Telkom has paused plans to seek a partner for struggling subsidiary BCX, saying it will first stabilise the business before considering its next move. This comes as the third largest mobile operator eyes increased market share in mobile data and fibre markets.
Two years ago, as part of its value unlock strategy, Telkom planned to sell shares in BCX and other subsidiaries so it could focus on its fibre infrastructure subsidiary Openserve and its mobile consumer business.
It has since sold its tower operation Swiftnet to private equity firm Actis and black-owned investment firm Royal Bafokeng Holdings. It will continue to sell property assets housed under Gyro.
“Right now the big focus is on solidifying and getting the basics right with BCX,” Telkom Group CEO Serame Taukobong said.
“We are encouraged by the positive growth we are seeing in the IT services and IT solutions business, which is beginning to yield positive results. What has been lagging is the converged communications business, which is the legacy business; the plan is to stabilise that quite quickly so that we can have more solid and constant growth before any significant decision is made with BCX.”
What has been lagging is the converged communications business, which is the legacy business; the plan is to stabilise that quite quickly
In the year to end-March BCX, which provides a range of technology, hardware, software and related products to corporate clients, reported a 2.3% decline in revenue to R12.9bn. Earnings before interest, tax, depreciation and amortisation dropped 28% to R1.2bn.
Taukobong said BCX operated in a highly competitive market, and during the year it focused on enhancing the quality and sustainability of its client base. “The key thing now is to get into more software and cloud services contracts to ensure that you get the stickiness in the longer term contracts.”
BCX was also facing competition from international companies that were snapping up contracts from large multinationals. Moreover, corporates were cutting costs, which affected their technology services budgets, said Taukobong.
Philip Short, portfolio manager at Flagship Asset Management, said BCX had performed poorly. “They should sell it, perhaps to one of the other mobile players or to Altron. The legacy fixed-line business is, as expected, in permanent decline, but that [BCX] is offsetting gains in the next generation network [NGN] division, which is also within Openserve, is disheartening.”
Short said Telkom “should be more of a value-unlock play, where they break up the business and sell off the separate assets… The sum of the parts is worth much more than where it is currently trading at but I can’t see the group as a whole unlocking the value.”
Peter Takaendesa, head of equities at Mergence, said there was no pressure to sell more assets at this stage as the proceeds from the disposal of Swiftnet would provide significant breathing room.
“Many South African companies have been holding back on capital investment given the uncertainty created by load-shedding, political [events] and the higher interest rate environment. However, if the division cannot generate attractive returns on investment even after their intervention then there is no need to hold on for much longer.”
Telkom wants to boost mobile data revenue, which grew 10.6% year on year to R14.3bn in financial 2024. Its mobile subscriber base now stands at 20.4-million, up 11.9%. Of these, 12.7-million (62.3%) used broadband services, an increase of 9.5% year on year.
Taukobong said Telkom’s mobile data revenue growth was much higher than the industry average, “which is a positive indicator for us. We have been saying ‘do not just look at SIM market share, but look at data revenue share’… If we carry on at the same rate, certainly in the next three or four years we will be at No 2, this is our target. Then I think we would have really entrenched ourselves as a solid data player.”
The ambition for Openserve is to entrench it as the No 1 provider of fibre infrastructure and services. Openserve fibre passes more than 1.2-million houses but of those only 590,527, a 19.8% increase year on year, have activated internet services.
“We want to continue driving connectivity rates and it’s not just about homes passed, but homes connected. Openserve has the highest connectivity rate and in that instance, we definitely want to be among the leaders, if not the leader in homes connected in the next two or three years. So that is the aspiration, being the leaders in revenue share and also effective connectivity.”
Telkom’s total group revenue grew 1.6% to R43.2bn, driven by an increase in mobile data and NGN fibre data connectivity. From a loss position in the prior year, profit for the year soared to R1.9bn, boosted by among other things the non-recurrence of one-off restructuring costs. Telkom will resume dividend payments and may do so from next year.
Takaendesa said Telkom delivered improved results this year in terms of its operational cash generation. However, the group’s return on invested capital remained much lower than its cost of capital and any cash returns to shareholders in future would largely depend on operational cashflows to protect the balance sheet.
“Telkom’s data-led strategy requires relatively high levels of capital investment to remain sustainable and therefore the group needs to limit debt levels on its balance sheet. We view the new dividend policy linked to 30%-40% of operational free cash flow as appropriate in order to protect the balance sheet.”
He said the company was still facing structural challenges, despite the growing contribution from new generation revenue streams and the sustainability of the improved cash generation, which “we saw in this annual result will be key to avoid balance sheet trouble over the coming 3-5 years or being forced to sell more assets”.
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