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.
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.
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.
|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|
|– 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||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.