this book regarding its plan, now hinging the group’s growth on Telkom’s prowess as an infrastructure company. And outgoing CFO Dirk Reyneke told Business Day that Telkom’s balance sheet was strong enough to fund the expansion.
“We are comfortable that our balance sheet is adequately geared with sufficient headroom to cover the capex [capital expenditure] required,” he said.
He explained that Telkom had cash balances of R3.6bn and unused facilities of R4.6bn.
“We’re sitting on R8.2bn of available cash as we speak. We’re very comfortable that we’ve got a strong balance sheet with enough headroom to finance growth, even before any value-unlock transactions.”
The group reported that its net debt stood at just less than R18.2bn in the six months to end-September, up 8% from the previous comparable period. This translates to a net debt to ebitda (earnings before interest, tax, depreciation and amortisation) ratio of 1.8 times.
Some in the market are not as confident about Telkom's balance sheet.
Peter Takaendesa, head of equities at Mergence Investment Managers, says Telkom “will have to sell more assets or allow well-funded strategic partners to fund that transition if they want to win as an infraco [infrastructure company].”
Funding telecoms infrastructure is notoriously expensive. In recent years, Vodacom and MTN infamously each spent about R10bn a year expanding their mobile networks while the likes of Remgro continue to spend their own billions on fibre at Vumatel and Dark Fibre Africa.
Telkom’s push as an infrastructure player appears to be at odds with the group’s move to sell off some its networking assets through Swiftnet.
“The group has indicated that they are positioning the Telkom of tomorrow as a leading infrastructure company, but now the strategy looks inconsistent on the surface when they announce they will be selling the masts and towers infrastructure business,” said Takaendesa.
“The group is battling to generate cash from operations while capital investments required to compete sustainably in both the mobile and fibre markets is quite demanding, as we have seen with Vodacom and MTN.”
Questions about Telkom’s ability to pay for its growth are not new. Three years ago, the group suspended paying dividends in favour of investment into businesses such as mobile.
Telkom has also been working furiously to cut costs, which saw it reducing headcount recently. Earlier in 2023, the group announced it was looking to firm up its cash position by selling a portion of its device receivables book to financial institutions for R1bn, another piece of its cost-cutting exercise.
As part of a bigger plan to “sweat assets” and “unlock value”, the group has recently completed a structural separation of its fibre unit, Openserve, which now operates as its own business.
It had been hoped that such a move would allow for outside investment in the unit, or to assist negotiations with lenders. Banks rate infrastructure companies differently to traditional telecoms, which means Openserve could be viewed with a different risk profile to that of Telkom as a group or other business units, such as BCX.
But even then, the group looks set to continue operating a centralised treasury function for its operations.
“We still run a central treasury. Negotiations will [still] be at the top, or centre,” said Reyneke. “But since we split up the balance sheets and carved them out, we’ve got debt in each one of the subsidiaries or divisions and we look at the each of them individually, in terms of credit rating, gearing compared to peers and ratings-agency requirements.”
He said Telkom had “a blended gearing of 1.5 to 1.9 times for the group. In there, we have different gearing for BCX and Openserve, for example, and that informs the blended rating.”
But, for now, negotiations and funding “will still come from the central pot”.
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