Why Telkom is undervalued - and what Sipho Maseko is doing about it

Telkom CEO Sipho Maseko

Telkom CEO Sipho Maseko pointed out something of the obvious at the group’s interim results presentation earlier this week: the telecommunications group is undervalued.

“It’s a core belief that we remain undervalued as a company,” Maseko said.

With a price-to-earnings ratio of 12.67 and a forward p:e of 6.59, at a share price of R33.01, it looks relatively cheap for a company that has done reasonably well in an economy that has been knocked by the Covid-19 crisis.

Read: Telkom to spin off data centre business in major shake-up

In fact, under the circumstances, it has done more than well. It has superseded Cell C to become the third largest mobile operator in the country, resulting in mobile data revenue rising a massive 53.8% to R6-billion for the half-year to end-September.

Its efforts to control cost can be seen in the wage bill amounting to R9.86-billion when Maseko took charge in 2013, but now standing at R10.7-billion

It also managed its cost really well. This can be seen in operating revenue falling 0.4% to R21-billion but Ebitda (earnings before interest, tax, depreciation and amortisation) rising 6.3% to R 5.9-billion.

Its efforts to control cost can be seen in the wage bill amounting to R9.86-billion when Maseko took charge in 2013, but now standing at R10.7-billion. This means that in seven years, Telkom has managed to restrict wage bill growth by less than 9%. It reduced its headcount from 21 209 to 15 099 over the same period.

The group is not without problems. The performance of BCX continues to raise concerns, but on the whole it seems well placed to tap into the trend of a society that is increasingly willing to work and play online.

Adapted well

Even though its latest numbers show it has adapted well to a post-Covid world, its valuation is far from what Maseko believes it should be. This is why he is looking to run Gyro, which is responsible for managing its properties and tower portfolio, and Openserve, its wholesale infrastructure provider, as separate companies with their own boards. The idea is to set them to find possible outside investors.

“In the first half of the year, we started with the market-sounding process to gauge interest on the Gyro mast and towers business. And we have concluded that process and the analysis thereof, and now we will be proceeding with a firmer plan in the second half of the year,” said Maseko.

“Secondly, we’ve made significant progress in structurally separating our fibre infrastructure business – that is Openserve – and we are in the process of concluding the separation of its balance sheet from Telkom.”

He added: “Once we’ve done this we will then be able to perform a further valuation of Openserve’s key assets on real data, then prepare Openserve for its own value unlock opportunity.”

There is, however, an elephant in the room when it comes to valuing Telkom, according to Atvance Intellect MD Steven Ambrose: government’s shareholding in the group. Ambrose notes that prior to Maseko’s appointment, the government was not shy to use its 40% holding to push its own agenda. State interference was one of the reasons Telkom had four CEOs in as many years. It was only once Maseko was made CEO that the group started to stabilise.

Now read: Fixed-line business is dying, but Telkom’s mobile business is on fire

Ambrose said Telkom might be on the right track now, but investors have not forgotten how the government interfered with its board. He said this is why its share price has been prone to extremes. When Maseko was appointed it was trading at R13/share. It has since more than doubled to R33, but it is still off from the R97 it was trading at in late June 2019.

Talk of government selling its stake in Telkom is not helping its valuation

The skittishness in its share price can be seen in it being up 76.5% from where it was six months ago but down 51% from where it was a year ago.

Ambrose said talk that government is thinking of selling its stake in Telkom is not helping its valuation. He asked if it plans to sell, who is it planning to sell to and how is it valuing its holding? As things now stand, he said the state’s plans for Telkom have more sway over the group’s valuation than any operational goals it achieves.