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Why Telkom is undervalued

Despite putting out resilient numbers.
Ready to spin out companies – Telkom CEO Sipho Maseko. Image: Moneyweb

Telkom CEO Sipho Maseko pointed out something of the obvious at the group’s interim results presentation earlier this week: the telecoms group is undervalued.

“It’s a core belief that we remain undervalued as a company,” Maseko said.

With a price-earnings (PE) ratio of 12.67 and a forward PE of 6.59, at a share price of R33.01, it looks relatively cheap for a company that has done reasonably well in an economy that has been knocked by the Covid-19 crisis.

Up and down

In fact, under the circumstances, it has done more than well. It has superseded Cell C to become the third largest mobile operator in the country, resulting in mobile data revenue rising a massive 53.8% to R6 billion for the half-year to end September.

Read: Telkom’s mobile business is on fire

It also managed its cost really well. This can be seen in operating revenue falling 0.4% to R21 billion but Ebitda (earnings before interest, tax, depreciation, and amortisation) rising 6.3% to R 5.9 billion.

Cost cutter

Its efforts to control cost can be seen in the wage bill amounting to R9.86 billion when Maseko took charge in 2013, but now standing at R10.7 billion.

This means that in seven years Telkom has managed to restrict wage bill growth by less than 9%.

It reduced its headcount from 21 209 to 15 099 over the same period.

The group is not without problems. The performance of BCX continues to raise concerns, but on the whole, it seems well placed to tap into the trend of a society that is increasingly willing to work and play online.

Even though its latest numbers show it has adapted well to a post-Covid world, its valuation is far from what Maseko believes it should be.

Spin outs

This is why he is looking to run Gyro, which is responsible for managing its properties and tower portfolio, and Openserve, its wholesale infrastructure provider, as separate companies with their own boards.

The idea is to set them to find possible outside investors.

“In the first half of the year, we started with the market-sounding process to gauge interest on the Gyro mast and towers business. And we have concluded that process and the analysis thereof, and now we will be proceeding with a firmer plan in the second half of the year,” said Maseko.

“Secondly, we’ve made significant progress in structurally separating our fibre infrastructure business – that is Openserve – and we are in the process of concluding the separation of its balance sheet from Telkom.”

He added: “Once we’ve done this we will then be able to perform a further valuation of Openserve’s key assets on real data, then prepare Openserve for its own value unlock opportunity.”

The elephant in the room

There is, however, an elephant in the room when it comes to valuing Telkom, according to Atvance Intellect MD Steven Ambrose: government’s shareholding in the group.

Ambrose notes that prior to Maseko’s appointment the government was not shy to use its 40% holding to push its own agenda.

State interference was one of the reasons Telkom had four CEOs in as many years. It was only once Maseko was made CEO that the group started to stabilise.

Ambrose says Telkom might be on the right track now, but investors have not forgotten how the government interfered with its board.

He says this is why its share price has been prone to extremes. When Maseko was appointed it was trading at R13 a share. It has since more than doubled to R33, but it is still off from the R97 it was trading at in late June 2019.

The skittishness in its share price can be seen in it being up 76.5% from where it was six months ago but down 51% from where it was a year ago.

Ambrose says talk that the government is thinking of selling off its stake in Telkom is not helping its valuation. He asks if it plans to sell, who is it planning to sell to and how is it valuing its holding?

As things now stand, he says the state’s plans for Telkom have more sway over the group’s valuation than any operational goals it achieves.

Listen: Maseko talks to Nompu Siziba about Telkom’s interim results

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It just does not make sense to argue outright and or to imply that, the government’s ownership of 40% gives it too much power to interfere in the running of the company, which is why presumably the share price tanked. Only to turn around, in the same breath, and argue the very opposite of that, by saying and or implying that the reason the share price has not appreciated significantly since its decline, even as the company is undervalued, is because investors are worried about the government selling (in effect reducing its influence and implied ‘control’ if not ‘influence’) down its stake in the company. This kind of two-forked tongue speak is disengenous, to say the least. Which one is it, you want government involvement or you don’t want it, you can’t have them both, choose one.

The reason a share lags it’s intrinsic value is because the investor perception of the share is influenced by the comments of users of the product.
Telkom needs a CEO who will recognise this.
In short, Telkom is a dog, and wont change under existing management.

got how many ads / reminders from telkom: copper line is phased out get the optical fibre, applied for it from +/- 4-5 months ago with no constructive reaction – yesterday i was told the advertisement / reminder / marketing was meant only for brand new customers and not for 30-year+ long customers – i made the suggestion if i cancel all my copper landline contracts with telkom, and my wife, with who i live in the same house and share the same bed, applies for this “new customer deal” will she get it and the answer was positive.

said to the telkom employee: based on that marketing strategy, telkom offer new technology to new customers whilst kicking decade-long customers in the face

I myself took the bet on Telkom at R18. So as a shareholder I am happy with the “growth” thus far. I am in agreement with other commentators on the service to clients. I am adding to that, that I have a Telkom LTE uncapped internet bundle, but because this in not competitive RE other service providers, I am thinking long and hard to change providers. What is stopping me? Shareholding in Telkom (Loyalty is a killer I know) and Stories about difficulty in stopping a contract with Telkom (I hate admin). What I am trying to say – my feeling is that I am not the only person whom are thinking about switching providers, especially with all the GREAT deals on internet providing currently available and ESPECIALLY since you can do it quickly and easily through LTE technology. This is for my very worrisome as a shareholder. Let’s hope however Telkom have an “Ace” up their sleeves.

The whole of South Africa is undervalued at this current moment. Maseko has done a brilliant job and deserves all the credit. Life is never a perfect science but Investors are acting like its easy or cheap to buy quality companies with excellent growth prospects like this.

Watch this space. When our market turns, it will shoot up!

Ha ha, I would say heavily over valued. The Eskom and other SOE debt, civil service increases, tax decreases, ongoing corruption, record unemployment, BEE surcharges, dying municipalities are still coming home to roost. Not that the ANC regime cares.

Telkom and customer, no love affair. For many, the name Telkom, speaking, comparable with swearing in any house of religion.

Incompetent Directors. Telkom share price should have been R150+ if ran properly.

Take just one example – They did build a new Head Office for BCX costing hundreds of millions in Centurion even though BCX has been underperforming for years. Why??? How can you justify this expense?

Take back the shares from the illegal Oliphant Consortium.

Maybe its because Telkom is linked to Government. I would also
not have faith in the company!

I am always amazed how people always complain about Telkom. Have they ever tried MTN, Vodacom or any large concern. It is always the same. Press this button press that button etc. Once it happened I pressed the wrong button. Somebody answered and said she will put me through to the right department. It started ringing and suddenly I was cut off. In one company on their website they gave a number to dial. A person answered and said she cannot help me but she will give me an E-mail address that will sort out my problem. I never got a reply from that E-mail. I was ignored. So tell me about the wonderful companies that always sort out your problems. Even SARS did a better job this year in sorting out my problems that many private companies did.

End of comments.

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