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Three red flags in Telkom financials

Is free cash flow actually still negative?
Management believes the group is in a position to ‘reconsider the suspension of the dividend policy’. Image: Moneyweb

On the face of it, Telkom’s headline results for the year to March 31 were ‘robust’.

Revenue was flat but declines in fixed-line and IT revenue (BCX) were offset by a sharp jump in mobile service revenue (up 34.5%).

Read: Copper on its last legs as Telkom fixed-line number swoons again (May 24)

Ebitda (earnings before interest, tax, depreciation and amortisation) increased by 12%, with headline earnings per share up 53%.

However, there are some worrying signs hidden in the numbers …

1. Mobile service revenue growth has halved

The company’s growth engine, mobile, saw a pronounced slowdown in the second half of the last financial year. The growth in service revenue slowed from 48% year on year in the six months to September 30 to 24% in the six months to March 30, 2021. Some of this could be explained by ‘front-loaded’ demand due to lockdown in the first half, but growth in 2020 was above 50% in each half.

Year-on-year post-paid subscriber growth has stalled, with the operator actually shedding 30 000 subscribers in the last six months.

The growth rate of mobile subscribers and mobile service revenue in the current quarter is going to be critical in establishing what the trajectory going forward could be.

H1 2020 vs
H1 2019
H2 2020 vs
H2 2019
H1 2021 vs
H1 2020
H2 2021 vs
H2 2020
Revenue 5% 1% 0% 1%
Fixed line revenue -12% -19% -19% -13%
Mobile revenue 57% 53% 48% 24%
Post-paid subscribers 26% 37% 24% 1%
Prepaid subscribers 93% 21% 18% 35%

2. Is free cash flow actually still negative?

On Monday Telkom touted a significant improvement in free cash flow in the last year to R2.063 billion. This, it says, “was driven by the 20.6% growth in cash generated from operations … driven mainly by growth in the mobile business and cash release initiatives of approximately R1.2 billion”.

Excluding the costs of its voluntary retrenchments (voluntary separation packages and voluntary early retirement packages), free cash flow was negative R1.429 billion in the six months to September 2019. The picture looked a lot better by March 2020, where it reported free cash flow of R1.782 billion, due to “improved working capital management in the second half”.

In those six months, trade and other payables increased by R723 million, but the year-on-year increase was even more pronounced at R1.8 billion.

One could argue that if the amounts owing to creditors hadn’t increased by R1.8 billion, free cash flow would’ve been a lot closer to zero than to R2 billion.

Fast-forward to the most recent financial year, and trade and other payables increased by another 37.8% to R11.493 billion. Telkom says this was “mainly driven by growth in the mobile business”. This is an increase of R3.154 billion!

Adjust the reported free cash flow of R2.063 billion by this sharply higher amount owing to creditors and it’s easy to see a scenario where free cash flow is still negative.

Put another way, trade and other payables are now 26.6% of revenues, from 14.5% in March 2018.

Trade and other payables
Mar 2017 Sep 2017 Mar 2018 Sep 2018 Mar 2019 Sep 2019 Mar 2020 Sep 2020 Mar 2021
Original R7.516bn R7.065bn R6.878bn R7.476bn R7.406bn R7.616bn R8.339bn R8.855bn R11.493bn
Restated R7.465bn R5.771bn R6.536bn

* Implementation of various new IFRS (including IFRS 15) necessitated restatements.

There is nothing in the reported numbers to explain why the mobile business has required such a large increase in amounts due to creditors.

Total capex was R693 million higher in the past year (splits between the halves are lumpier than usual because of the Covid-19 lockdown in the first half). But the increase in amounts due to creditors in the last 12 months is equal to the operator’s total capex on its mobile network in the second-half.

Had it not paid a single supplier by March 30? Did it suddenly pay them all in April?

Inventories are up R54 million year on year (to R1.026 billion) due to “a network equipment bulk order discount deal”, but this also cannot explain the increase in payables.

Telkom has not responded to a request for comment regarding the increase in trade payables.

H1 2019 H2 2019 H1 2020 H2 2020 H1 2021 H2 2021
Capex R3.276bn R4.398 R4.238bn R3.517bn R2.942bn R5.506bn
Mobile capex R1.352bn R1.659 R2.246bn R1.430bn R1.397bn R3.105bn
Mobile as % of total 41% 38% 53% 41% 47% 56%

3. What is the real net debt picture?

Telkom says net debt to Ebitda improved to 0.9 times, from 1.3 times in March 2020.

It says its “conservative funding approach enabled us to report a healthy cash balance of R5.002 [billion] as at 31 March 2021″.

“We de-risked our balance sheet by repaying net loans of R1.132 [billion].”

March 2021 March 2020 Variance %
Bank and cash balances R5.002bn R4.726bn 5.8%
Current borrowings (R1.904bn) (R2.967bn) 35.8%
Non-current borrowings (R13.934bn) (13.813bn) (0.9%)
Net debt (R10.836bn) (R12.054bn) 10.1%

The repaid borrowings were a portion of its current loans. Non-current borrowings are effectively at the same level as they were a year ago.

Bank/cash balances are up by R276 million, but with a R3 billion increase in amounts payable to creditors, these bank balances should, realistically, be lower. This would push net debt to above levels from a year ago. It has guided net debt to Ebitda to be “less than or equal 1.0x” over the next three years.

It says “management believes that Telkom is in a position to reconsider the suspension of the dividend policy”.

“Therefore, the dividend policy will be reviewed, and a new dividend policy will be communicated on release of the FY2022 interim results in November 2021.”

Quite where cash flow for R1.8 billion in dividends is going to come from remains to be seen.

The pressure is on.

Read: Telkom is out of time

Listen to Anchor’s Martin Smith unpack Telkom and Netcare results in this MoneywebNOW podcast with Simon Brown: 



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Yeah and so? What is the point of this article?

It’s….it’s not that deep and also we’ve been watching TKG debt for some years and you pick up these issues today?

TKG just reached it’s 52-week high as expected. PE 28x. We good.

They will still receive their non performance bonuses whatever happens.

As a person with Telkom shares there was a time I would have agreed with you on their non performance but their share price have doubled from R23 to R46 so I am quite happy. But on one thing I will agree with you that their remunerations is still far to high even if their share price have improved.

Great analysis, asking some good questions

End of comments.





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