Telkom intends to raise R1 billion despite declining profitability

Telkom intends to generate R1 billion by selling “qualifying device receivables” to banks.

The idea was disclosed by the largely state-owned corporation in a quarterly trade statement issued on Tuesday.

“The working capital investment in mobile handsets and post-paid cost of sales are immediate costs, with corresponding revenues recognised over 24 to 36 months and thereby do not immediately offset the upfront costs associated with growing our post-paid subscriber base,” Telkom stated.

“This, in turn, has also put pressure on margins and cash generation in the short term.”

In response, Telkom stated that it has begun cost-cutting actions in the hopes of returning to a blended group EBITDA margin of 25% during the next six to eighteen months.

“A number of initiatives are already in progress to address the Group cost base. These are aimed at rebasing our cost structures,” Telkom said.

“The benefits of these initiatives are expected to be visible in the medium term from FY2024 onwards.”

Telkom warned it would have to invest in exiting and reducing certain direct and operating costs in the coming 6–18 months.

A substantial portion of these costs will reflect in FY2023.

“In addition, in order to mitigate the impact of frontloaded investment in working capital as well as ongoing pressure on free cash flow (FCF), the Group plans to raise a further R1 billion by the end of FY2023 through the sale of qualifying device receivables to external financial institutions to mitigate the impact on FCF,” it said.

For the quarter ended 31 December 2023, Telkom reported a slight uptick in revenue to R11 billion (2.3%).

EBITDA (earnings before interest, taxes, depreciation, and amortisation) fell 13.5% to R2.5 billion.

Telkom Mobile income increased by 7% to R5.7 billion, while mobile data traffic increased by 25.6% year on year to 309 petabytes (PB). The number of mobile data customers climbed by 12.9% to 18.6 million.

BCX’s IT business revenue increased 8.8% to R1.5 billion.

Openserve reported a 15% increase in fixed data traffic to 492PB.

Telkom cautioned shareholders to expect lower profits in the coming quarter.

“While the group saw an uplift in Q3 FY2023 revenue, the annual trend of declining profitability is expected to continue into the fourth quarter,” it said.

“We expect an overall weaker Q4 FY2023 relative to Q3 FY2023 impacted by the ongoing upfront investment in working capital, continued accelerated load-shedding and inflationary cost pressures.”

It stated that the upfront charges associated with its cost-cutting measures will put additional pressure on group profitability and free cash flow for the fiscal year.

Telkom stated that the associated advantages will not be realised for several years.

Telkom’s share price has risen 6% since markets started on Tuesday, and it is now trading at R36.20.