Telkom shares plunged 30% after the mobile operator said yesterday that it was planning to impair assets by R13 billion in order to migrating legacy units to new generation technologies, while it expected its annual earnings to decline by up to 105%.
The assets it is impairing are Openserve, Telkom Consumer, Gyro and BCX.
After the group’s release of an early morning trading statement yesterday for the year ended March 31, the shares dived to a low of R31.38.
This after it closed Wednesday at R31.38. The counter has decreased by 33.8% in the past year.
Telkom said significant market changes and current economic conditions, including accelerated load shedding, low anticipated economic growth rates and a high-interest rate environment, coupled with evolving technological advancements had had an adverse effect on it.
“Another factor that determines whether or not an impairment of assets is required is whether the carrying value of net assets is higher than the market capitalisation, which is the case for Telkom,” the group said.
Anchor Capital fund manager Mike Gresty said: “I am surprised the share has held up as well as it has in the context of a trading update in which I can find no redeeming features.
“I am not sure if this is because investors are still optimistic about a potential value unlock through breaking up the business, but such a view does not square very well with the revelation in this update that Telkom will be impairing the value of its operations to the tune of R13bn.”
Gresty said to put this in context if one excludes lease liabilities, Telkom’s net asset value stands at R24bn, and if lease liabilities are included, it stands at R18bn.
“Either way, it is an enormous impairment, which I interpret to mean dramatically diminished future return potential for its assets as they stand,” he said.
The telecoms operator also anticipated that headline earnings per share (Heps) to drop by between 85% and 105% from the previous comparable period due to load shedding and inflationary cost pressure.
The decline would be driven by marginal revenue growth emanating from migrating legacy to new generation technologies; the deliberate upfront investment in working capital for handsets and equipment; costs associated with the impact of accelerated load shedding caused by an unreliable power supply; and inflationary cost pressures.
Costs related to its restructuring, as well as impairment costs, had impacted its bottom line.
“A provision for the restructuring process, as set out in a Sens announcement released on February 14, 2023, further impacted basic earnings and headline earnings in the current period.
“The expected impairment charge is estimated at R13 billion, impacts basic earnings in the current period,” it said.
Telkom announced a restructuring process aimed at meeting future demands in February. Up to 15% of employees in the group have been impacted by this process.
“In line with the consultation process with unions, Telkom extended voluntary severance packages and voluntary early retirement packages to all employees in the group,” it said.
Telkom said it was currently engaging its social partners, including concluding organisational manning and was on track to achieve the initial commitment.
“The cash-out payment relating to the restructuring will occur in the 2024 financial year,” it said.
Telkom is set to publish its annual results for the year ended March 31, 2023, on or about June 13, 2023.
Anchor Capital’s Gresty said: “Cash generation in this business has been an Achilles heal for Telkom and the picture presented by news in the update – well-below-expectation operational earnings in the second half of 2023, that it has been investing in working capital (buying handsets) and will have to pay out R1.1bn in severance packages in yet another round of retrenchments is worrying indeed.”
Gresty also said he believed that Telkom was under enormous competitive pressure from two far financially stronger competitors, MTN and Vodacom, and time was not on its side.