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TELKOM SA SOC LIMITED - Group Interim Results for the six months ended 30 September 2021

Release Date: 09/11/2021 07:40
Code(s): TKG TL23 TL31 TL30 TL26 TL32 TL27 TL29 TL28 TL24 TL25     PDF:  
Wrap Text
Group Interim Results for the six months ended 30 September 2021

Telkom SA SOC Ltd
(Incorporated in the Republic of South Africa)
Registration number 1991/005476/30
JSE share code: TKG
JSE bond code: BITEL
ISIN: ZAE000044897
(Telkom, the Company or the Group)

Group Interim Results for the six months ended 30 September 2021

- EBITDA up 1.2% with EBITDA margin at 28.1%
- HEPS up 30.4% to 285.5 cents BEPS up 27.3% to 276.8 cents
- Mobile data revenue up 6.1% to R6 374 million
- Mobile customer base up 18.8% to 16.3 million
- FTTH connectivity rate at 46.9%

Telkom delivered strong earnings growth despite a challenging trading and economic environment. 
The first half of the year saw the economy struggle to recover from the consequences of COVID-19, 
which were compounded by the recent unrest in certain parts of South Africa. Group profitability 
continued to grow ahead of revenue, underpinned by our sustainable cost management, which seeks 
to ensure that cost to serve is optimised and operating expenditure (opex) growth is contained 
below inflation. Telkom remains resolute in executing its strategic goals, with the Value Unlock 
programme on track. The masts and towers business listing on the JSE is on target for the fourth 
quarter of the financial year. The effective management transition is in place, with the appointment 
of the Group Chief Executive Officer (CEO) Designate and the new CEO of Telkom Consumer. As the mobile 
business continues to grow, Telkom onboarded a second national roaming partner.

Operating environment
The pandemic continues to have an impact on lives, families and communities. Telkom has continued 
to prioritise the wellbeing of its employees. As the attention of the world moved to vaccines, 
we developed a proactive COVID-19 vaccination framework that supports an increased focus on mental 
and physical wellness and a need for greater resilience. Telkom supported the Business for South Africa 
initiatives to ensure access to vaccines for all South Africans. In July, we entered into an agreement 
with Dis-Chem that enabled us to prioritise vaccination for all employees who are eligible to get the 
COVID-19 vaccine, including up to five extended family members. We unveiled our hybrid work policy, 
which allows most employees to work remotely. We support government's national COVID-19 vaccination 
programme aimed at achieving population immunity in South Africa and in the workplace.

The pandemic and subsequent lockdowns continue to impact the South African economy. Customers remain under 
severe financial pressure due to loss of jobs and reduced income. Small and medium enterprises (SMEs) 
are also under strain, with some SMEs being liquidated as they were the hardest hit by the pandemic. 
The competitive environment has intensified with increased competitive activities in the first half of the year.

Group financial performance overview
The Group sustained its revenue performance
Group revenue was flat at R21 292 million, driven by the mobile business and the masts and towers business. 
Mobile revenue increased by 9.7% despite experiencing the COVID-19 bump in the prior period as a result 
of the stringent lockdown alert level that was implemented. The masts and towers business continued on its 
growth trajectory, with external revenue increasing by 4.6% as it commercialises its portfolio. The performance 
was offset by the IT business, which remains under pressure due to the challenging trading environment, 
and a decline in the fixed-line business as customers migrate to new technologies such as fibre and LTE. 
Although the fixed-line business declined by 9.5% in the period, we saw a significant slowdown in the rate 
of decline compared to the 18.2% reported in the prior period. The stability in the fixed-line business 
is attributable to a slowdown in fixed voice churn and an increase in usage, due to improved economic activity 
in the period compared to the prior period when South Africa was in lockdown level 5.

Solid EBITDA growth underpinned by sustainable cost management
Group EBITDA grew faster than revenue with an increase of 1.2% to R5 978 million and the EBITDA margin 
expanding by 0.5 ppts to 28.1%. This was underpinned by our effective sustainable cost management programme, 
which aims to contain opex growth below inflation and optimise cost to serve. Opex declined by 3.1% 
year on year despite an average Group-wide salary increase of 6%, which was effective from 1 April 2021. 
Mobile cost to serve was optimised despite the increase in certain costs associated with the post-paid 
market such as distribution channel costs following a year of lower distribution costs due to the impact 
of the strict lockdown. The cost to serve improvement was enabled by optimised roaming costs as we maintain 
stringent roaming traffic thresholds and migrate traffic to our network, supported by the ongoing network investment.

HEPS increase driven by lower finance charges and fair value movements
Reported HEPS increased by 30.4% to 285.5 cents while BEPS increased by 27.3% to 276.8 cents compared 
to the prior period. This was mainly due to a significant decline in finance charges and fair value movements 
compared to the prior period as well as the increase in Group EBITDA. Finance charges and fair value movements 
declined by 34.9% to R659 million. Finance charges reduced due to our funding strategy of ongoing settlement 
of maturing debt. Finance charges reduced by 25.2% to R541 million. Our funding strategy allowed us to balance 
our cost of debt ratio to 52:48 floating to fixed. This ensures that the risk to changes in interest rates remains 
balanced. Fair value movements and foreign exchange losses reduced significantly by 91.9% to R17 million from 
R209 million due to currency volatility and favourable foreign exchange hedging position.

Capital investment for growth accelerated in the first half of the year
We continued to invest in our key growth areas, fibre and mobile, with a capital investment increase 
of 22.7% to R3 610 million representing a capex to revenue intensity of 17.0%. The network rollout 
in the prior period was impacted by the lockdown in the first quarter of the prior year. 
With the highest FTTH connectivity rate of 46.9% in the market, we started accelerating our fibre 
rollout following a period of focusing on connectivity rate to improve returns. Going forward, we will 
focus on expanding our FTTH footprint while simultaneously focusing on connecting premises to ensure 
that we maintain a high connectivity rate.

Balance sheet remains stable with adequate capacity to fund our strategy
Our conservative funding approach enabled us to strengthen our balance sheet by repaying maturing 
debt of approximately R1.1 billion in the prior financial year, with R900 million repaid in the first half 
of the prior financial year. In the first half of the current year, we settled a further R100 million of debt 
in line with our debt maturity profile. We have adequate balance sheet capacity to effect our strategic funding 
requirements with net debt to EBITDA ratio stable at 1.1x driven by a 32.3% decrease in the cash balances 
at the end of the period and an increase of additional IFRS 16 lease liabilities to support mobile growth.

Free cash flow under pressure due to increased capex
In line with management expectations, we generated negative free cash flow (FCF) of R839 million due 
to an increase of R1.1 billion in capex paid in the period under review. During the period, we executed 
an off-balance sheet disposal of the handset receivable book amounting to approximately R300 million 
in line with management's cash release initiatives to improve working capital management.

Business performance overview
Telkom Consumer continued to be the driver of growth in the Group with revenue increasing by 2.1% 
to R12 960 million driven by the mobile business. This was partially offset by the decline in fixed-line 
business due to continued migration to next-generation technologies such as long-term evolution (LTE) 
and fibre, and ongoing pressure in the SME segment. Mobile service revenue grew by 6.8% to R8 847 million, 
supported by 18.8% year on year growth in active customers to 16.3 million. Mobile data revenue grew by 
6.1% to R6 374 million, supported by 10.3% growth in mobile broadband customers to 10.6 million, 
which represents 65.5% of our active customer base. This performance was delivered against a strong 
first half of the prior year, which saw a surge in data demand due to the pandemic.

Driving the growth of adjacent revenue streams and opportunities remains a strategic imperative which 
we are actively investing in. Included in Telkom Consumer revenue is content and financial services revenue 
of R388 million, which grew 23% year on year. This revenue is expected to continue to grow and will 
be a solid base from which to grow as we look to diversify revenue.

BCX was the hardest hit by the challenging environment, as it serves all the sectors of the economy. 
Revenue declined by 6.1% to R7 461 million. We continue to see sluggish investments by corporates 
as the country battles with the impact of the pandemic and the effects of restrictions on parts 
of the economy. The Information technology (IT) business remains under pressure due to the lingering 
impact of the lockdown and the global supply chain constraints and shortages of semiconductor chips.

Openserve continued to stabilise with its topline revenue slightly down by 1.8% to R6 720 million, 
supported by the fibre ecosystem, including fibre to the base stations and fibre to the business. 
From a fibre to the home (FTTH) perspective, the number of homes passed increased by 54.2% to 707 399, 
and the number of homes connected with fibre increased by 34.3% to 331 735. The 331 735 number of homes 
connected with fibre surpassed the number of homes connected with copper of 230 817.

Gyro masts and towers (Swiftnet) continued to commercialise its masts and towers business, with revenue 
increasing by 7.3% to R674 million, supported by an increase in the productive portfolio tenancy ratio 
from 1.52x in the prior period to 1.55x. The business is being prepared for listing on the JSE.

Effective management transition is in place
The appointment of the Group CEO Designate and CEO of Telkom Consumer effective 1 October 2021 
will ensure continued execution of Group strategy. Serame Taukobong was appointed Group CEO Designate 
and will take over the role of Group CEO on 1 July 2022. His successor in Telkom Consumer, Lunga Siyo, 
was appointed CEO: Telkom Consumer.

Telkom adds MTN South Africa as a second national roaming partner
Telkom has entered into a roaming agreement with MTN South Africa. MTN South Africa is Telkom's second 
roaming partner, effective 1 November 2021. The roaming agreement covers 2G, 3G and 4G, which will include 
seamless handover between Telkom and MTN networks. Telkom currently has a roaming agreement with Vodacom South Africa 
and has opted for two national roaming partners. Telkom's innovation in mobile network deployment has enabled 
flexibility to offer customers a better experience and optimse its existing roaming spend.

A separate listing of the masts and towers business (Swiftnet)
Telkom is pursuing a separate listing of its masts and towers business (Swiftnet) on the JSE before 
the end of the financial year. Significant progress has been made, including, but not limited to, 
formal engagements with the JSE. Telkom believes that a separate listing of Swiftnet will affirm the valuation 
of the masts and towers business and its contribution to the overall valuation of the Telkom business, 
thereby unlocking further value for Telkom.

Outlook statement
Given the challenges in the first half of the year, management will focus on growing the topline revenue 
and profitability in the second half of the year. Discipline in capital expenditure will continue 
to be exercised and we will focus on initiatives to improve cash generated from operations. Management expects 
FCF to normalise in the second half of the year and return to positive territory similar to the past two years. 
As the growth in the mobile business normalises and the fixed-line business is starting to stabilise following 
periods of decline subsequent to execution of a migration strategy, management will now focus on its IT business 
which has been under pressure due to various reasons. To this end, the Board is investigating a strategic 
intervention in the business which could include but not limited to introducing a strategic partnership 
in the business. This is aimed at addressing capacity and capabilities in BCX and ensure sustainable 
growth going forward.

The Board remains committed to the value unlock strategy, which is premised on Telkom's market 
capitalisation not representing its intrinsic value. Telkom has different classes of infrastructure 
assets such as data centres, a wholesale network business and masts and tower business, which are globally 
valued at higher multiples for separate individual businesses than telecommunications. Telkom has made progress 
in consolidating the data centres into Gyro, with the intention of building a carrier neutral data centre 
infrastructure business, while the legal separation of Openserve is on track. Significant progress 
has been made in respect of a separate listing of its masts and towers business (Swiftnet), including, 
but not limited to, formal engagements with the JSE. The listing is expected to be concluded before the end 
of the financial year subject to market and other conditions. The Board believes that a separate listing 
of Swiftnet will affirm the valuation of the masts and towers business and its contribution to the overall 
valuation of Telkom. The proceeds of the value unlock are expected to rebase the balance sheet and/or reinvest 
in the business and/or shareholder rewards.

Returning cash to shareholders remains a key element of our capital allocation framework. The Board remains 
committed to reinstate the dividend policy by the end of the current financial year. Given the advanced stage 
of the separate listing of Swiftnet which is expected to be concluded by end of the financial year and the 
management transition, the Board will be better placed to take a holistic view of the capital allocation 
and make an announcement on the dividend policy at the end of the financial year. The Board will deliberate 
on the dividend declaration at that stage.

                                                                            Reviewed    Reviewed              
                                                                           September   September                   
                                                                                2021        2020   Variance
Financial information summary                                                     Rm          Rm          %
Gross operating revenue                                                       21 292      21 396       (0.5)
EBITDA                                                                         5 978       5 908        1.2
EBITDA margin (%)                                                               28.1        27.6        0.5
Capex                                                                          3 610       2 942       22.7
Free cash flow                                                                  (839)        211     (497.6)
BEPS (cents)                                                                   276.8       217.5       27.3
HEPS (cents)                                                                   285.5       219.0       30.4
Net debt to EBITDA (times)                                                       1.1         0.9        0.2
Interim dividends (cents)                                                          -           -          -

Sello Moloko

Sipho Maseko
Group Chief Executive Officer

Dirk Reyneke
Group Chief Financial Officer

9 November 2021

Nedbank Corporate and Investment Banking, a division of Nedbank Limited

Further information: The short-form interim financial results announcement is the responsibility 
of the board of directors of Telkom. It is only a summary of the information contained in the long-form 
interim financial results announcement and does not contain full or complete details.

Any investment decisions should be based on the long-form interim financial results announcement published 
on the JSE's website on Tuesday, 09 November 2021 and also available on Telkom's website at

The long-form interim financial results announcement, including the auditor's review opinion, is available 
on the company's website at: and on the JSE's 
website at:

Transfer secretaries are Computershare and they are contactable on +27 11 370 5000.

Date: 09-11-2021 07:40:00
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