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There can be no messing about when it comes to succession: the next CEO of Telkom will make or break the company. Not since Telkom’s creation as an individual entity in 1991 – or, indeed, before that point, when it went from telegraph carrier to Government department before being unbundled as a public utility – has there been a more decisive point in its history.
And it’s a substantial history. Stepping into Telkom’s main undersea cable station in Cape Town is like travelling back in time. The forecourt has been transformed into a makeshift museum, where the walls are lined with various artefacts of the company’s past that stretches back to 1859, when the first telegraph was sent in the then-disputed territory of South Africa pre-union.
Some of the relics include sections of the South African Telegraph Company’s copper cable that first connected Durban to Europe in 1879. These items are a reminder that Telkom – while it’s only been known as such since 1991 – is a company with deep roots. But like other dinosaurs it’s big and ancient.
With the announced retirement of Reuben September as group CEO – following the news that four of the company’s top execs had accepted voluntary retrenchment and early retirement packages mere weeks before – Telkom’s top-level management is clearing out and question marks loom over who will take the reins at SA’s telecommunications network.
The market clearly agrees it’s time for a change. On the Friday that September announced his resignation, the JSE was down overall – but Telkom shares lifted on the news. Commentary sparked from analysts such as Frost & Sullivan’s Spiwe Chireka, who said Telkom had gone from bad to worse under September’s reign, pointing to its acquisition of Nigerian Multi Links as a prime example of bad decision-making. World Wide Worx Strategy MD Steven Ambrose said September’s departure was the best thing that could have happened to it.
That must all be sobering for the CEO.
September’s tenure at Telkom effectively began in 1977, when he joined the Department of Posts and Telecommunications as a pupil technician. To say he’s come a long way since then would be a vast understatement. September’s move into corporate included fulfilling the portfolio of managing executive for technology and network services and then chief technical officer and COO for the company before ultimately taking over as CEO in an acting capacity in 2007 and officially being appointed to the top post in November of that year.
He was appointed a director of Telkom’s board in May 2007 and also served as a director of Vodacom, in which Telkom held a majority share until selling out to British company Vodafone last year.
There’s little argument to be made about the fact September knows more about Telkom than anyone else – and that may just be the problem.
World Wide Worx MD Arthur Goldstuck says it’s possible to be too deeply ingrained in a company. He adds that September had spent a lifetime at Telkom and there are very few major corporations where lifetime employees are able to become successful CEOs. This wasn’t because of their ability but because they’re too steeped in the culture of the organisation.
That’s particularly true in telecoms, where the past three decades have seen rapid change – especially over recent years. Adapting to that change requires outside insight and fresh thinking.
Goldstuck says the nature of September’s appointment was a barrier to Telkom’s adaptation to modern environments. It now stands at a critical juncture. Its business has seen a degree of disintermediation in SA’s telecoms sector, where legislative and regulatory changes have created more of a free-for-all environment. Telkom’s monopoly has been broken on paper, although it does still control the most vital bits of the country’s leased-line infrastructure.
The new frontier for Telkom is mobile – and here it’s a rookie competing with giants in the form of Vodacom and MTN on one hand and the rapidly up-scaling Cell C on the other.
The major concern expressed by analysts about September’s successor is a fear of Government using its ongoing stake in the company to effectively install a new CEO. We all know how that’s played out at the SABC as a fine example of public sector-inspired management.
As far as Goldstuck is concerned, Telkom’s next CEO could come from anywhere – except Government: what Telkom needs is someone with vision and energy. Someone who can deal with a tough regulatory environment but who also understands the needs of a developing country. “This can’t be the deployment of a cadre – if that happens we’re looking at another SABC,” says Goldstuck.
Other analysts place even more strenuous criteria on successors to the throne at Telkom. Kaplan Equity Analysts’ Irnest Kaplan believes the next CEO should have experience at guiding incumbent networks out of public corporation status into the realms of privatisation. That would exclude South Africans from the job and require someone who has overseen the process for the likes of a British Telecoms or AT&T.
However, no matter who you speak to, the message is clear: it’s time for Government to get out of Telkom – and not just insofar as management decisions are concerned.
Government’s share of Telkom currently sits at 39%. When it listed in New York and Johannesburg in 2003 the retention of State shares was justified, in terms of Telkom being a national asset. Government has proved it couldn’t manage its way out of a cardboard box when it comes to corporates. It’s bungled the SABC, SA Airways and Eskom. Telkom is headed the same way unless a new leadership is established that can buck the company’s current direction and put Government in its place – preferably nowhere as far as holding a stake is concerned.
The challenges that face Telkom from a competitive and strategic perspective must also be tackled. When it comes to forcing Government out of running Telkom, there have been insinuations a clash between September and the politicians over the State’s shareholding could be a primary reason for his leaving.
The ruction between September and Government is centred on the sale of Telkom’s shareholding in Vodacom, which was given the blessing of former President Thabo Mbeki’s cabinet but regarded as undesirable by trade-union federation Cosatu, which has a greater influence in current President Jacob Zuma’s administration than in his predecessor’s.
September may well have pushed a privatisation agenda too far with the powers that be and sealed his fate, at least on a political level, with the sale of its shares in Vodacom. To a British company, nogal.
Politics aside, September was also at the helm during a particularly exciting time in terms of opportunities for Telkom – all of which it missed.
Kaplan says fixed-mobile is an obvious play Telkom should have made but curiously neglected. That’s a strategy whereby a telecoms provider offers a unified mobile and fixed-line solution. Kaplan says Telkom held a majority stake in Vodacom until recently but never leveraged that for a fixed-mobile offering. Telkom is now moving into mobile but could have benefited from getting into the game earlier.
Telkom also ditched its Telkom Media subsidiary, which was designed to combat MultiChoice in the SA market. It’s astounding it didn’t hang on to that asset and use it to a launch a triple-play strategy, where television, data and voice services are delivered from a single provider. If it had combined that with connectivity, both on mobile and fixed lines, it would certainly have captured market.
That Telkom missed those tricks is confusing, to say the least.
Goldstuck says he senses Telkom doesn’t always know quite what it’s doing. It’s too busy navel-gazing to see the bigger picture in terms of telecoms. He says the new appointee to the post of CEO must know how to handle new territories, such as mobile, for the company. “This person must have a clear battle strategy,” says Goldstuck, “because it’s going to be a war.”
That’s especially true of Telkom Mobile, its subsidiary that will tackle incumbent mobile operators Vodacom and MTN. Along the way it will also come up against Cell C, under the guidance of Lars Reichelt, who has already made great strides in revitalising SA’s third cellular network.
While pursuing this new area of perceived opportunity it will also be important for Telkom not to lose focus in terms of existing operations. “Telkom’s fixed-line interests are both a massive investment and advantage for it,” says Goldstuck. “It should be defending and growing its fixed-line business from two sides: ADSL and its high-speed diginet lines.”
Telkom’s fixed lines have been a boon for it, given its monopoly ownership of the South African network. Goldstuck says Telkom shouldn’t be abandoning this vital asset but rather defending and expanding it. He’s puzzled as to why that hasn’t happened. “In this environment you need a ‘go to battle’ rather than a ‘go to market’ strategy. Telkom’s inability to defend and grow its fixed-line consumer offering and the soft nature of its mobile launch are flaws,” says Goldstuck.
The defence and consolidation of Telkom’s assets should also reach outside SA to territories such as Kenya, where it has a strong foothold. Goldstuck adds that can’t exclude turning the focus back on its home market – although clearly action is required in Nigeria, where Telkom’s investment in Multi Links has been disastrous. “The real focus has to be SA. It’s Telkom’s core business, but also where a majority of its business comes from. Neglecting it for the sake of Nigeria would be a folly.
“I don’t think they’re doing that though: they brought on clearly competent people to enter those markets. But it’s used to being Telkom in SA, where it didn’t have competition historically. The same isn’t true across SA’s borders.
“When it’s gone into other markets it hasn’t known how to deal with corporate culture. It’s entered where it’s a nobody and acted as if it were in the same position it’s in SA.”
The move into mobile is no different. Telkom Mobile will essentially be “a nobody” – piggybacking on MTN’s network where required while trying to build its own cellular infrastructure with a budget dwarfed by those of its competitors. Though its backhaul capacity is substantial, it will require more than that to capture the market it’s aiming at. Telkom must incentivise consumers to churn and it’s difficult to imagine how it will achieve that.
Kaplan says Telkom’s mobile strategy doesn’t add up. “I want to see a strong Telkom. I don’t want to see it erode away over the next five years. That said, you have to wonder how its mobile strategy will play out. It’s been talking about it for five years but hasn’t done much yet.
“On the technology front, Telkom won’t have much to play with in terms of mobile. When it comes to the business savvy required to come up with the kind of products that will inspire subscribers to switch… I just don’t see it. MTN and Vodacom have years’ worth of data about adjusting products and gauging market reaction. Telkom has no background in that and faces a major uphill battle.”
Kaplan says Cell C started in 2001 but only recently went EBITDA positive. Its market share remains small, despite recent gains. Telkom has entered the fray 16 years late, says Kaplan. “We’ll have to wait and see what their mobile strategy amounts to. I’m sceptical. Telkom could well be the destabilising force the mobile incumbents are petrified of – but it’s difficult to see how at this stage.”
All accounted for, Telkom has a lot going for it. It remains in a favourable position, thanks to its monopolistic legacy. It commands the most substantial fixed-line network in the country and is making inroads with its Cybernest data centre operations. It also has vital stakes in international bandwidth projects, including its existing undersea cable system that still carries a vast majority of SA’s international bandwidth.
Says Kaplan: “I still think Telkom is best positioned for this whole cloud computing and massive data centre movement. We’ve seen overseas incumbents team up with the right companies in terms of strategic alliance and swing the business, because nobody can compete with it. The telcos have all the pipes.”
But Telkom Mobile is a gamble. It could pay off if it manages to integrate its wireless operations effectively. Telkom Media would have helped here in terms of triple-play – but there’s no use crying over spilt milk.
The opportunity is there for Telkom to remain relevant in SA’s rapidly changing telecoms sector – but it must have the right leadership.
Goldstuck says it will also have to make peace with the cannibalisation of some existing operations in favour of improving the services it provides to customers. He uses the example of the launch of ADSL, which Telkom delayed due to fears it would cannibalise its ISDN operations. That led to Telkom extending the life of antiquated infrastructure at the price of implementing more effective connectivity.
“That’s indicative of the corporate culture at Telkom,” Goldstuck says. “But in this environment you have to embrace new technology and constantly look to improve your quality of service.”
The game is Telkom’s to win or lose. The outcome will depend on who takes the company into its next chapter.
Who will fill September’s shoes?
SPECULATION IS RIFE as to who Reuben September’s successor will be as CEO of Telkom. And without any clear indication of who is being considered for the top spot at South Africa’s incumbent telecommunications network it remains speculation for now.
One suggestion is that Jeffrey Hedberg, former CEO of Cell C – who was appointed to sort out Telkom’s disastrous MultiLinks subsidiary in Nigeria – could be in the running. Hedberg was instrumental is turning Cell C around and creating a platform for the vast improvements being made by current CEO Lars Reichelt. He also has experience in mobile, which will be vital to Telkom’s future plans.
Another favourite is current MD of Telkom South Africa, Nombulelo “Pinky” Moholi. A formidable businesswoman, Moholi has an extensive history with Telkom and is known for voicing about key issues with decisive opinions. While there’s strong sentiment against an internal appointment, Moholi may well take the reins of the group.
Rumour has it that Telkom’s current chairman, Jeff Molobela, is also vying for the job. As a Government-appointed chairman, Molobela is perhaps the least favourite option among analysts.
September will continue to serve as CEO until his contract expires in November this year. It’s therefore unlikely a successor will be announced any time soon, even with Telkom’s annual results expected in the next couple of weeks. ¦
TELKOM AS AN INVESTMENT
Poor dividends and too many little plans
… make it less attractive
WITH ITS FIXED-LINE ASSETS and almost monopolistic position, Telkom should in fact be a typical old-world safe investment for widows and orphans. Unfortunately, the State utility has too many little plans – most of which don’t work and merely waste capital and management’s time, which make its investment merits fall between two stools. Telkom without Vodacom isn’t something like British American Tobacco (BAT), with its safe profit and high dividend. Nor is it an MTN or Naspers, which can be described as South Africa’s two best large-capital growth shares.
By far the larger portion of Telkom Ltd’s income – more than R17bn – comes from Telkom SA, the fixed-line operator. That’s the party-line system that operated in farming communities in the past. However, it’s constantly under pressure, and growth is in a downward spiral, mostly due to pressure from the regulatory authority. Telkom itself – not its flashy partners and large 082 and 083 sponsors – had to bear the major portion of the pressure for lower prices. That puts it in the unenviable position of always looking for something else to make up for the poor growth prospects of its ordinary and traditional business – unfortunately, so far without much success.
It’s that quo vadis position of Telkom that causes tension in its management and also creates uncertainty among investors.
In its trading update, Telkom cautions its normalised basic profit per share – that is, without the profit made from the sale of Vodacom – for the year to 30 March 2010 would be a few percent over or under 450c/share. If Telkom focused on its traditional business – for which little new capital is required – it would easily be able to declare 60% of the profit as a dividend, just like BAT.
A share with a safe profit of 450c, of which 270c (60%) is declared as a dividend, would have been quite an attractive investment at its current price of R36. A solid earnings multiple of only eight times its annual profit and a dividend yield of 6%/year would attract a lot of investment money, even if its growth prospects are as low as SA’s inflation rate.
However, investors don’t know where Telkom is heading. And that’s why the advice is quite simple: If Telkom is planning to transform itself into a technology giant wanting to compete everywhere, including in Africa, the advice to the investor is to keep away. For safe, old-world technology with a good dividend yield the recommendation would be a clear “yes”.
The renowned Warren Buffett recently made his largest ever investment by buying an old-world railway line and a lot of rolling stock. There’s nothing wrong with quality old-world things. They only need to be well managed.
VIC DE KLERK
And it’s a substantial history. Stepping into Telkom’s main undersea cable station in Cape Town is like travelling back in time. The forecourt has been transformed into a makeshift museum, where the walls are lined with various artefacts of the company’s past that stretches back to 1859, when the first telegraph was sent in the then-disputed territory of South Africa pre-union.
Some of the relics include sections of the South African Telegraph Company’s copper cable that first connected Durban to Europe in 1879. These items are a reminder that Telkom – while it’s only been known as such since 1991 – is a company with deep roots. But like other dinosaurs it’s big and ancient.
With the announced retirement of Reuben September as group CEO – following the news that four of the company’s top execs had accepted voluntary retrenchment and early retirement packages mere weeks before – Telkom’s top-level management is clearing out and question marks loom over who will take the reins at SA’s telecommunications network.
The market clearly agrees it’s time for a change. On the Friday that September announced his resignation, the JSE was down overall – but Telkom shares lifted on the news. Commentary sparked from analysts such as Frost & Sullivan’s Spiwe Chireka, who said Telkom had gone from bad to worse under September’s reign, pointing to its acquisition of Nigerian Multi Links as a prime example of bad decision-making. World Wide Worx Strategy MD Steven Ambrose said September’s departure was the best thing that could have happened to it.
That must all be sobering for the CEO.
September’s tenure at Telkom effectively began in 1977, when he joined the Department of Posts and Telecommunications as a pupil technician. To say he’s come a long way since then would be a vast understatement. September’s move into corporate included fulfilling the portfolio of managing executive for technology and network services and then chief technical officer and COO for the company before ultimately taking over as CEO in an acting capacity in 2007 and officially being appointed to the top post in November of that year.
He was appointed a director of Telkom’s board in May 2007 and also served as a director of Vodacom, in which Telkom held a majority share until selling out to British company Vodafone last year.
There’s little argument to be made about the fact September knows more about Telkom than anyone else – and that may just be the problem.
World Wide Worx MD Arthur Goldstuck says it’s possible to be too deeply ingrained in a company. He adds that September had spent a lifetime at Telkom and there are very few major corporations where lifetime employees are able to become successful CEOs. This wasn’t because of their ability but because they’re too steeped in the culture of the organisation.
That’s particularly true in telecoms, where the past three decades have seen rapid change – especially over recent years. Adapting to that change requires outside insight and fresh thinking.
Goldstuck says the nature of September’s appointment was a barrier to Telkom’s adaptation to modern environments. It now stands at a critical juncture. Its business has seen a degree of disintermediation in SA’s telecoms sector, where legislative and regulatory changes have created more of a free-for-all environment. Telkom’s monopoly has been broken on paper, although it does still control the most vital bits of the country’s leased-line infrastructure.
The new frontier for Telkom is mobile – and here it’s a rookie competing with giants in the form of Vodacom and MTN on one hand and the rapidly up-scaling Cell C on the other.
The major concern expressed by analysts about September’s successor is a fear of Government using its ongoing stake in the company to effectively install a new CEO. We all know how that’s played out at the SABC as a fine example of public sector-inspired management.
As far as Goldstuck is concerned, Telkom’s next CEO could come from anywhere – except Government: what Telkom needs is someone with vision and energy. Someone who can deal with a tough regulatory environment but who also understands the needs of a developing country. “This can’t be the deployment of a cadre – if that happens we’re looking at another SABC,” says Goldstuck.
Other analysts place even more strenuous criteria on successors to the throne at Telkom. Kaplan Equity Analysts’ Irnest Kaplan believes the next CEO should have experience at guiding incumbent networks out of public corporation status into the realms of privatisation. That would exclude South Africans from the job and require someone who has overseen the process for the likes of a British Telecoms or AT&T.
However, no matter who you speak to, the message is clear: it’s time for Government to get out of Telkom – and not just insofar as management decisions are concerned.
Government’s share of Telkom currently sits at 39%. When it listed in New York and Johannesburg in 2003 the retention of State shares was justified, in terms of Telkom being a national asset. Government has proved it couldn’t manage its way out of a cardboard box when it comes to corporates. It’s bungled the SABC, SA Airways and Eskom. Telkom is headed the same way unless a new leadership is established that can buck the company’s current direction and put Government in its place – preferably nowhere as far as holding a stake is concerned.
The challenges that face Telkom from a competitive and strategic perspective must also be tackled. When it comes to forcing Government out of running Telkom, there have been insinuations a clash between September and the politicians over the State’s shareholding could be a primary reason for his leaving.
The ruction between September and Government is centred on the sale of Telkom’s shareholding in Vodacom, which was given the blessing of former President Thabo Mbeki’s cabinet but regarded as undesirable by trade-union federation Cosatu, which has a greater influence in current President Jacob Zuma’s administration than in his predecessor’s.
September may well have pushed a privatisation agenda too far with the powers that be and sealed his fate, at least on a political level, with the sale of its shares in Vodacom. To a British company, nogal.
Politics aside, September was also at the helm during a particularly exciting time in terms of opportunities for Telkom – all of which it missed.
Kaplan says fixed-mobile is an obvious play Telkom should have made but curiously neglected. That’s a strategy whereby a telecoms provider offers a unified mobile and fixed-line solution. Kaplan says Telkom held a majority stake in Vodacom until recently but never leveraged that for a fixed-mobile offering. Telkom is now moving into mobile but could have benefited from getting into the game earlier.
Telkom also ditched its Telkom Media subsidiary, which was designed to combat MultiChoice in the SA market. It’s astounding it didn’t hang on to that asset and use it to a launch a triple-play strategy, where television, data and voice services are delivered from a single provider. If it had combined that with connectivity, both on mobile and fixed lines, it would certainly have captured market.
That Telkom missed those tricks is confusing, to say the least.
Goldstuck says he senses Telkom doesn’t always know quite what it’s doing. It’s too busy navel-gazing to see the bigger picture in terms of telecoms. He says the new appointee to the post of CEO must know how to handle new territories, such as mobile, for the company. “This person must have a clear battle strategy,” says Goldstuck, “because it’s going to be a war.”
That’s especially true of Telkom Mobile, its subsidiary that will tackle incumbent mobile operators Vodacom and MTN. Along the way it will also come up against Cell C, under the guidance of Lars Reichelt, who has already made great strides in revitalising SA’s third cellular network.
While pursuing this new area of perceived opportunity it will also be important for Telkom not to lose focus in terms of existing operations. “Telkom’s fixed-line interests are both a massive investment and advantage for it,” says Goldstuck. “It should be defending and growing its fixed-line business from two sides: ADSL and its high-speed diginet lines.”
Telkom’s fixed lines have been a boon for it, given its monopoly ownership of the South African network. Goldstuck says Telkom shouldn’t be abandoning this vital asset but rather defending and expanding it. He’s puzzled as to why that hasn’t happened. “In this environment you need a ‘go to battle’ rather than a ‘go to market’ strategy. Telkom’s inability to defend and grow its fixed-line consumer offering and the soft nature of its mobile launch are flaws,” says Goldstuck.
The defence and consolidation of Telkom’s assets should also reach outside SA to territories such as Kenya, where it has a strong foothold. Goldstuck adds that can’t exclude turning the focus back on its home market – although clearly action is required in Nigeria, where Telkom’s investment in Multi Links has been disastrous. “The real focus has to be SA. It’s Telkom’s core business, but also where a majority of its business comes from. Neglecting it for the sake of Nigeria would be a folly.
“I don’t think they’re doing that though: they brought on clearly competent people to enter those markets. But it’s used to being Telkom in SA, where it didn’t have competition historically. The same isn’t true across SA’s borders.
“When it’s gone into other markets it hasn’t known how to deal with corporate culture. It’s entered where it’s a nobody and acted as if it were in the same position it’s in SA.”
The move into mobile is no different. Telkom Mobile will essentially be “a nobody” – piggybacking on MTN’s network where required while trying to build its own cellular infrastructure with a budget dwarfed by those of its competitors. Though its backhaul capacity is substantial, it will require more than that to capture the market it’s aiming at. Telkom must incentivise consumers to churn and it’s difficult to imagine how it will achieve that.
Kaplan says Telkom’s mobile strategy doesn’t add up. “I want to see a strong Telkom. I don’t want to see it erode away over the next five years. That said, you have to wonder how its mobile strategy will play out. It’s been talking about it for five years but hasn’t done much yet.
“On the technology front, Telkom won’t have much to play with in terms of mobile. When it comes to the business savvy required to come up with the kind of products that will inspire subscribers to switch… I just don’t see it. MTN and Vodacom have years’ worth of data about adjusting products and gauging market reaction. Telkom has no background in that and faces a major uphill battle.”
Kaplan says Cell C started in 2001 but only recently went EBITDA positive. Its market share remains small, despite recent gains. Telkom has entered the fray 16 years late, says Kaplan. “We’ll have to wait and see what their mobile strategy amounts to. I’m sceptical. Telkom could well be the destabilising force the mobile incumbents are petrified of – but it’s difficult to see how at this stage.”
All accounted for, Telkom has a lot going for it. It remains in a favourable position, thanks to its monopolistic legacy. It commands the most substantial fixed-line network in the country and is making inroads with its Cybernest data centre operations. It also has vital stakes in international bandwidth projects, including its existing undersea cable system that still carries a vast majority of SA’s international bandwidth.
Says Kaplan: “I still think Telkom is best positioned for this whole cloud computing and massive data centre movement. We’ve seen overseas incumbents team up with the right companies in terms of strategic alliance and swing the business, because nobody can compete with it. The telcos have all the pipes.”
But Telkom Mobile is a gamble. It could pay off if it manages to integrate its wireless operations effectively. Telkom Media would have helped here in terms of triple-play – but there’s no use crying over spilt milk.
The opportunity is there for Telkom to remain relevant in SA’s rapidly changing telecoms sector – but it must have the right leadership.
Goldstuck says it will also have to make peace with the cannibalisation of some existing operations in favour of improving the services it provides to customers. He uses the example of the launch of ADSL, which Telkom delayed due to fears it would cannibalise its ISDN operations. That led to Telkom extending the life of antiquated infrastructure at the price of implementing more effective connectivity.
“That’s indicative of the corporate culture at Telkom,” Goldstuck says. “But in this environment you have to embrace new technology and constantly look to improve your quality of service.”
The game is Telkom’s to win or lose. The outcome will depend on who takes the company into its next chapter.
Who will fill September’s shoes?
SPECULATION IS RIFE as to who Reuben September’s successor will be as CEO of Telkom. And without any clear indication of who is being considered for the top spot at South Africa’s incumbent telecommunications network it remains speculation for now.
One suggestion is that Jeffrey Hedberg, former CEO of Cell C – who was appointed to sort out Telkom’s disastrous MultiLinks subsidiary in Nigeria – could be in the running. Hedberg was instrumental is turning Cell C around and creating a platform for the vast improvements being made by current CEO Lars Reichelt. He also has experience in mobile, which will be vital to Telkom’s future plans.
Another favourite is current MD of Telkom South Africa, Nombulelo “Pinky” Moholi. A formidable businesswoman, Moholi has an extensive history with Telkom and is known for voicing about key issues with decisive opinions. While there’s strong sentiment against an internal appointment, Moholi may well take the reins of the group.
Rumour has it that Telkom’s current chairman, Jeff Molobela, is also vying for the job. As a Government-appointed chairman, Molobela is perhaps the least favourite option among analysts.
September will continue to serve as CEO until his contract expires in November this year. It’s therefore unlikely a successor will be announced any time soon, even with Telkom’s annual results expected in the next couple of weeks. ¦
TELKOM AS AN INVESTMENT
Poor dividends and too many little plans
… make it less attractive
WITH ITS FIXED-LINE ASSETS and almost monopolistic position, Telkom should in fact be a typical old-world safe investment for widows and orphans. Unfortunately, the State utility has too many little plans – most of which don’t work and merely waste capital and management’s time, which make its investment merits fall between two stools. Telkom without Vodacom isn’t something like British American Tobacco (BAT), with its safe profit and high dividend. Nor is it an MTN or Naspers, which can be described as South Africa’s two best large-capital growth shares.
By far the larger portion of Telkom Ltd’s income – more than R17bn – comes from Telkom SA, the fixed-line operator. That’s the party-line system that operated in farming communities in the past. However, it’s constantly under pressure, and growth is in a downward spiral, mostly due to pressure from the regulatory authority. Telkom itself – not its flashy partners and large 082 and 083 sponsors – had to bear the major portion of the pressure for lower prices. That puts it in the unenviable position of always looking for something else to make up for the poor growth prospects of its ordinary and traditional business – unfortunately, so far without much success.
It’s that quo vadis position of Telkom that causes tension in its management and also creates uncertainty among investors.
In its trading update, Telkom cautions its normalised basic profit per share – that is, without the profit made from the sale of Vodacom – for the year to 30 March 2010 would be a few percent over or under 450c/share. If Telkom focused on its traditional business – for which little new capital is required – it would easily be able to declare 60% of the profit as a dividend, just like BAT.
A share with a safe profit of 450c, of which 270c (60%) is declared as a dividend, would have been quite an attractive investment at its current price of R36. A solid earnings multiple of only eight times its annual profit and a dividend yield of 6%/year would attract a lot of investment money, even if its growth prospects are as low as SA’s inflation rate.
However, investors don’t know where Telkom is heading. And that’s why the advice is quite simple: If Telkom is planning to transform itself into a technology giant wanting to compete everywhere, including in Africa, the advice to the investor is to keep away. For safe, old-world technology with a good dividend yield the recommendation would be a clear “yes”.
The renowned Warren Buffett recently made his largest ever investment by buying an old-world railway line and a lot of rolling stock. There’s nothing wrong with quality old-world things. They only need to be well managed.
VIC DE KLERK
