Monday, January 24

Telkom burns cash as warning signs pile up


Telkom burned about R1 billion in cash in the last six months.

It reported a negative free cash flow of R839 million in the six months to the end of September, a change of R1.05 billion from the positive figure of R211 million reported in the first half of last year. It argues that this is due to “an increase of R1,100 million in paid capital expenditure in the period under review.”

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This was caused by the Covid-19 lockdown in the first half of the last fiscal year. This meant that the operator had higher-than-normal capex in the second half, peaking in the fourth quarter. The operator settled a portion of the fourth quarter capex (which was R3.3 billion) in the first half of this year, making clear comparisons impossible. It has declined to reveal the actual figure, saying only that “in accordance with industry practice, our general supplier payment conditions are 90 days.”

In response to questions from Moneyweb, Telkom says: “In the first half of fiscal 2022 we have spent approximately R700 million more on equity investments than the previous year and this will be settled in the second half. The cadence of cadence execution has normalized in the current year and this will be reflected in our cash flow performance. ”

The question, really, is what the free cash flow outlook will look like for this financial year.

While the operator includes the impact of lease payments in its free cash flow calculation, it excludes share purchase costs for its share incentive scheme. This is a cash expense and required R285 million in cash in the previous year and R393 million in cash in this period. It could easily be argued that free cash flow was therefore negative in the first half of last year and more than R 1.2 billion negative in the last six months.

Another unique boost

Buried in the operator’s results is a note that Telkom “executed an off-balance sheet disposal of the phone’s accounts receivable book amounting to approximately R300 million in line with management’s cash release initiatives to improve the management of the phone. working capital ”.

This provided a R305 million boost to cash in the six months. It says that it “recognized a derecognition gain of R43 million within other income in the income statement and other comprehensive income” and that “Telkom will continue to explore similar initiatives to ensure higher cash flow.”

This is a one-time transaction that the group will only be able to redo once their phone accounts receivable book grows back to a reasonable level.

At the end of it all, the group burned R1.6 billion in cash in the six months. This saw their net cash balance decrease from R5 billion on April 1 to R3.4 billion on September 30.

They have almost run out of one-time transactions or “cash-release initiatives” to drive cash flow.

It has stretched the amounts owed to creditors to the limit, with trade and other accounts payable at about a quarter of full year’s income. With your current income outlook, last year’s one-time earnings are not likely to be repeated.

Commercial and other accounts payable

March 2019 7.406 billion rand
September 2019 R7.616bn
March 2020 R8.339bn
September 2020 R8.855bn
March 2021 R11.493bn
September 2021 R10.464bn

Capex requirements are not going to be reduced. Currently, capex on revenue is 17%. But based on previous full-year periods, this figure should be closer to 20%.

Flat income

Group revenue has been flat at R21 billion every half since the second half of 2019 … not a great sign.

Mobile service revenue growth, which has helped bring the group’s overall number to a halt, continues to slow.

Read:

Telkom’s mobile growth continues unabated: up 36% in the first quarter
Telkom is wrong: there are no market failures in mobile devices

The increase in mobile service revenues in the first half of this year was only 7%, the first time that it was reduced to single figures.

Change from the previous year period First semester of 2020 H2 2020 1S 2021 H2 2021 H1 2022
Mobile services revenue 57% 53% 48% 24% 7%

Another way of looking at this is the growth rate in each six-month period compared to the immediately preceding six months.

Change vs previous six months First semester of 2020 H2 2020 1S 2021 H2 2021 H1 2022
Mobile services revenue 22% 25% 19% 5% 2%

Revenues from fixed and mobile services have been exchanged almost exactly between the second half of 2020 and the first half of 2022 (R8.6 billion and R7 billion respectively, compared to R7 billion and R8.8 billion).

Average revenue per user is under pressure and this will continue to be the case if Telkom continues to grow prepaid customers as aggressively as it is (up 24% to 13.7 million). Remember, Cell C has actively reduced its subscriber base to focus on profitable customers.

BCX not resistant at all

Just a year ago, BCX described the IT segment of BCX’s revenue (that is, everything but connectivity and voice) as “resilient.” In last week’s presentation, he says “IT is still under pressure.”

IT revenue at BCX is down 16% compared to two years ago, which is hugely problematic for what was supposed to be a defensive business.

It says the converged communications revenue outlook is “approaching stabilization” and this is just one percentage point higher (-17%) than the IT segment compared to two years ago. This shows how poorly the IT segment is performing. Imagine how much worse the 13.9% margin would look if you didn’t cut 12% of BCX’s headcount for the year. Three years ago (first half of 2020), the margin was 16.8%.

At the current rate of execution, it is quite conceivable that BCX would end this year with a 4 billion rand drop in revenue for fiscal 2019, a decrease of more than 20%. This is an impressive fall.

Torres to the rescue

Its tower unit, Swiftnet, will be listed on the JSE later this year in an effort to unlock value. The main driver of this decision is that the operator argues that its “infraco” assets are not correctly valued by the market.

This is not a huge business. Revenues in the first half of 2022 were R674 million, but it has very attractive margins of 79%, with an Ebitda (earnings before interest, taxes, depreciation and amortization) of R532 million. He points out that 56% of his tenants are external customers, which is positive.

Will moving the needle be enough for Telkom?

Telkom will easily be able to raise quite a few billions of rand by listing a “minority interest”. The options for income are “reinvest in the business; readjust the balance sheet; or return cash to shareholders ”.

Read: Telkom’s Openserve is next for a JSE list

Given that the group has a net debt of R12.6 billion in fiscal 2022 and that it was burned in cash in the six months, is there any bet on a dividend? It can be argued that he has been forced to corner where have sell a stake in this business.


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