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Telkom faces rising debt and declining profit levels

Executive emoluments top R116m despite slide in share price.
Image: Bloomberg

Telkom’s annual financial statements for the financial year ended March 31, 2020, were given a clean audit report by the external auditors PricewaterhouseCoopers (PwC). This puts many state-owned entities (SOEs) to shame.

It is however somewhat jarring that PwC incorrectly headed their audit report March 31, 2019. After all, auditors should at least demonstrate attention to detail.

The Telkom group supplies telecommunication, multimedia, technology, information, mobile communication services and other related information technology services. It is undergoing a restructuring process, shifting from a legacy fixed voice revenue business model to mobile. The group is facing a tough trading environment, and strong competition.

Read: Telkom looking to cash in on towers business

Telkom suspends dividend as spectrum auction looms

Profit for the year declined to R608 million (2019: R2.8 billion) representing basic earnings per share of 121.1 cents per share (2019: 561.9 cents per share) and headline earnings per share of 208.1 cents per share (2019: 619.2 cents per share).

Despite declining profit levels, the group reports an improvement in operational performance: mobile customers increased by 23.9% to 12 million, mobile data traffic by 69.9%, fixed line broadband traffic by 11.4%, FTTH (fibre to the home) connectivity rate by 48.2%, cloud services in data centres by 10%, and M&T (manufacturers and traders) tenancy ratio by 1.32x.

Restructuring process

Towards the end of the financial year, Telkom commenced phase one of a two-phase restructuring process, shifting to fibre. The legacy high-margin, fixed-voice business showed a rapid decline to 22% of group revenue. This is in line with global trends.

The mobile business drives the overall group revenue growth, offsetting the negative impact of the decline in fixed voice revenue.

Telkom has started the process of consultation with labour to restructure the business for future competitiveness. Telkom has also offered voluntary severance and voluntary early retirement packages as an alternative to retrenchments.

Interest bearing debt

In a Sens release dated March 10, 2020, Telkom announced that it had increased the maximum aggregate outstanding nominal amount of all notes that may be issued under the domestic medium-term note programme from R10 billion to R15 billion, effective from March 9, 2020.

Rm 2020 2019
Interest bearing debt 12 005 10 241
Finance charges 1 202 885

Per the cash flow statement, new funds of R8.7 billion were raised, and debt of R6.9 billion was paid. Higher interest rates are paid on the new debt, R5.8 billion of the new debt is charged an interest rate of over 9%.

Cash flows are ebbing

The restructuring process and capex demands are putting pressure on Telkom’s debt position. The cash generated from operations before dividends paid amounted to R10.3 billion (2019: R7.6 billion). However, capex amounted to R7.7 billion (2019: R7.6 billion), and finance charges increased to R1.4 billion (2019: R847 million). The restructuring process will place further pressure on cash flows in the 2020/2021 financial year.

If Telkom had not managed to raise new finance, it would have been R3.9 billion in the red.

Directors’ and prescribed officers’ emoluments

In a tough economic environment, and with a declining share price, it seems executives are not tightening their belts. The increase in emoluments from R88.5 million (1.86% of operating profit) to R116.4 million (4.33% of operating profit), is outrageous.

On June 22, 2015, the Telkom market price was sitting at R53.70. After a bumpy five years, the share price has plummeted to R26.86. A plummeting share price does not fit well with excessively rewarded executives.

Rand Retainer fees Attendance fees Remuneration Fringe and other benefits 2020 2019
Non-executive 6 245 585 6 610 597 12 856 182 10 875 370
Executive
– SN Maseko 8 830 449 12 986 598 21 817 047 15 309 687
– TBL Molefe 4 712 456 717 631 5 430 087 5 464 016
– DJ Fredericks 1 935 987
Prescribed officers 39 346 888 36 904 986 76 251 874 54 942 647
6 245 585 6 610 597 52 889 793 50 609 215 116 355 190 88 527 707

 

Operating profit R2.7  million R4.8 million
% of operating profit 4.33% 1.86%.

Directors’ interest and prescribed officers

2020 2019
2020 Ifrs expense 2019 Ifrs expense
No of shares R No of shares R
AN Samuels 66 883 2 827 730 91 475 1 609 985
AC Beukes 36 275 1 722 033 45 455
CJ Moganwa 65 968 1 158 855
PJ Bogoshi 63 364 2 212 993 62 611 298 654
S Taukobong 53 899 4 223 123 186 503 889 619
NM Lekota 46 583 3 200 008 46 542 546 337
L Siyo 37 106 651 838
DJ Fredericks 51 491 2 077 166 76 359
LTS Maloba 22 085 105 345
IM Russell 478 817
TBL Molefe 56 051 788 157
421 569 18 073 746 587 081 4 716 914

Telkom has 14 directors (including non-executive directors), and 6 prescribed officers (excluding resignations).

Sars v Telkom

The Supreme Court of Appeal on March 25, 2020 handed down a judgment against Telkom in regard to a foreign exchange loss incurred in 2012. This resulted in a debt owing to Sars of R861 million. Sars demanded payment of R300 million before March 31, 2020. Telkom has applied to the Constitutional Court for leave to appeal the judgment.

Beneficial shareholders of more than 2% (Annexure A)

The Government holds 40.51% (207.0 million shares) (2019: 40.5%), the Public Investment Corporation (PIC) holds 14.97% (76.5 million shares) (2019: 11.9%), and Telkom Treasury Stock holds 2.61% (13.3 million shares) (2019: 2.61%).

A Sens notice dated March 17, 2020, advised shareholders that the PIC had acquired further securities in Telkom, and that their interest in the ordinary shares now amounted to 15.488%. One would assume that the PIC acquired these shares on behalf of the Government Employees Pension Fund? Be that as it may, the list of significant investors in the annual financial statements should have been updated.

Reducing the fat cats?

The integrated annual report has yet been released, and it should provide more detailed information on the estimated costs of the restructuring process, and the planned future capex. Perhaps this report should also provide some justification for the necessity to have 12 non-executive directors (should 4 not suffice?), and a very high emoluments bill.

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Totally unacceptable remuneration for EXCO members. Shareholders must stand up and demand salary cuts!

Oh dear a mirror image of a few others that we know of, just a bit later than the others……………..

End of comments.

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