South Africa: Ailing Telkom warns of 83% earnings drop

Telecoms

Telkom on Wednesday moved to stabilise the company by appointing two board members and an executive in its cellphone businesses, but it warned that earnings will drop by as much as 83%.

The company is facing severe operational challenges, which were made worse recently when it lost six board members, including its chairman. CEO Nombulelo Moholi has also resigned and is serving notice.

The appointment of Jabulane Mabuza and Kholeka Mzondeki brings the number of board members to eight — meaning it is sufficiently constituted as required by Telkom’s memorandum of association, although it had 14 board members until its annual general meeting last month.

The election of a new chairman may be highly contested by board members, especially those appointed by the government, Telkom’s majority shareholder.

The government removed four board members at the annual general meeting. It is considering a new strategy for the company and may want a chairman who will ensure its smooth adoption.

Telkom on Wednesday warned in an interim trading statement for the six months to September that headline earnings per share will drop by up to 83%. Its share price has fallen almost 10% since Ms Moholi’s resignation last week. "We welcome the appointment of our new board members and believe that their depth of knowledge, skill and experience will be of great value to Telkom," Ms Moholi said on Wednesday.

She added that "while these are challenging times for the company and its people, I am convinced that Telkom will emerge strengthened and able to continue to contribute to the economic growth of the country".

Analysts said the company urgently needed a clear strategy so it could begin rebuilding.

"While Telkom is a listed entity with private shareholders, the government is the majority shareholder with its own set of socioeconomic priorities to fulfil," Sanlam Private Investments equity analyst Farai Mapfinya said on Wednesday.

He said the uncertainty over the company’s future was probably the main trigger behind the recent sell-off in its stock.

Mr Mapfinya also said that, given its track record, Telkom will probably struggle to find a new CEO.

Telkom said on Wednesday that it expected headline earnings per share from continuing operations for the six months to the end of September to be 78%-83% lower than the comparative period. Basic earnings per share from continuing operations during the period are expected to be 62%-67% lower than those of the prior period.

The company also said that operational performance up to the end of August had been characterised by flat revenue and operating costs that escalated just below inflation.

In its initial trading statement issued in September, Telkom said the lower earnings were mainly attributable to an increase in the provision for Competition Commission fines.

Telkom was fined R449m for anticompetitive behaviour, but is appealing the ruling.

"The investment community is voting with its shares. There is loss of confidence in the management of the company, with government’s continued interference seen as a major negative factor," independent analyst Ian Cruickshanks said on Wednesday.

Telkom has appointed Attila Vitai, a former Motorola and Vodafone executive, MD of Telkom Mobile, the division which includes 8ta, and Telkom Business Mobile.