Telkom, the telecoms player that for the better part of three years has been in a turnaround phase, has seemingly weathered the storm.
CEO Sipho Maseko and his team embarked on a cost-reduction programme that included huge job cuts and reviving the struggling mobile network business. This has resulted in a strong balance sheet, low gearing and good cash flow.
Telkom will pay an interim dividend of 131c/share, as the board amended the current dividend policy to one of a total dividend distribution of 60% of headline earnings for the year and an interim dividend of 40% of interim headline earnings.
Its interim performance was supported by the acquisition of Business Connexion, product innovation and the expansion of its distribution channels.
Traction was also gained through the FreeMe data offering, resulting in Telkom’s mobile business delivering its first earnings before interest, tax, depreciation, and amortisation (Ebitda) of R200m for the half year to September, from a loss of R37m.
The mobile business, which was launched in 2010, grew subscribers by 42.3% to 3.2m.
Ebitda was, according to Aslam Dalvi, associate portfolio manager at Kagiso Asset Management, ahead of expectations.
Maseko says FreeMe continues to be popular with customers and has performed even better than the group expected.
In the six-month period Telkom sold approximately 170,000 prepaid FreeMe bundles, with over 70% of sales coming through its channels.
However, the fixed-line business is still under pressure. Fixed-line voice usage and subscription revenue decreased by 4% to R7bn (September 2015: R7.3bn) driven by competition, mobile substitution, a 7% decline in the number of lines and customers migrating to lower-value bundled offerings.
Maseko says the company is not out of the woods yet, and is still in "uncomfortable territories".
"Our capital resources will be in unlocking broadband opportunities in fibre and mobile," he says. Telkom is prioritising fibre to premises and the mobile business, as "we see these areas as growth platforms," says Maseko,
The group plans to invest some of its R7bn capital expenditure in fibre, but fibre to homes has not been generating the higher revenues expected. The most profitable element is fibre to businesses and base stations, where average revenue per user is six to seven times higher than to homes.
The connectivity rate for fibre to the home is 13%, and 144,512 houses have been connected to the high-speed fixed-line network. Telkom aims to increase it to 20% as it targets 1m homes by 2018.
Maseko believes that adding over-the-top services such as video on demand, music streaming and financial services could stimulate take-up.
With the momentum the company has built, what is the worst that could happen to Telkom now? A bad acquisition, according to Maseko. He adds that the company is pursuing acquisitions to enhance its business. "We are constantly looking at different opportunities. Potential acquisitions must be of quality and be accretive to our business."
A sovereign downgrade, if it happens, is unlikely to have a negative effect on the business since it has a strong balance sheet, says Maseko.
Mergence portfolio manager Peter Takaendesa says the only thing that could dampen the momentum at Telkom over the medium term is if the company fails to retain the management team that is driving its turnaround strategy.
Maseko has been at the helm since April 2013 and is the second-longest-serving CEO in a 10-year period. Sizwe Nxasana served as CEO of Telkom from 1998 until 2005. Between 2006 and early 2013 Telkom had three CEOs and one acting CEO. Most of them left following clashes with government and the board at that time.