SOUTH AFRICA'S TELKOM SEES SLOWER H2 PROFIT GROWTH

Mergers, Acquisitions and Financial Results

South Africa's fixed-line phone company Telkom expects its full-year earnings to grow at a slightly slower pace than in the first half as the impact of tariff cuts bites, its chief said in an interview.

Chief Executive Papi Molotsane told Reuters late on Wednesday he expected headline earnings per share -- the main measure of profit in South Africa -- to grow at around 35 percent or less in the year to end March 2006.

"Full-year earnings growth might be slightly lower than in the first half -- around the same or slightly lower due to the impact of lower tariffs in the second half," Molotsane said.

Telkom reported a 35-percent jump in headline earnings per share for the six months to end September thanks to a leaner wage bill and stellar growth at its 50-percent owned mobile phone arm Vodacom.

Headline earnings per share excludes capital, non-trading and certain exceptional items.

Molotsane reiterated that moves to cut tariffs to meet regulatory requirements and to gird for competition when a second national operator launches this year would also crimp its core profit margin.

"We are looking at an EBITDA margin of around 40 or the early 40s for the second half," he said.

Molotsane said in November it expected a second-half core profit margin of between 40 and 44 percent.

State-controlled Telkom has chalked up impressive profit growth in recent years as it cut more than half of its workforce and reaped dividends from its stake in Vodacom, South Africa's leading cell phone operator.

Molotsane ruled out any further job cuts even though a moratorium on forced redundances agreed with unions expires at the end of March.

""We are in negotiations with the labour movement over wages but there will be no more forced retrenchments," he said.

Most analysts say Telkom stock looks reasonably priced at around 11 times this year's earnings, compared to its closest rival, mobile operator MTN, which trades at almost 15 times earnings according to Reuters data.

Telkom shares rose 0.74 percent to 163.85 rand on Wednesday.

But analysts say Telkom needs to find new sources of revenue as it faces stiffer competition and waning demand for its fixed-line business and as the communications regulator slaps down tougher price caps.

Molotsane has made improved customer service and the faster roll-out of broadband Internet services his top priorities since he took the helm at Telkom in September last year and hopes to acquire a technology company to expand its data services.

Molotsane reiterated that if Telkom fails to make an acquisition by the end of March it will consider paying a special dividend or buying back shares. "We will explore all those possibilities...We are aware that companies that have a lot of cash on their balance sheets get punished."

Reuters