Despite having experienced different impacts to its business units as a result of Covid-19 and the related lockdown, JSE-listed telecommunications company Telkom still came out of the first half of its financial year with improved profitability, strong liquidity and a strengthened balance sheet.
The company incurred R81-million in pandemic-related expenses since the beginning of South Africa’s national lockdown on March 26 and up to September 30 − the end of its interim period.
However, Telkom posted a 25.4% year-on-year increase in headline earnings a share to 219c, while basic earnings a share increased by 29.5% year-on-year to 217.5c.
This was driven by 18.8% year-on-year growth in operating profit for the six months under review, while the company’s earnings before interest, taxes, depreciation and amortisation grew by 6.3% year-on-year to R5.9-billion.
The company did not declare an interim dividend for the six months under review.
Group profit after tax increased by 28.5% year-on-year to R1.08-billion.
During the lockdown, Telkom noted a considerable increase in mobile traffic of 80.8% year-on-year, boosting the company’s mobile data revenue by 53.8% year-on-year. This was as a result of most people working from home during the pandemic and ongoing investment on Telkom’s part to allow more broadband traffic.
Telkom said the mobile business performed exceptionally well, despite the national lockdown negatively impacting distribution channels. The mobile business sustained its growth trajectory into the first half of the year, growing service revenue by 47.8% to R8.2-billion, placing the company solidly as the third-largest mobile operator in South Africa.
Telkom reported that the consumer business benefited from the increased demand from people working from home, while BCX and Small and Medium Business, also known as Yep!, were negatively impacted on by the national lockdown, as corporate customers were under severe financial pressure.
“We saw customers requesting extended payment terms and applying for payment holidays to manage their liquidity. The migration to work-from-home negatively impacted the enterprise fixed business, as use was diverted to mobile connectivity, leading to a significant decline in fixed voice revenue.
“Enterprise customers reduced information technology (IT) spend in the first half of the year and postponed some of their capital investment projects as a response to the heightened uncertainty caused by Covid-19. This resulted in BCX IT business revenue declining by 8.6%,” Telkom explained.
Overall, group revenue demonstrated resilience in the face of the pandemic and decreased by 0.4% to R21.3-billion.
Openserve saw an increase in demand for fixed connectivity resulting in an improved fibre-to-the-home (FTTH) connectivity rate from 43.6% in the prior six-month period to 53.8% in the current six months under review, which marked the highest connectivity rate in the market.
The lockdown’s negative impact on enterprise fixed voice volumes, however, impacted Openserve negatively. Consequently, Openserve's revenue declined by 13.6% year-on-year.
Gyro masts and towers continued to commercialise its current masts and towers portfolio in the period under review, with revenue having increased by 7.7% year-on-year to R628-million, despite the slowdown in the permitting and construction process as a result of the lockdown.
Looking ahead, Telkom said it would continue building financial resilience in the face of a tough trading environment, focusing on sustainable cost management, cash preservation, disciplined capital allocation and mitigating financial risks.
“Protecting liquidity is of utmost importance to us under the current economic environment. Management remains comfortable with the annual cash release target of R700-million to R1-billion communicated at the end of the prior six-month period to continue to preserve cash,” the company stated.
Telkom executed an off-balance-sheet disposal of handset receivable book amounting to about R170-million in October, with an additional R400-million expected to be concluded soon.
The company will explore similar initiatives to unlock cash flow during the second half of the financial year.
Through its improved cash generation and positive free cash flow owing to optimised working capital and continued cash release initiatives in the first half of the financial year, the company had been able to strengthen its balance sheet, providing it with sufficient headroom to fund spectrum acquisition through debt.
Telkom generated R1.3-billion of free cash flow in the six months under review, which was a 206% increase year-on-year, and had R211-million of cash remaining after paying R1.1-billion relating to the company’s retrenchment process.
The company in March announced plans to spend R1.5-billion on reducing its staff complement, mainly as a result of the technological shift to fibre, compounded by a rapid decline in Telkom’s traditional high-margin fixed voice business – in line with global trends.
“Our capital expenditure rollout was impacted by the national lockdown. We expect to be back on schedule in the second half of the year.
"With the highest connectivity rate of 53.8% in FTTH and a significant reduction in unit cost to deploy FTTH, Telkom will accelerate its fibre rollout programme with the objective to make homes fibre ready while continuing its drive for a higher connectivity rate,” Telkom said.
Meanwhile, the company remains committed to the value unlock strategy. Unlocking value from its portfolio of businesses was a key component of its capital allocation framework and would afford management flexibility to re-base the balance sheet and invest in growth portfolios.
“In the first half of the financial year, we started with a market sounding exercise to gauge interest on Gyro masts and towers. We are in the process of concluding the analysis of proposals received. Significant work is under way to enable Telkom to perform a valuation of Openserve key assets and prepare Openserve for its value unlock opportunity.
“We are also reviewing the data centre portfolio, as we seek to expand into a major infrastructure provider,” Telkom added.