Wrap Text
Group Interim Results
for the six months ended 30 September 2013
Telkom SA SOC Limited
(Registration number 1991/005476/30) JSE share code: TKG
ISIN: ZAE000044897
Group Interim Results
for the six months ended 30 September 2013
Special note regarding forward looking statements
Many of the statements included in this document, as well as oral
statements that may be made by us or by officers, directors or employees
acting on behalf of us, constitute or are based on forward looking
statements.
All statements, other than statements of historical facts, including,
among others, statements regarding our convergence and other strategies,
future financial position and plans, objectives, capital expenditures,
projected costs and anticipated cost savings and financing plans, as well
as projected levels of growth in the communications market, are forward
looking statements. Forward looking statements can generally be identified
by the use of terminology such as may, will, should, expect,
envisage, intend, plan, project, estimate, anticipate,
believe, hope, can, is designed to or similar phrases, although
the absence of such words does not necessarily mean that a statement is
not forward looking. These forward looking statements involve a number of
known and unknown risks, uncertainties and other factors that could cause
our actual results and outcomes to be materially different from historical
results or from any future results expressed or implied by such forward
looking statements. Among the factors that could cause our actual results
or outcomes to differmaterially from our expectations including, but not
limited to those risks identified in Telkoms most recent annual report,
which are available on Telkoms website at www.telkom.co.za/ir.
We caution you not to place undue reliance on these forward looking
statements. All written and oral forward looking statements attributable
to us, or persons acting on ourbehalf, are qualified in their entirety
by these cautionary statements. Moreover, unless we are required by law
to update these statements, we will not necessarily update any of these
statements after the date of this document, either to conform them to actual
results or to changes in our expectations.
The information contained in this document is also available on Telkoms
investor relations website www.telkom.co.za/ir.
Telkom SA SOC Limited ("Telkom" or "the Group" or "the Company") is listed on
the JSE Limited. Information may be accessed on Reuters under the symbols
TKGJ.J and on Bloomberg under the symbol TKG.SJ. Information contained on
Reuters and Bloomberg is provided by a third party and is not incorporated
by reference herein. Telkom has not approved or verified such information
and does not accept any liability for the accuracy of such information.
Group salient features
for the six months ended 30 September 2013
ADSL subscribers increased 6.7% to 898 203.
Calling plan subscribers increased 2.0% to 860 161.
Managed data network sites increased 12.8% to 45 441.
Active mobile subscribers increased 6.9% to 1 598 173 with a blended ARPU
of R58.81.
Mobile sites integrated increased 28.3% to 2 238.
871 LTE sites integrated.
Operating revenue up 0.3% to R16.2 billion.
Fixed-line voice and interconnection revenue decreased 4.7%
to R8.7 billion.
Fixed-line data revenue increased 1.2% to R5.2 billion.
Mobile revenue increased 55.4% to R926 million.
Mobile data revenue increased 50.0% to R303 million.
EBITDA margin excluding the net curtailment gain and competition
commission provision was relatively flat at 24.3%.
Headline earnings per share excluding the net curtailment gain increased
significantly to 224.2 cents.
The Group generated free cash flow of R33 million, a 97.8%
decrease from the previous period.
Group interest bearing debt decreased 34.9% to R4.3 billion.
Overview
Johannesburg, South Africa 18 November 2013, Telkom SA SOC Limited (JSE:
TKG) today announced Group interim results for the six months ended
30 September 2013.
Results from operations
For the six-month period the Group recorded a profit after tax of R2 946
million. This is significantly higher than the previous reporting period
and is driven by a R2 173 million net curtailment gain recognised on the
post-retirement medicalaid liability and higher fair value gains as a
result of the weakening of the Rand in the current period and a R389 million
provision for the Competition Commission fine in the previous six months.
The company has reassessed the underlying assumptions used to determine
the value of the post-retirement medical aid liability for qualifying
employees. The growth assumption for the subsidisation amount at
retirement has been capped at 0% and employees were offered a settlement
calculated at the economic value of their liability. This curtailment and
subsequent settlement is the main contributor to a net non-cash gain of
approximately R2 173 million and a reduction in the post-retirement
medical aid liability for these qualifying employees.
The net curtailment gain is not part of the results from operations for
the period under review and has accordingly been excluded from the discussion
below. The prior period also includes a provision of R389 million for the
Competition Commission fine. Excluding these items EBITDA is flat compared
to the prior period.
The Group recorded a profit after tax of R773 million, excluding the net
curtailment gain (30 September 2012: R548 million) and an EBITDA excluding
net curtailment gain of R3 933 million (30 September 2012: R3 948 million
excluding the Competition Commission provision).
Our overall financial performance reflects the realities currently facing
our business. Our fixed voice business continues to be under pressure and
the mobile business continues to face the challenge of gaining market
share in a highly competitive market. Our net revenue increased by 1.1%,
driven by payments to mobile operators which were impacted by the
reduction in mobile termination rates. We recorded promising growth of
50.0% in mobile data revenue and 110.2% in IT Business services revenue.
Data revenue constituted 33.7% of group revenue and increased by 3.1%.
Lower prices on data due to competitive offerings continue to negate the
impact of volume growth experienced in this area.
The Group continues to generate strong cash flows and the capital
structure remains solid. Interest bearing debt decreased 34.9% to R4.3
billion at 30 September 2013.
Report structure
In line with the Groups convergence strategy, key performance indicators
are measured and evaluated on an overall basis.
The Group therefore consists of one operating segment.
However, this report provides further details of the fixed-line business
that provides fixed-line access and data communication services through
Telkom South Africa, and the mobile business that provides mobile voice
services, data services and handset sales through Telkom Mobile. The
contribution of the iWayAfrica, Trudon and Swiftnet subsidiaries are also
shown separately.
The comparative information for September 2012 has been restated due to
the adoption of IAS 19R and the amendment to IAS 16.
Message from Telkom group CEO Sipho Maseko:
The Groups financial performance indicates a challenging
industry environment. Despite a considerable increase in the Groups
earnings, owing to several once-off items, underlying operational earnings
remain under pressure. The Group reported headline earnings, excluding the
net curtailment gain recognised on the post-retirement medical aid
liability, of224.2 cents from 101.1 cents. This also excludes the provision
for the Competition Commission fine in the prior reporting period. The
increase was primarily due to lower payments to mobile operators resulting
from the reduction in mobile termination rates and higher fair value gains
as a result of the weakening of the Rand.
Operating revenue increased slightly by 0.3% to R16 192
million due to higher mobile and IT Business services revenue,
partially offset by lower fixed-line voice revenue. We are encouraged by
the improvement in mobile data revenue which increased 50.0% to R303
million resulting from an increase in the number of data subscribers and
data deals and promotions launched during the period. However, we are
continuing to explore all avenues to de-risk the mobile business.
Operating expenses decreased by 18.1% to R10 323 million. This is due to
the R2 173 million net curtailment gain and the R389 million provision for
the Competition Commission fine included in the prior reporting period.
Excluding the gain and Competition Commission provision in the previous
year, operating expenses would have increased 2.4%.
Our capital structure remains sound despite large cash outflows resulting
from payments of severance packages, part of the Competition Commission
fine and an increase in our capital expenditure. We continue to invest in
modernising our network to provide high speed, quality and reliable
broadband to South Africans. For the 2014 financial year, management has
taken a prudent approach to cap its capital expenditure to R6.5 billion
while the Group reviews its options, particularly in mobile.
Telkoms Board and management team have already resolved several long term
issues affecting the performance of the Group. This includes impairing a
large portion of the Groups legacy assets, settling Competition
Commission matters, successfully addressing unfair and uncompetitive
mobile termination rates and reviewing the post-retirement medical aid
liability.
Defining our role clearly as a listed national incumbent will allow us to
address the dichotomy in shareholder expectations. Through its people,
technology and infrastructure, Telkom has the unique opportunity to meet
the needs of all its stakeholders: our shareholders, customers, employees
and the broader society in which we operate. To achieve this, we must
prioritise our objectives to shape the Groups strategic imperatives and
ensure we succeed in the following key areas:
Financial performance strategic capital allocations, returns driven to
restore financial health
Customer perception deliver superior customer service and
experience
Operational excellence and efficiency drive execution
capability and connectivity to own the home
Infrastructure quality invest in the right technologies
Alignment of all stakeholders Telkom cannot deliver on its
strategy without the support of all its stakeholders
Telkom is instilling a disciplined approach to capital allocation. We will
invest in areas where we have leadership, and place a greater emphasis on
productivity and returns. Infrastructure investment in particular will be
returns-driven.
Telkom has the most extensive infrastructure network in the country. We
need to monetise that advantage and drive the take-up in high-speed
broadband services enabled by the New Generation Network (NGNEC). The
National Broadband Plan is an opportunity for Telkom to improve the scale
and efficiency of its network.
There is a window of opportunity for Telkom to become the leader in data
transmission, but we must act with speed and determination to
commercialise our competitive advantage.
Operational data
Six months ended
September
2013 2012 %
ADSL subscribers1 898 203 841 831 6.7
Calling plan subscribers 860 161 843 491 2.0
Closer subscribers 836 312 814 888 2.6
Supreme call subscribers 23 849 28 603 (16.6)
WiMAX subscribers 3 781 3 168 19.3
Internet all access
subscribers2 512 293 516 423 (0.8)
Fixed access lines (000)3 3 713 3 894 (4.6)
Post-paid 2 396 2 465 (2.8)
Post-paid ISDN channels 750 761 (1.4)
Pre-paid 478 571 (16.3)
Payphones 89 97 (8.2)
Remote MSANs installed in
the access network 205
Number of central offices
active 13
Ports connected via MSAN
access 183 880
Fixed-line penetration
rate(%)4 7.2 7.5 (4.0)
Revenue per fixed access
line (ZAR)5 2 279 2 283 (0.2)
Total fixed-line traffic
(millions of minutes) 8 991 9 273 (3.0)
Managed data network sites 45 441 40 284 12.8
Telkom Company employees6 19 316 21 217 (9.0)
Trudon employees 487 527 (7.6)
Swiftnet employees 111 114 (2.6)
iWayAfrica employees 341 433 (21.2)
Fixed access lines per
employee6 192 184 4.7
iWayAfrica subscribers 16 998 21 064 (19.3)
Total mobile subscribers 4 419 085 3 764 530 17.4
Active mobile subscribers 1 598 173 1 495 083 6.9
Pre-paid7 1 283 615 1 121 967 14.4
Post-paid 314 558 373 116 (15.7)
Mobile base stations
constructed 2 578 2 067 24.7
Mobile sites integrated 2 238 1 745 28.3
LTE sites integrated 871
ARPU (Rand)8 58.81 67.16 (12.4)
Pre-paid7, 8 28.75 23.12 24.4
Post-paid8 156.63 164.68 (4.9)
Churn % pre-paid 52 52
1. Excludes Telkom internal lines and includes business,
consumer, corporate, government and wholesale customers.
2. Includes Telkom Internet ADSL, ISDN and WiMAX subscribers.
3. Excludes Telkom internal lines.
4. Penetration rate is based on the 2011 Census population statistics.
5. Revenue per fixed access line has been restated to exclude internal
revenue in line with the new disclosure.
6. Based on number of Telkom Company employees, excluding
subsidiaries.
7. Based on a subscriber who has participated in a revenue generating
activity within the last 90 days.
8. The ARPU for September 2012 has been restated to exclude
internal revenue in line with the new disclosure and to include Telkom
Business mobile.
Financial performance
Group operating revenue
Six months ended
30 September 30 September
In ZAR millions 2013 2012 %
Voice 8 185 8 540 (4.2)
Fixed-line usage 4 071 4 411 (7.7)
Fixed-line subscriptions 3 889 3 847 1.1
Mobile voice and
subscriptions 225 282 (20.2)
Interconnection 739 874 (15.4)
Fixed-line domestic 236 286 (17.5)
Fixed-line international 470 551 (14.7)
Mobile interconnection 33 37 (10.8)
Data 5 453 5 289 3.1
Data connectivity 2 791 2 761 1.1
Leased line facilities 941 988 (4.8)
Internet access and
related services 846 798 6.0
Managed data network
services 444 464 (4.3)
Multi-media services 25 27 (7.4)
Mobile data 303 202 50.0
IT Business services 103 49 110.2
Customer premises equipment
sales and rentals 864 578 49.5
Sales 135 156 (13.5)
Rentals 364 347 4.9
Mobile handset and
equipment sales 365 75 386.7
Other 172 44 290.9
iWayAfrica 169 182 (7.1)
Trudon 562 592 (5.1)
Swiftnet 48 47 2.1
Total 16 192 16 146 0.3
Group operating revenue increased by 0.3% to R16 192 million (30 September
2012: R16 146 million) driven by growth in mobile data and IT Business
services revenue.
Fixed-line voice usage revenue continued its declining trend and decreased
7.7% to R4 071 million (30 September 2012: R4 411 million). This was driven
by a 3.0% decline in voice minutes, which continues being affected by mobile
substitution, a reduction in fixed termination rates of approximately R55 million
and a decrease of approximately R130 million relating to the pass through of the
reduction in mobile termination rates to fixed-line customers. Furthermore,
the number of lines also declined by 4.6%.
Fixed-line subscriptions revenue grew 1.1% to R3 889 million (30 September
2012: R3 847 million) as a result of line rental tariff adjustments (5.8%
increase in post-paid residential and a 6% increase in business line
rental tariffs effective 1 August 2012 and 1 August 2013).
Although revenue from our mobile operations increased by 55.4%, mobile voice
and subscriber revenue decreased 20.2% and interconnection revenue decreased
10.8%. This is driven by both the decline in the number of post-paid subscribers
andlower post-paid ARPU. The decline in our post-paid subscribers is
attributable to the expiration of a large number of hybrid contracts as
well as the continuation of the debtors clean-up to ensure a better
quality customer base. These hybrid contracts were generating low ARPUs
and the current base is providing a more sustainable growth base than the
prior period. Fixed-line domestic interconnection revenue decreased
17.5% to R236 million (30 September 2012: R286 million)
primarily due to the 20.9% average decrease in fixed termination rates.
Fixed-line international interconnection revenue decreased by
14.7% to R470 million (30 September 2012: R551 million) largely as a
result of the loss of traffic as competitors provide their own routes.
Data connectivity increased 1.1% to R2 791 million (30 September 2012:
R2 761 million) as a 6.7% increase in the number of ADSL subscribers to
898 203 (30 September 2012: 841 831) was offset by lower revenue from
Diginet, Megalines, ATM and LanConnect.
Revenue from mobile leased line facilities remained under pressure and
declined 4.8% to R941 million (30 September 2012: R988 million) as
self-provisioning by other operators continues.
Internet access revenue increased 6.0% contributed by higher
IP Connect revenue.
Managed data network services revenue decreased 4.3% to R444 million
(30 September 2012: R464 million) as a credit note of approximately
R30 million was issued following the renegotiation of a contract. In terms of
the renegotiated contract the revenue will only be recognised in the
second half of the 2014 financial year. The migration of customers to
lower cost solutions also contributed to the decrease and was partially
offset by a 12.8% increase in the number of sites to 45 441 (30 September
2012: 40 284).
Mobile data revenue increased 50.0% to R303 million (30 September 2012:
R202 million) from growth in the number of data subscribers, data deals
and promotional products launched during the period in line with our
strategy to focus on data.
IT Business services revenue increased 110.2% to R103 million
(30 September 2012: R49 million) as we experienced good traction in the IT
market with key strategic wins.
Although our customer premises equipment sales decreased 13.5% to R135
million (30 September 2012: R156 million) due to a strategic decision to
discontinue the sale of PC and gaming equipment, our rentals increased
4.9% to R364 million (30 September 2012: R347 million) from growth in new
generation equipment rentals and higher tariffs.
Mobile handset and equipment sales revenue increased 386.7% driven by
higher bulk sales to dealers as well as the sharp increase from Smartphone
and Tablet sales.
Other revenue increased 290.9% to R172 million (30 September
2012: R44 million) as we recognised higher revenue from
expired cards and higher co-location revenue generated from an increase in
the number of sites.
Group other income
Six months ended
30 September 30 September
In ZAR millions 2013 2012 %
Telkom 150 140 7.1
iWayAfrica 8 7 14.3
Trudon 14 14
Swiftnet 1 3 (66.7)
Total 173 164 5.5
Higher rental received from commercial buildings was the main contributor
to the increase in other income.
Group direct expenses
Six months ended
30 September 30 September
In ZAR millions 2013 2012 %
Payments to other
operators 2 026 2 458 17.6
Direct cost 257 159 (61.6)
Cost of sales 744 502 (48.2)
Total 3 027 3 119 2.9
The 2.9% decrease in direct expenses driven by the decrease in mobile
termination rates was partially offset by higher mobile acquisition costs,
higher cost of customer premises equipment and mobile handsets sold.
Telkom direct expenses
Six months ended
30 September 30 September
In ZAR millions 2013 2012 %
Payments to other
operators 1 913 2 332 18.0
Mobile network operators 1 100 1 481 25.7
International network
operators 458 517 11.4
Fixed-line network
operators 199 178 (11.8)
Data commitments 156 156
Direct cost 258 159 (62.3)
Cost of sales 541 306 (76.8)
Total 2 712 2 797 3.0
Payment to other operators decreased by 18.0% resulting from a reduction
in mobile termination rates, lower international settlement rates and
volumes, and higher fixed-line volumes, offset by lower fixed-line
termination rates.
Direct cost increased 62.3% following an increase in mobile sales
acquisition cost relating to a 6.9% increase in active mobile subscribers.
The increase in cost of sales is mainly as a result of the increase in the
cost of mobile handsets sold.
Group operating expenses
Six months ended
30 September 30 September
In ZAR millions 2013 2012 %
Employee expenses* 4 987 4 812 (3.6)
Selling, general and
administrative expenses* 2 357 2 517 6.4
Service fees 1 557 1 472 (5.8)
Operating leases 504 442 (14.0)
Depreciation, amortisation,
impairments and write-offs 3 091 2 966 (4.2)
Total 12 496 12 209 (2.4)
* Excluding the net curtailment gain from employee expenses in
September 2013 and the provision for the Competition Commission fine from
selling, general and administrative expenses in September 2012.
Group operating expenses increased by 2.4% to R12 496 million
(30 September 2012: R12 209 million) in the six months ended
30 September 2013, primarily due to the 6.8% average salary increase for
bargaining unit employees and a 3.6% average salary increase for
management employees as well as the impairment of legacy and
technologically aged spare parts that was reclassified from inventory to
property, plant and equipment in terms of an amendment to IFRS.
Group operating expenditure contribution
Six months ended
30 September 30 September
In ZAR millions 2013 2012 %
Telkom* 12 231 11 950 (2.4)
iWayAfrica 63 71 11.3
Trudon 155 149 (4.0)
Swiftnet 47 39 (20.5)
Total 12 496 12 209 (2.4)
* Excluding the net curtailment gain in September 2013 and the provision
for the Competition Commission fine in September 2012.
Telkom operating expenses
Six months ended
30 September 30 September
In ZAR millions 2013 2014 %
Employee expenses 4 812 4 626 (4.0)
Salaries and wages 3 649 3 609 (1.1)
Benefits* 1 313 1 206 (8.9)
Workforce reduction expenses 64 32 (100.0)
Employee related expenses
capitalised (214) (221) (3.2)
Selling, general and
administrative expenses 2 340 2 513 6.9
Materials and maintenance 1 554 1 531 (1.5)
Marketing 453 375 (20.8)
Bad debts 41 211 80.6
Other* 292 396 26.3
Service fees 1 545 1 460 (5.8)
Property management 836 797 (4.9)
Consultants, security and other 709 663 (6.9)
Operating leases 475 415 (14.5)
Buildings 205 161 (27.3)
Equipment 19 17 (11.8)
Vehicles 251 237 (5.9)
Depreciation, amortisation,
impairments and write-offs 3 059 2 936 (4.2)
Depreciation 2 294 2 461 6.8
Amortisation 316 420 24.8
Impairment and write-offs 449 55 (716.4)
Total 12 231 11 950 (2.4)
* Excluding the net curtailment gain from employee expenses in
September 2013 and the provision for the Competition Commission
fine from selling, general and administrative expenses in
September 2012.
Employee expenses were 4.0% higher driven by a 6.8% average salary
increase for bargaining unit employees and a 3.6% average salary increase
for management employees, partially offset by a 9.0% decrease in headcount
achieved through the voluntary severance packages and voluntary early
retirement packages offered.
Selling, general and administrative expenses reduced by 6.9% to R2 340
million (30 September 2012: R2 513 million), contributed by lower
inventory write-offs and bad debts which reduced by 80.6% as lower
international bad debts were written off and mobile credit vetting systems
were improved. We did however experience an increase in marketing expenses
of 20.8% as mobile marketing campaigns increased.
Space optimisation projects, repairs and renovation of mobile buildings
and masts, resulted in a 4.9% increase in property management expenses.
Consultants, security and other service fees increased 6.9% driven by
higher consulting cost incurred relating to the Company transformation
process.
Operating leases increased 14.5% as we increased in the number of mobile
sites acquired and higher building leases.
Depreciation decreased 6.8% to R2 294 million (30 September 2012:
R2 461 million). The decrease relates to the R12 billion impairment
of the asset base in March 2013. This was partially offset by accelerated
depreciation as we reviewed the useful lives of new connections installed
to customer premises.
Impairment and write-offs increased significantly. With effect from
1 April 2013, Telkom adopted an amendment to IAS 16, property, plant and
equipment (PPE) which clarifies that spare parts previously included in
inventory be classified as PPE if they meet the definition of PPE.
Consequently, certain legacy and technologically aged items were
reclassified to PPE from inventory. As the carrying amount of these items
exceeded the recoverable amount thereof, IFRS required an impairment to be
recognised regarding these assets.
Details of operating expenditure related to our mobile business that is
included in Telkoms operating expenditure are provided below for
additional information to monitor Telkom Mobile as a start-up business.
Mobile operating expenditure
Six months ended
30 September 30 September
In ZAR millions 2013 2012 %
Payments to other
operators 230 191 (20.4)
Direct cost 215 126 (70.6)
Cost of sales 331 131 (152.7)
Employee expenses 180 153 (17.6)
Selling, general and
administrative expenses 565 534 (5.8)
Service fees 71 116 38.8
Operating leases 107 61 (75.4)
Depreciation, amortisation,
impairments and write-offs 248 166 (49.4)
Total 1 947 1 478 (31.7)
EBITDA
Six months ended
30 September 30 September
In ZAR millions 2013 2012 %
Telkom* 3 679 3 655 0.7
EBITDA margin (%) 23.9 23.8 0.1
Trudon 266 306 (13.1)
EBITDA margin (%) 47.3 51.7 (4.4)
Swiftnet (1.0) 5.0 (120.1)
EBITDA margin (%) (2.1) 10.6 (12.7)
iWayAfrica (11) (18) 38.9
EBITDA margin (%) (6.5) (9.9) 3.4
Total 3 933 3 948 (0.4)
* Excluding the net curtailment gain in September 2013 and the provision
for the Competition Commission fine in September 2012.
Investment income
Investment income consists of interest received on short-term investments
and bank accounts. Investment income decreased by 17.4% to R123 million
(30 September 2012: R149 million) as a result of lower cash balances.
Finance charges and fair value movements
Finance charges include interest paid on local and foreign borrowings,
amortised discounts on bonds and commercial paper bills, fair value gains
and losses on financial instruments and foreign exchange gains and losses
on foreign currency denominated transactions and balances.
Foreign exchange and fair value gains increased significantly to R279
million (30 September 2012: R60 million). The increase emanated from
higher fair value gains on derivatives caused by the weakening of the Rand
and a higher fair value of the investment in Cell Captive preference
shares. The interest expense decreased by 21.3% to R269 million
(30 September 2012: R342 million) driven by lower interest rates and a 34.9%
decrease in interest bearing debt from 31 March 2013.
Taxation
The consolidated tax expense decreased to R202 million (30 September 2012:
R301 million) resulting from lower taxable profit in the six months ended
30 September 2013 as the deferred tax on the net curtailment gain was
not recognised and the Competition Commission fine provided in the prior
period was not tax deductible.
The consolidated effective tax rate for the six months ended
30 September 2013, excluding the net curtailment gain was 20.7%. The
consolidated effective tax rate, excluding the non-deductible
Competition Commission fine for the six monthsended 30 September 2012
was 35.5%. The higher effective tax rate for the six months ended
30 September 2012 was as a result of the non-deductible impairment of
the loan to Multi- Links and the loan and investment in iWayAfrica.
Although the impairments are eliminated on consolidation, it
has an impact on the Companys taxation expense.
Consolidated statement of financial position
The Groups capital structure remains strong. Net debt, after financial
assets and liabilities, decreased by 4.6% to R2 029 million from R2 122
million as at 31 March 2013, resulting in a net debt to EBITDA ratio of
0.3 times excluding the net curtailment gain at 30 September 2013. On
30 September 2013, the Group had cash balances, including other financial
assets and liabilities, of R2 229 million (31 March 2013: R4 464 million).
Current liabilities decreased in the six months ended 30 September 2013 as
we settled the R2.0 billion syndicated loan payable in December 2013.
Free cash flow
Six months ended
30 September 30 September
In ZAR millions 2013 2013 %
Cash generated from
operations before
dividends paid 3 166 3 595 (11.9)
Less: Additions to
property, plant and
equipment (3 133) (2 085) 50.3
Free cash flow 33 1 510 (97.8)
Free cash flow decreased 97.8% to R33 million (30 September 2012:
R1 510 million) resulting from a 50.3% increase in additions to
property plant and equipment and a 11.9% decrease in cash generated from
operations. Cash generated from operations decreased due to the payment of
severance packages, higher creditor payments resulting from the weakening
of the Rand against major currencies and payment of part of the Competition
Commission fine in the six months ended 30 September 2013.
Group capital expenditure
Our capital expenditure remains directed at our strategic intent of
building our Next Generation Network and growing our mobile and converged
service offerings.
Group capital expenditure which includes spend on intangible assets,
increased by 49.5% to R3 173 million (30 September 2012: R2 123 million)
and represents 19.6% of Group operating revenue (30 September 2012: 13.1%).
Six months ended
30 September 30 September
In ZAR millions 2013 2012 %
Baseline 1 083 968 (11.9)
Network evolution 1 014 344 (194.8)
Mobile 815 521 (56.4)
Sustainment 60 89 32.6
Effectiveness and efficiency 58 23 (152.2)
Support 91 99 8.1
Regulatory and other 2 15 86.7
iWayAfrica 2 2
Trudon 35 48 27.1
Swiftnet 13 14 7.1
Total 3 173 2 123 (49.5)
Baseline capital expenditure of R1 083 million (30 September
2012: R968 million) was largely for the deployment of
technologies to support the growing data services business, links to the
mobile cellular operators and expenditure for access line deployment in
selected high growth commercial and business areas. The increased
expenditure for the period can be attributed to growth in the IP Network,
Customer Specific Solutions and the core transport network.
Expenditure on network evolution of R1 014 million (30 September 2012:
R344 million) was mainly for the continued rollout of the Next Generation
Network programme to modernise the legacy voice network, to provide high
speed ADSL service in selected areas and to address the associated operational
and business support systems. Expenditure has increased as the programme
progresses beyond the initial phase.
Mobile capital expenditure increased 56.4% as we continue to invest in our
mobile and LTE network. This is as a result of the first half of the prior
year being a repositioning period.
The sustainment category expenditure of R60 million (30 September 2012:
R89 million) was largely for the replacement of obsolete power systems as
well as the replacement and modernisation of the access and core network.
The increase in the effectiveness and efficiency category to R58 million
(30 September 2012: R23 million) was as a result of the movement of staff
from leased buildings to owned buildings and of the upgrade of the IT
service desk.
The support capital expenditure of R91 million (30 September 2012:
R99 million) is mainly for the rebranding of Telkom stores, for the
provision of new buildings and building extensions in support of network
growth and compliance upgrades.
Three year financial targets
F2014 F2015 F2016
Revenue Stabilise Stabilise Grow
to grow
EBITDA margin Increase Increase Increase
1% - 2% 1% - 2% 1% - 2%
Capex to Revenue 18% - 21% 14% - 17% 14% - 17%
Net Debt to EBITDA =1 =1 =1
Reinstate Dividend Reinstated Reinstated
Auditors Review Report
Our auditors, Ernst & Young Inc. have reviewed the condensed consolidated
interim financial statements. The unmodified review report is available
for inspection at the Groups registered office.
Board approval
The condensed consolidated interim financial statements were
authorised for issue by the Board of Directors of Telkom ("Board") on
15 November 2013.
Preparation and supervisor of annual financial statements
These condensed consolidated interim financial statements were prepared by
Riàz Mohammed Alli: Senior Manager and supervised by Deon Fredericks:
Acting Chief Financial Officer.
Condensed consolidated interim statement of profit or loss and other
comprehensive income
for the six months ended 30 September 2013
Reviewed Restated*
30 September 30 September
2013 2012
Notes Rm Rm
Total revenue 4 16 482 16 454
Operating revenue 16 192 16 146
Payments to other operators 5.1 2 026 2 458
Cost of sales 5.2 1 001 661
Net operating revenue 13 165 13 027
Other income 173 164
Operating expenses 10 323 12 598
Employee expenses 5.3 2 814 4 812
Selling, general and
administrative expenses 5.4 2 357 2 906
Service fees 5.5 1 557 1 472
Operating leases 5.6 504 442
Depreciation, amortisation,
impairment, write-offs
and losses 5.7 3 091 2 966
Operating profit 3 015 593
Investment income 123 149
Finance charges and fair
value movements (10) 282
Interest 269 342
Foreign exchange gains and
fair value movements (279) (60)
Profit before taxation 3 148 460
Taxation 6 202 301
Profit for the period 2 946 159
Other comprehensive income
Items that may be reclassified
subsequently to profit or loss
Exchange differences on
translating foreign
operations 5 10
Items that may not be
reclassified subsequently to
profit or loss
Defined benefit plan
actuarial gains 1 101 43
Defined benefit plan asset
ceiling limitation (245) (24)
Income tax relating to
components of other
comprehensive income 7 (69) (5)
Other comprehensive income
for the period, net of
taxation 792 24
Total comprehensive income
for the period 3 738 183
Profit attributable to:
Owners of Telkom 2 891 91
Non-controlling interests 55 68
Profit for the period 2 946 159
Total comprehensive income
attributable to:
Owners of Telkom 3 683 115
Non-controlling interests 55 68
Total comprehensive income
for the period 3 738 183
Basic and diluted earnings
per share (cents) 8 566.2 17.8
* The amounts have been restated due to the adoption of IAS
19R and the amendment to IAS 16. The layout of the statement of profit or
loss and other comprehensive income has been changed to provide more
relevant disclosures.
Condensed consolidated interim statement of financial position at
30 September 2013
Reviewed Restated*
30 September 30 September
2013 2012
Notes Rm Rm
Assets
Non-current assets 30 519 30 346
Property, plant and
equipment 24 876 24 881
Intangible assets 2 665 2 581
Other investments 2 612 2 492
Deferred expenses 39 50
Other financial assets 12 76 83
Finance lease receivables 210 219
Deferred taxation 10 41 40
Current assets 9 094 11 232
Inventories 11 832 760
Income tax receivable 18 16
Current portion of finance
lease receivables 125 131
Trade and other receivables 5 861 5 804
Other financial assets 12 1 067 2 134
Cash and cash equivalents 13 1 191 2 387
Total assets 39 613 41 578
Equity and liabilities
Equity attributable to
owners of the parent 21 482 17 798
Share capital 5 208 5 208
Treasury shares (771) (771)
Non-distributable reserves 2 311 2 164
Retained earnings 14 734 11 197
Non-controlling interests 398 379
Total equity 21 880 18 177
Non-current liabilities 7 403 10 271
Interest-bearing debt 15 3 841 3 899
Other financial liabilities 12
Employee related provisions 16 2 323 5 153
Non-employee related
provisions 16 320 238
Deferred revenue 903 952
Deferred taxation 10 16 17
Current liabilities 10 330 13 130
Trade and other payables 5 677 4 661
Shareholders for dividend 22 22
Current portion of
interest-bearing debt 15 493 2 758
Current portion of employee
related provisions 16 1 494 2 605
Current portion of non-
employee related provisions 16 683 786
Current portion of deferred
revenue 1 574 1 740
Income tax payable 358 501
Current portion of other
financial liabilities 28 54
Credit facilities utilised 13 1 3
Total liabilities 17 733 23 401
Total equity and
liabilities 39 613 41 578
* The amounts have been restated due to the adoption of IAS
19R and the amendment to IAS 16.
Condensed consolidated interim statement of Changes in equity for the six
months ended 30 September 2013
Reviewed Restated*
30 September 30 September
2013 2012
Notes Rm Rm
Balance at 1 April 18 177 30 121
Attributable to owners of
Telkom 17 798 29 707
Change in accounting
policy (20)
Non-controlling interests 2.1 379 434
Total comprehensive income
for the period 3 738 183
Profit for the period as
restated 2 946 159
Other comprehensive income 792 24
Exchange differences on
translating foreign
operations 5 10
Net defined benefit plan
asset ceiling limitation (225) (17)
Net defined benefit plan
actuarial gains 1 012 31
Acquisition of subsidiaries and non-
controlling interests (2)
Dividend paid** (35) (105)
Balance at 30 September 21 880 30 197
Attributable to owners of
Telkom 21 482 29 801
Non-controlling interests 398 396
* The amounts have been restated due to the adoption of IAS
19R and the amendment to IAS16.
** Dividend paid to the non-controlling interests of the
Trudon Group.
Condensed consolidated interim statement of cash flows for the six months
ended 30 September 2013
Reviewed Restated*
30 September 30 September
2013 2012
Notes Rm Rm
Cash flows from operating
activities 3 131 3 490
Cash receipts from
customers 15 999 16 146
Cash paid to suppliers and
employees (12 527) (12 161)
Cash generated from
operations 3 472 3 985
Interest received 186 243
Finance charges paid (230) (243)
Taxation paid (262) (390)
Cash generated from
operations before dividend
paid 3 166 3 595
Dividend paid (35) (105)
Cash flows from investing
activities (2 060) (4 357)
Proceeds on disposal of
property, plant and
equipment 2
Additions to property,
plant and equipment and
intangible assets (3 133) (2 085)
Decrease/(increase) in
repurchase agreements* 1 071 (2 272)
Cash flows from financing
activities (2 259) 265
Loans raised 300 2 012
Loans repaid (2 712) (1 715)
Finance lease capital
repaid (77) (93)
Settlement of derivatives 230 61
Net decrease in cash and
cash equivalents (1 188) (602)
Net cash and cash
equivalents at beginning
of period 2 384 1 165
Effect of foreign exchange
rate differences on cash
and cash equivalents (6) (2)
Net cash and cash
equivalents at end of
period 13 1 190 561
* Repurchase agreements were reclassified from financing activities to
investing activities.
Notes to the condensed consolidated interim financial statements
for the six months ended 30 September 2013
1. Corporate information
Telkom SA SOC Limited (Telkom) is a Company incorporated and domiciled in
the Republic of South Africa whose shares are publicly traded. The main
objective of Telkom, its subsidiaries, joint venture and associate (the
Group) is to supply telecommunication, multimedia, technology, information
and other related information technology services to Telkoms customers,
as well as mobile communication services, in South Africa and certain
other African countries.
2. Basis of preparation and accounting policies
Basis of preparation
The condensed consolidated interim financial statements have been prepared
in accordance with IAS 34 Interim Financial Reporting and in compliance
with the Listings Requirements of the JSE Limited and the South African
Companies Act, 2008.
The condensed consolidated interim financial statements are presented in
South African Rand, which is the Groups functional currency. All
financial information presented in Rand has been rounded off to the
nearest million.
The condensed consolidated interim financial statements are prepared on
the historical cost basis, with the exception of certain financial
instruments initially (and sometimes subsequently) measured at fair value.
The results of the interim period are not necessarily indicative of the
results for the entire year and these reviewed financial statements should
be read in conjunction with the audited financial statements for the year
ended 31 March 2013.
The preparation of the condensed consolidated interim financial statements
requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Although
these estimates are based on managements best knowledge of current events
and actions that the Group may undertake in the future, actual results may
differ from those estimates.
Significant accounting judgements, estimates and assumptions In preparing
these condensed consolidated interim financial statements, the significant
judgements made by management in applying the Groups accounting policies
and the key sources of estimation uncertainty were consistent with those
appliedto the consolidated financial statements for the year ended
31 March 2013 with the exception of the curtailment to the post-retirement
medical aid liability.
Significant accounting policies
The condensed consolidated interim financial statements have been prepared
in accordance with the accounting policies adopted in the Groups last
annual financial statements for the year ended 31 March 2013, except for
the adoption of the amendments and new standards listed below.
The accounting policies have been applied consistently throughout the
Group for the purposes of preparation of these condensed consolidated
interim financial statements.
IAS 16 (amendment) Property, Plant and Equipment: Classification of
Service Equipment
The amendment clarifies that spare parts and servicing equipment are
classified as property, plant and equipment rather than inventory when
they meet the definition of property, plant and equipment. Previously the
Group classified strategic spare parts which were not considered as major
parts as inventory.
Following the amendment, the Group reclassified spare parts with a
carrying amount of R376 million (1 April 2012: R352 million) from
inventory to property, plant and equipment. The useful lives of the spare
parts have been estimated to be approximately five years.
IAS 19R Employee Benefits
IAS 19R Employee Benefits prescribes a number of changes to the accounting
for employee benefits. As a result of adopting the revised standard, the
Group has changed its accounting policy with respect to the basis for
determining the income or expense related to the Groups defined benefit
plans. These adjustments were made on a retrospective basis.
The standard replaces the interest cost on the defined benefit obligation
and the expected return on plan assets with a net interest cost based on
the net defined benefit asset or liability and the discount rate, measured
at the beginning of the year. This has increased profit or loss charge as
the discount rate applied to assets is lower than the expected return on
assets. This has no effect on total comprehensive income as the increased
charge in profit or loss is offset by
a credit in other comprehensive income.
In addition, unvested past service costs can no longer be deferred and
recognised over the future vesting period. Instead all past service costs
are recognised at the earlier of when the amendment occurs and when the
Group recognises related restructuring or termination costs. Until 2013,
the Groups unvested past service costs were recognised as an
expense on a straight-line basis over the average period until
the benefits became vested. With the transition to IAS 19R,
past service costs are recognised immediately if the benefits have vested
immediately following the introduction of, or changes to, a pension plan.
The effect has been that the profit or loss has increased by R104 million
as at 31 March 2013 and R53 million as at 30 September 2012. The effect on
the defined benefit obligation was an increase of R2 million as at
31 March 2013 and R5 million as at 30 September 2012.
2.1 IAS 19R (amendment) Employee Benefits and Strategic
Inventory Impact
Impact of transition to IAS 19R and IAS 16
Impact on interim condensed consolidated statement of financial position
As at As at
31 March 30 September
2013 2012
Rm Rm
Increase in the defined benefit
obligation due to past servicecost
recognition (3) (5)
Decrease in deferred tax
liabilities 1
Increase in property, plant and
equipment due to service
equipment restatement 357* 352
Decrease in strategic inventory due
to service equipment restatement (406) (376)
Net impact (52) (28)
* Depreciated amount.
The effects on the statement of profit or loss and other comprehensive
income for the year ended 31 March 2013 and for the six months ended
30 September 2012 are:
Year to Six months to
31 March 30 September
2013 2012
Rm Rm
Profit or loss:
Increase in employee benefit expenses (144) (73)
Decrease in tax expenses 40 20
Increase in depreciation due to
service equipment restatement (25) (13)
Decrease in deferred tax
liabilities 7 4
Net decrease in profit for the
year (122) (62)
Equity holders of the parent (122) (62)
Other comprehensive income:
Increase in remeasurement
movement in OCI 146 74
Increase in tax effect on
remeasurement movements in OCI (41) (21)
Net increase in other
comprehensive income 105 53
Equity holders of the parent 105 53
There was no material impact on the Groups interim condensed consolidated
statement of cash flows. The basic and diluted earnings per share moved
from 30.2 cents as previously reported to 17.8 cents for the six months
ended 30 September 2012. The headline earnings and diluted headline earnings per
share moved from 37.2 cents as previously reported to 24.9 cents for the
six months ended 30 September 2012.
The following new standards, amendments to standards and interpretations
that have been adopted and do not have a material impact on the Group.
IFRS 1 First-time Adoption of IFRS Amendments permit the repeated
application of IFRS 1, borrowing costs on certain qualifying assets
(effective 1 January 2013).
IFRS 1 First-time Adoption of IFRS Amendment addresses how a first-time
adoptee would account for a government loan with a below market rate of
interest (effective 1 January 2013).
IFRS 7 Financial Instruments Disclosures Amendments
enhancing disclosures about offsetting of financial assets and
financial liabilities (effective 1 January 2013).
IAS 32 Financial Instruments: Presentation Amendments to clarify tax
effect of distribution to holders of equity instruments (effective
1 January 2013).
IAS 34 Interim Financial Reporting Amendments to clarify interim
financial reporting segment information for total assets and total
liabilities to enhance consistency with the requirements of IFRS 8
(effective 1 January 2013)
IFRIC 20 Stripping Costs in the Production Phase of a Surface
Mine (effective 1 January 2013).
Standards and interpretations in issue not yet adopted and not yet
effective
The new standards, amendments to standards and interpretations
in issue have not yet been adopted and are not yet effective. All
standards are effective for annual periods beginning on or after the
stated effective date.
IFRS 7 Financial Instruments Disclosures Amendments requiring
disclosures about the initial application of IFRS 9 (effective 1 January
2015).
IFRS 9 Financial Instruments Classification and measurement of financial
assets and financial liabilities and derecognition requirements (effective
1 January 2015).
IAS 32 Financial Instruments: Presentation Amendments to application
guidance on the offsetting of financial assets and financial liabilities
and the related net credit exposure (effective 1 January 2014).
IAS 36 Impairment of Assets Amendment to disclosures of the recoverable
amount of impaired non-financial assets as
a consequence of issuing IFRS 13 Fair Value Measurement
(effective 1 January 2014).
IFRIC 21 Levies Interpretation on the accounting for levies imposed by
governments (effective 1 January 2014).
3. Segment information
The Executive Committee manages the business on a combined basis. This
reflects the financial information reviewed by the Executive Committee
when making decisions about performance and resource allocation and is
consistent with the manner in which the Telkom network generates revenue,
ie on a combined basis. As a result, Telkom has a single operating and
reporting segment. No Group geographical information is provided as the
majority of the Groups operations are carriedout in South Africa.
Refer to prior years annual report.
The Telkom segment provides fixed-line access, fixed-line usage, data
communications services (through Telkom and Cybernest), mobile voice
services and handset sales.
September September
2013 2012
Rm Rm
4. Total revenue 16 482 16 454
Operating revenue 16 192 16 146
Other income (excluding profit on
disposal of property, plant and
equipment, intangible assets,
investments and profit on disposal
of subsidiary) 167 159
Investment income 123 149
Operating revenue increased due to higher mobile data revenue and higher
data revenue from Cybernest partially offset by lower fixed-line voice and
interconnection revenue.
Investment income decreased due to lower levels of cash available for
investment.
Restated
September September
2013 2012
Rm Rm
5. Expenses
5.1 Payments to other operators 2 026 2 458
Payments to other network operators
(interconnection fees) has decreased
due to the reduction in the
termination rates.
5.2 Cost of sales 1 001 661
The increase in the cost of sales is
due to increased customer premises
equipment sales.
5.3 Employee expenses* 2 814 4 812
The decrease in employee expenses is
mainly due to a net curtailment gain
of R2.2 billion related to the post-
retirement medical aid benefit that
has been reduced. This was set-off
with a R100 million curtailment loss
from the Telkom Retirement Fund due
to the closing of the voluntary
severance and voluntary early retirement
process as well as a lower headcount.
The average salary increase and the
adoption of IAS 19R adversely impacted
employee expenses.
Refer to note 16 with regard to the
curtailment gain.
5.4 Selling, general and administrative
expenses 2 357 2 906
Selling and administrative expenses
decreased mainly due to the provision
for the Competition Commission fine
in 2012.
Included in selling, general and
administrative expenses is write-down
of inventories to the value of R11
million (2012: R17 million).
5.5 Service fees 1 557 1 472
Increases in service fees are due to
the cost incurred on the transformation
programme of the Company.
5.6 Operating leases 504 442
Operating leases increased as a
result of an increase in the number of
mobile sites acquired and an
increase in building leases.
5.7 Depreciation, amortisation,
impairment, write-offs and losses 3 091 2 966
Depreciation of property, plant and
equipment 2 309 2 474
Amortisation of intangible assets 333 436
Impairment of property, plant and
equipment and intangible assets 392
Write-offs of property, plant and
equipment and intangible assets 57 56
Depreciation and amortisation decreased as a result of a lower asset base
after a R12 billion impairment of assets in March 2013, partially offset
by accelerated depreciation emanating from the review of the useful
lives of drop wires installed at customer premises. Impairment and write-offs
increased significantly due to the decision to impair property, plant and
equipment that was reclassified from inventories following a change in
accounting policy.
* Restated due to the adoption of IAS 19R.
Restated
September September
2013 2012
Rm Rm
6. Taxation 202 301
South African normal company taxation 273 470
Deferred taxation (refer to note 10)* (71) (169)
The tax expense is lower as a
result of lower taxable income mainly
as a result of the realisation of
employee related provisions raised at
March 2013.
7. Taxation effects of other comprehensive
income
Tax effects relating to each component
of other comprehensive income
Exchange differences on
translating foreign operations 5 10
Net foreign currency translation
differences for foreign operations 5 10
Defined benefit plan actuarial
gains* 1 101 43
Tax effect of defined benefit plan
actuarial gains* (89) (12)
Net defined benefit plan actuarial
gains 1 012 31
Defined benefit plan asset ceiling
limitation (245) (24)
Tax effect of defined benefit plan
asset ceiling limitation 20 7
Net defined benefit plan asset
ceiling limitation (225) (17)
Other comprehensive income for the
year before taxation 861 29
Tax effect of other comprehensive
income for the year (69) (5)
Other comprehensive income for the
year, net of taxation 792 24
* Restated due to the adoption of
IAS 19R.
8. Earnings per share
Total operations
Basic and diluted earnings per
share (cents) 566.2 17.8
Headline earnings and diluted headline
earnings per share (cents) 649.8 24.9
Reconciliation of weighted average
number of ordinary shares:
Ordinary shares in issue 520 783 900 520 783 900
Weighted average number of
treasury shares (10 190 084) (10 190 084)
Weighted average number of shares
outstanding 510 593 816 510 593 816
Reconciliation of diluted weighted
average number of ordinary shares
Diluted weighted average number of
shares outstanding 510 593 816 510 593 816
Total operations
Reconciliation between earnings and
headline earnings:
Profit attributable to equity
holders of Telkom 2 891 91
Adjustments:
Profit on disposal of property,
plant and equipment and intangible
assets (7) (5)
Impairment loss on property, plant
and equipment and intangible assets 392
Write-offs of property, plant and
equipment and intangible assets 57 56
Taxation effects (15) (15)
Headline earnings 3 318 127
* The amounts have been restated due to
the adoption of IAS 19R and the
amendment to IAS 16.
September March
2013 2013
Rm Rm
9. Capital additions and disposals
Property, plant and equipment 2 967 4 755
Additions 2 972 4 777
Disposals (5) (22)
Intangible assets 201 960
Additions 201 961
Disposals (1)
The capital expenditure for the six months was largely due to the
deployment of the Next Generation Network, mobile cellular services and
baseline technologies.
Restated
September March
2013 2013
Rm Rm
10. Deferred taxation 25 23
Deferred taxation assets 41 40
Deferred taxation liabilities (16) (17)
Deferred tax
assets are recognised
for deductible temporary differences
to the extent of the related tax
benefit through future taxable profits
is probable. The Group did not
recognise deferred tax assets of R2 242
million (31 March 2013: R3200 million) in
respect of temporary differences amounting
to R8 007 million (31 March 2013: R11 300
million) that can be carried forward
against future taxable income.
11. Inventories 832 760
Gross inventories 953 1 067
Write-down of inventories to net
realisable value (121) (307)
March 2013 has been restated due to
the adoption of the amended IAS 16.
Maintenance spares were reclassified to
property, plant and equipment.
Refer to note 2.
Decrease in inventory is mainly due to
network equipment partly offset by
an increase in installation and maintenance
and merchandise stock. The
write-down of inventory is mainly due to the
provision for technology obsolescence and
slow moving stock.
12. Other financial assets
Other financial assets consist of: 76 83
Total other financial assets 1 143 2 217
Held-to-maturity
Repurchase agreements 910 1 980
At fair value through profit or loss
Derivative instruments 233 237
Forward exchange contracts 112 132
Cross currency swaps 121 105
Less: Current portion of other
financial assets 1 067 2 134
Held-to-maturity
Repurchase agreements 910 1 980
At fair value through profit or loss
Derivative instruments 157 154
Forward exchange contracts 112 132
Cross currency swaps 45 22
Repurchase agreements
The Group manages a portfolio of
repurchase agreements, with a view to generating additional investment
income on the favourable interest rates and security provided on these
instruments. They are short term, usually seven days and are held-to-
maturity.
September March
2013 2013
Rm Rm
13. Net cash and cash equivalents
Cash disclosed as current assets 1 191 2 387
Cash and bank balances 268 234
Short-term deposits 923 2 153
Credit facilities utilised (1) (3)
Net cash and cash equivalents 1 190 2 384
The decrease in cash and cash equivalents is mainly due to the repayment
of the syndicated loan of R2 billion. This was partly off-set by an inflow
of R1 billion from repurchase agreements.
14. Financial risk management
Exposure to continuously changing market conditions has made
management of financial risk critical for the Group. Treasury policies,
risk limits and control procedures are continuously monitored by the Board
of Directors through its Audit Committee.
The condensed consolidated interim financial statements do not include all
financial risk management information and disclosures required in the
annual financial statements, and should be read in conjunction with the
Groups annual financial statements as at 31 March 2013.
14.1 Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its
financial obligations as they fall due. The Group is exposed to liquidity
risk as a result of uncertain cash flows as well as capital commitments
of the Group.
Liquidity risk is managed by the Groups Treasury team in accordance with
policies and guidelines formulated by the Groups Executive Committee. In
terms of its borrowing requirements the Group ensures that sufficient
facilities exist to meet its immediate obligations.
Compared to the 2013 financial year-end, there was no material change in
the contractual undiscounted cash out flows for financial liabilities.
14.2 Fair value of financial instruments
The carrying amount of financial instruments approximate fair value, with
the exception of interest-bearing debt (at amortised cost), which has a
fair value of R5 148 million (31 March 2013: R7 661 million) and a carrying
amount of R4 334 million (31 March 2013: R6 657 million) (refer to note 15).
Fair value at
Type of 30 September
financial instrument 2013 Valuation technique Significant inputs
Receivables, bank R4 468 million Undiscounted future Probability of
balances, repurchase estimated cash flows default
agreements, and other due to short-term
liquid funds,payables maturities of these
and accruals, credit instruments
facilities utilised
and shareholders for
dividends
Derivatives R205 million Discounted cash Yield curves,market
flows interest rate and
market foreign
exchange rate
Borrowings R5 148 million Discounted cash Market interest rate
flows
The estimated net fair values as at the reporting date, have been
determined using available market information and appropriate valuation
methodologies as outlined below. This value is not necessarily indicative
of the amounts that the Group could realise in the normal course of business.
Derivatives are recognised at fair value. The fair values of derivatives
are determined using quoted prices or, where such prices are not
available, a discounted cash flow analysis is used. These amounts reflect
the approximate values of the net derivative position at the reporting
date. The fair values of listed investments are based on quoted market
prices.
The fair values of the borrowings disclosed above are based on quoted
prices or, where such prices are not available, the expected future
payments discounted at market interest rates. As a result they differ from
carrying values.
The fair value of receivables, bank balances, repurchase agreements and
other liquid funds, payables and accruals, approximate their carrying
amount due to the short-term maturities of these instruments.
14.3 Fair value hierarchy
The table below analyses financial instruments carried at fair
value, by valuation method.
The different levels have been defined as follows:
(a) Quoted prices in active markets for identical assets or
liabilities (level 1).
(b) Inputs other than quoted prices, that are observable for the asset or
liability (level 2).
(c) Inputs for the asset or liability that are not based on observable
market data (level 3).
The following tables presents the fair value of the Groups assets and
liabilities:
Total Level 1 Level 2 Level 3
30 September 2013 Rm Rm Rm Rm
Assets measured at fair
value
Forward exchange contracts 112 112
Investment in preference
shares 2 607 2 607
Cross currency swaps 121 121
Liabilities measured at
fair value
Interest rate swaps (5) (5)
Forward exchange contracts (23) (23)
Liabilities measured at
amortised cost
Interest-bearing debt (5 148) (3 752) (1 396)
Total Level 1 Level 2 Level 3
31 March 2013 Rm Rm Rm Rm
Assets measured at fair value
Forward exchange contracts 132 132
Investment in preference
shares 2 490 589 1 901
Transfer to level 1* 1 901 (1 901)
Cross currency swaps 105 105
Liabilities measured at fair
value
Interest rate swaps (51) (51)
Forward exchange contracts (15) (15)
Liabilities measured at
amortised cost
Interest-bearing debt (7 661) (3 882) (3 779)
The fair value of the financial assets and financial liabilities are
sensitive to exchange rates and interest rates movements. The Rand
depreciated against major currencies during the period resulting
in unrealised fair value gains. The volatility of the exchange rates
also had an impact on the fair values of these instruments.
* During the year ended 31 March 2013, the Investment in Cell Captives
Coronation Absolute Portfolio with a market value of R1 901 million was
transferred from fair value level 2 to fair value level 1. The reason for
transfer is that the prices for each of the assets held in the absolute
portfolio was obtained from recognised market sources.
Restated
September March
2013 2013
Rm Rm
15. Interest-bearing debt
Non-current interest-bearing debt 3 841 3 899
Local debt 2 770 2 730
Foreign debt 396 456
Finance leases 675 713
Current portion of interest-bearing
debt 493 2 758
Local debt 200 2 494
Foreign debt 224 207
Finance leases 69 57
Repayments/refinancing
The Company repaid the syndicated loan
of R2 billion out of available cash
during the reporting period. The current
portion of interest-bearing debt of R424
million (nominal) as at 30 September 2013
is expected to be repaid from available
operational cash flow and/or the issue of
new debt instruments. Management believes
that sufficient funding facilities will
be availableat the date of repayment/
refinancing.
16. Provisions
Non-current portion of provisions 2 643 5 391
Employee related 2 323 5 153
Non-employee related 320 238
Current portion of provisions 2 177 3 391
Employee related 1 494 2 605
Non-employee related 683 786
The decrease in non-current employee
related provisions is mainly due to
the effect of the net curtailment gain
of R2.2 billion recognised on the post-
retirement medical aid benefit. Telkom
allowed eligible employees the option
to transfer their post-retirement
medical aid benefit to Liberty Life.
The Company curtailed the medical cap
increase to 0% for active members due
to rising operational costs and
affordability. Of the 9 302 eligible
employees, 7 549 employees exercised
their option to transfer their benefit
to Liberty Life. The increase in the non-
employee related portion is attributable to
the provision for certain legal matters.
The reduction of the current portion of
employee related provisions is attributable
to the net post-retirement medical aid
curtailment and bonus provision due to
lower headcount. Refer to note 2 for the
impact of the adoption of IAS 19R.
17. Commitments
Capital commitments authorised 3 470 7 542
Commitments against authorised
capital expenditure 2 008 2 855
Authorised capital expenditure not
yet contracted 1 462 4 687
Capital commitments are largely attributable to purchases of property,
plant and equipment and software (included in intangible assets). Management
expects these commitments to be financed from internally generated cash
and borrowings.
18. Contingencies Contingent liabilities Competition matters
Telkom was a party to a number of legal proceedings filed by several
parties with the South African Competition Commission (CC) alleging
anti-competitive practices described below. Some of the complaints filed
at the CC have been referred by the CC to the Competition Tribunal (CT)
for adjudication.
Should the CT find that Telkom committed a prohibited practice as set out
in the Competition Act for each of the cases, the CT may impose a maximum
administrative penalty of 10% of Telkoms annual turnover in the Republic
of South Africa and its exports from the Republic of South Africa during
Telkoms preceding financial year. However, Telkom has been advised by
external legal counsel that the CT has to date not imposed the maximum
penalty on any offender in respect of the contraventions it is being
accused of.
SAVA/Omnilink
This matter was settled on the basis that Telkom must pay the fine that
was originally awarded by the Tribunal in the sum of R449 million. Telkom
paid 50% of the fine on 12 October 2013 and will pay the balance on
12 October 2014.
CC Multiple Complaints Referral
Telkom and the CC signed a settlement agreement on 14 June 2013, in settlement
of the Multiple Complaints Referral. In terms of this settlement agreement,
Telkom admitted that its conduct during the complaint period amounted to a
contravention of sections 8(c) (margin squeeze) and 8(d)(iii) (bundling and
tying) of the Competition Act. The settlement agreement was confirmed by the
CT on 18 July 2013 and made an order of the CT. In terms of the aforementioned
settlement agreement, Telkom agreed to pay an administrative penalty of
R200 000 000, payable in three instalments. The first instalment of R66 666 666
was paid on 16 August 2013. The second instalment in the same amount is payable
during July 2014 and the last instalment of R66 666 668 is payable during
July 2015. Telkom furthermore committed to certain price reductions in the
2014, 2015 and 2016 financial years as well as to certain behavioural
remedies.
Matters before ICASA
Phutuma Networks (Proprietary) Limited (Phutuma)
Phutuma filed a complaint against Telkom at the Complaints and Compliance
Committee of ICASA (CCC) in February 2010. At the hearing during February
2013, Phutuma applied for a postponement and the matter was postponed for
hearing in August 2013. However, the matter was not finalised during this
hearing due to, amongst other things, new allegations raised by Phutuma which,
Telkom argued, did not form part of the complaint as currently constituted
before the CCC. No evidence was led regarding the merits of the claim.
The matter was postponed again to January 2014 in order to hear argument
regarding the admissibility of evidence Phutuma intends to introduce.
The matter was further postponed to May 2014 for the main hearing.
Supplier dispute
Radio Surveillance Security Services (Proprietary) Limited (RSSS)
During September 2011, RSSS served two summons on Telkom for the sum of
R215 million and R9 million (including VAT) respectively. Both summons
were withdrawn in November 2011 but reissued in December 2011. The smaller
claim of R9 million was settled. The claim for R215 million is being
defended. RSSS has alleged that Telkom is indebted to it for the rendering
and upgrading of 440 alarm systems previously purchased by Telkom, to be M3010
compliant.
Telkoms exception application was set down in August 2013 for hearing but
was postponed at the instance of RSSS with costs awarded to Telkom. The
exception hearing was again set down for hearing on 11 November 2013.
RSSS served a notice to amend its summons, to which Telkom objected,
whereupon a second notice to amend was filed. Telkoms exception application
was adjourned at the request of RSSS, with an associated cost
order against RSSS.
High Court
Phutuma Networks (Proprietary) Limited (Phutuma)
In August 2009 Phutuma served a summons on Telkom, claiming for damages
arising from a tender published by Telkom in November 2007 for the
outsourcing of the Telex and Gentex services and for the provision of a
solution to support the maritime industry requirements. The tender was
cancelled in June 2009, without any award being made, due to the
expiration of the validity period of the tender. Phutuma alleged that
Telkom awarded the tender to a third party outside a fair, transparent and
cost effective procurement process and claimed damages of R3 730 433 545,
alternatively R5 513 876 290, and further alternatively R1 771 683 580
plus interest at 15.5% per annum to date of payment from April 2008,
alternatively from 30 April 2009 being the date of notice in terms of Act 40
of 2002, further alternatively from date of service of this summons plus
legal costs.
The trial was re-enrolled for hearing in May 2013. On 22 May 2013 the
court refused Phutumas application for a postponement of the
trial. The court also granted absolution from the instance plus costs
since Phutuma could not establish the facts in support of its case to the
satisfaction of the court. Phutuma has filed a notice of appeal against
the judgment. No date for leave to appeal has been assigned by
the High Court.
African Pre-paid Services Nigeria Limited (APSN) vs Multi-Links (MLT):
Arbitration matter
In December 2008 MLT, a former Telkom subsidiary concluded a Super Dealer
Agreement (SDA) with African Prepaid Services (APS). In May 2009, APS
ceded and assigned all of its rights and obligations under the agreement
to APSN. On 13 June 2011, APSN launched arbitration proceedings in South
Africa against MLT claiming damages (9 claims) in a sum of USD481 milllion
arising from an alleged repudiation of the SDA by MLT. The claim was later
reduced to USD457 million. The matter is defended by MLT, which also filed
a counterclaim for USD123 million. In terms of an indemnity clause under
the Share Purchase Agreement with Hip Oils, Telkom is liable for all
amounts in excess of USD10 million in respect of the claim between APSN
and MLT.
The arbitration was set down for hearing in November 2012, which was
adjourned to enable MLT to file a special plea regarding certain alleged
irregularities pertaining to the negotiations and the conclusion of the
SDA. In August 2013, MLT successfully applied to the High Court to set
aside the arbitation proceedings pending the outcome of the damages action
of Telkom and MLT against Blue Label Telecoms and others.
Other
Hip Oils Topco Limited (Hip Oils)
With the sale of Telkoms shares in Multi-Links to HIP Oils, Telkom
provided a taxation indemnity and a creditors indemnity to HIP Oils and
Multi-Links where such liability or obligation was incurred prior to
3 October 2011 and to the extent that such liability was not disclosed or
exceed the amounts set out in Schedule 4 (creditors list) to the Sale and
Purchase Agreement. Discussions are underway with the Nigerian tax
authorities. Telkom is also in discussions with Multi-Links/Hip Oils
regarding contributions towards the creditors claims.
Contingent assets
Former Senior Executive of Telkom
Telkom has issued a summons against a former senior executive of Telkom in
April 2013, claiming an amount of USD6 million, for damages suffered as a
result of certain irregularities. Telkom paid USD1 million to a third
party due to the defendant, acting outside his authority and also USD5
million ultra vires, by binding Telkom jointly and severally under a
financial guarantee for the obligations of Multi-Links (a previous
subsidiary of Telkom) and also suffered damages of USD5 million due to the
defendants conduct.
Blue Label Telecoms Limited and five others
On 17 May 2013, Telkom and MLT issued a summons against Blue Label
Telecoms Limited, APSN and four other defendants, for damages of USD528
million arising out of a Super Dealer Agreement (SDA) concluded between APS
(a subsidiary of Blue Label) and MLT. MLT also filed a damages claim for
several millions US Dollars. The matter is defended. In August 2013,
Telkom and MLT successfully opposed a High Court application by APSN
that the North Gauteng High Court had no jurisdiction over it. In November
2013, APSN filed its plea and a counterclaim against MLT for damages in the
sum of USD457 million based on various claims and a claim against Telkom for
damages in the sum of USD451 million or so much of it as APSN does not
recover from Multi-Links arising from Telkoms alleged interference with
the contractual relationship between Multi-Links and APSN. Telkom and MLT
is in the process of finalising their pleas.
Arbitration
BLS Telecom LLC (BLS)
In October 2008, Telkom concluded a traffic termination agreement with BLS
(a USA company), which made provision inter alia for the resolution of
disputes by means of arbitration in South Africa. BLS disputed liability
for payment of various amounts owing to Telkom in terms of the agreement.
In 2011, Telkom served a Statement of Claim on BLS for payment of USD38
million in relation to services rendered in terms of the agreement. BLS
is defending the matter and has also filed a counterclaim of USD18 million
for a telecommunications network allegedly supplied to MLT and switchboxes
allegedly supplied to both Telkom and MLT. The matter is ongoing.
Tax matters
As noted in the 2013 consolidated annual financial statements, the 2012
tax return has been submitted, and has since then been provisionally assessed,
on the basis of the senior counsel opinions obtained. Since the tax treatment
of the R3.9 billion loss is based on an unique set of circumstances and a complex
legislative environment, the contingent asset will only be recognised once
the Telkom interpretation has been given final acceptance by SARS (or in
the case of a dispute has been positively resolved in the Tax Court). The
Company awaits the outcome of the SARS process, which will confirm the
recognition of the tax refund of R854 million, currently included in trade
and other payables.
The Group is regularly subject to an evaluation, by tax authorities, of
its direct and indirect tax filings. The consequence of such reviews is
that disputes can arise with tax authorities over the interpretation or
application of certain tax rules applicable to the Groups business. These
disputes may not necessarily be resolved in a manner that is favourable to
the Group. Additionally, the resolution of the disputes could result in an
obligation to the Group.
September September March
2013 2012 2013
Rm Rm Rm
19. Related parties Details
of material transactions and
balances with related parties
not disclosed separately in
the consolidated annual
financial statements were
as follows:
With shareholders:
Government of South Africa
Related party balances
Trade receivables 538 413 446
Trade payables
Department of
Communications (73)
Related party transactions
Revenue (1 562) (1 988) (3 017)
Individually significant
revenue* (653) (601) (1 345)
City of Cape Town (37) (33) (66)
Department of Correctional
Services (47) (41) (93)
Department of Health:
Gauteng (25) (24) (50)
Department of Justice (54) (52) (118)
South African National
Defence Force (26) (31) (72)
South African Police
Services (296) (265) (601)
South African Revenue
Services (24) (19) (42)
S.I.T.A. (Proprietary)
Limited (102) (82) (195)
South African Post Office (22) (25) (50)
Department of Interior
Affairs (20) (29) (58)
Collectively significant
revenue (909) (1 387) (1 672)
* The nature of the individually and collectively significant revenue
consists mostly of data revenue.
At 30 September 2013, the Government of South Africa held
39.8% (March 2013: 39.8%) of Telkoms shares, and has the
ability to exercise significant influence, and the Public Investment
Corporation held 13.4% (March 2013: 11.7%) of Telkoms shares.
September September March
2013 2012 2013
Rm Rm Rm
With entities under common
control:
Major public entities
Related party balances
Trade receivables 36 17 48
Trade payables 2
Related party transactions
Revenue (136) (157) (260)
Expenses 113 126 237
Individually significant
expenses 106 119 223
South African Post Office 47 48 96
Eskom 59 71 127
Collectively significant
expenses 7 7 14
Rent received (23) (13) (43)
Individually significant
rent received: South African
Post Office (21) (11) (39)
Collectively significant
rent received (2) (2) (4)
Rent paid 14 13 26
Individually significant rent
paid: South African
Post Office 9 9 17
Collectively significant
rent paid 5 4 9
Key management personnel
compensation:
(Including directors and
prescribed officers
emoluments)
Related party transactions
Short-term employee benefits 70 97 189
Post-employment benefits 5 5 10
Termination benefits 2 16 24
Loan to Group Chief Financial Officer
Telkom SA (SOC) Limited provided a loan of R5 997 775.43 to Mr Jacques
Schindehutte to assist him to acquire shares in Telkom. Interest on the
loan is calculated at 0% per annum.
The loan is repayable on termination of employment contract by any of the
following reasons: retirement, resignation, dismissal, abscondment or
medical disability. In the event of these reasons materialising the loan
shall bear interest at the prime rate plus 2% per annum, calculated from
the date of demand to the actual repayment, compounded monthly in arrears.
As security for the executives obligation to Telkom pursuant to the loan
agreement, the executive will pledge and cede in securitatem debiti to
Telkom all the shares in Telkom that are acquired through the use of the
loan facility (the Pledged Security) until the full and irrevocable discharge
of theloan, the executive shall not sell or otherwise dispose of the Pledged
Security or any interest therein. The Pledged Security shall be delivered
to and held by the escrow agent contemplated in the rules of the Employee
FSP until the repayment in full of the loan and any interest.
Telkoms management has recognised that the loan made to such executive
may not have been in compliance with the provisions of the Companies Act
and will, as a matter of urgency, take the matter under advisement from
its advisers for rectification and/or recovery of the amount, should that
be necessary. The Board resolutions in respect of the loans to be granted
are to be tabled for consideration/approval to the Board at its first
meeting after the Annual General Meeting, scheduled for the 15th November 2013.
Terms and conditions of transactions with related parties
Outstanding balances at the year-end are unsecured, interest free and
settlement occurs in cash. There have been no guarantees provided or
received for related party receivables or payables.
20. Significant events
Results of the Telkom annual general meeting regarding directors
reappointments
All Board members were re-elected as per the annual general
meeting ordinary resolutions with the exception of Mr J Molobela who
withdrew his nomination to be re-elected as director with effect from
27 September 2013. Mr B du Plessis did not stand for re-election for the
Board.
Suspension of Chief Financial Officer
Shareholders are advised that Mr Jacques Schindehütte, the Chief Financial
Officer of Telkom has been suspended by the Board effective 24 October 2013,
pending a disciplinary process. The suspension follows the findings of an
investigation commissioned by the Board after certain allegations were made
against Mr Schindehütte.
The Board has a duty to investigate and to test the validity of
allegations, which are brought to its attention through an appropriate
process, and will do this fairly, without favour or prejudice.
Mr Deon Fredericks has been acting as Chief Financial Officer of Telkom
with effect from 24 October 2013 and will fulfil this role until such time
as the disciplinary process against Mr Schindehütte is concluded.
Employee Forfeitable Share Plan (Employee FSP)
A new forfeitable share plan was approved at the Annual
General Meeting per special resolution where no more than 5% of Telkoms
amount of issued shares will be allocated to employees.
Post-retirement medical aid curtailment
Telkom announced during August 2013 that eligible employees have the
option to transfer their post-retirement medical aid benefit to Liberty
Life. The Company curtailed the medical cap increase to 0% as from 1
October 2013 for active members due to revenue remaining under pressure,
rising operational costs and affordability. Of the 9 302 eligible employees
7 549 employees exercised their option to transfer their benefit to Liberty
Life on 11 October 2013. The approximate net curtailment gain recognised
is R2.2 billion.
21. Subsequent events
Appointment of Chief Information Officer
Telkom announced on 21 October 2013 that Mr L De Villiers has been
appointed as Chief Information Officer with effect from 1 November 2013.
Fair value hedge accounting
The Group implemented hedge accounting for foreign currency risk hedging
instruments from 1 October 2013 in an attempt to mitigate earnings
volatility and better reflect the underlying economics of hedges.
Other matters
The directors are not aware of any other matter or circumstance since the
financial period ended 30 September 2013 and the date of this report, or
otherwise dealt with in the financial statements, which significantly affects
the financial position of the Group and the results of its operations.
www.telkom.co.za
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