Three red flags in Telkom financials

On the face of it, Telkom’s headline results for the year to March 31 were ‘robust’.

Revenue was flat but declines in fixed-line and IT revenue (BCX) were offset by a sharp jump in mobile service revenue (up 34.5%).

Read: Copper on its last legs as Telkom fixed-line number swoons again (May 24)

Ebitda (earnings before interest, tax, depreciation and amortisation) increased by 12%, with headline earnings per share up 53%.

However, there are some worrying signs hidden in the numbers …

1. Mobile service revenue growth has halved

The company’s growth engine, mobile, saw a pronounced slowdown in the second half of the last financial year. The growth in service revenue slowed from 48% year on year in the six months to September 30 to 24% in the six months to March 30, 2021. Some of this could be explained by ‘front-loaded’ demand due to lockdown in the first half, but growth in 2020 was above 50% in each half.

Year-on-year post-paid subscriber growth has stalled, with the operator actually shedding 30 000 subscribers in the last six months.

The growth rate of mobile subscribers and mobile service revenue in the current quarter is going to be critical in establishing what the trajectory going forward could be.

	H1 2020 vs H1 2019	H2 2020 vs H2 2019	H1 2021 vs H1 2020	H2 2021 vs H2 2020
Revenue	5%	1%	0%	1%
Fixed line revenue	-12%	-19%	-19%	-13%
Mobile revenue	57%	53%	48%	24%
Post-paid subscribers	26%	37%	24%	1%
Prepaid subscribers	93%	21%	18%	35%

2. Is free cash flow actually still negative?

On Monday Telkom touted a significant improvement in free cash flow in the last year to R2.063 billion. This, it says, “was driven by the 20.6% growth in cash generated from operations … driven mainly by growth in the mobile business and cash release initiatives of approximately R1.2 billion”.

Excluding the costs of its voluntary retrenchments (voluntary separation packages and voluntary early retirement packages), free cash flow was negative R1.429 billion in the six months to September 2019. The picture looked a lot better by March 2020, where it reported free cash flow of R1.782 billion, due to “improved working capital management in the second half”.

In those six months, trade and other payables increased by R723 million, but the year-on-year increase was even more pronounced at R1.8 billion.

One could argue that if the amounts owing to creditors hadn’t increased by R1.8 billion, free cash flow would’ve been a lot closer to zero than to R2 billion.

Fast-forward to the most recent financial year, and trade and other payables increased by another 37.8% to R11.493 billion. Telkom says this was “mainly driven by growth in the mobile business”. This is an increase of R3.154 billion!

Adjust the reported free cash flow of R2.063 billion by this sharply higher amount owing to creditors and it’s easy to see a scenario where free cash flow is still negative.

Put another way, trade and other payables are now 26.6% of revenues, from 14.5% in March 2018.

Trade and other payables
	Mar 2017	Sep 2017	Mar 2018	Sep 2018	Mar 2019	Sep 2019	Mar 2020	Sep 2020	Mar 2021
Original	R7.516bn	R7.065bn	R6.878bn	R7.476bn	R7.406bn	R7.616bn	R8.339bn	R8.855bn	R11.493bn
Restated	R7.465bn		R5.771bn		R6.536bn

* Implementation of various new IFRS (including IFRS 15) necessitated restatements.

There is nothing in the reported numbers to explain why the mobile business has required such a large increase in amounts due to creditors.

Total capex was R693 million higher in the past year (splits between the halves are lumpier than usual because of the Covid-19 lockdown in the first half). But the increase in amounts due to creditors in the last 12 months is equal to the operator’s total capex on its mobile network in the second-half.

Had it not paid a single supplier by March 30? Did it suddenly pay them all in April?

Inventories are up R54 million year on year (to R1.026 billion) due to “a network equipment bulk order discount deal”, but this also cannot explain the increase in payables.

Telkom has not responded to a request for comment regarding the increase in trade payables.

	H1 2019	H2 2019	H1 2020	H2 2020	H1 2021	H2 2021
Capex	R3.276bn	R4.398	R4.238bn	R3.517bn	R2.942bn	R5.506bn
Mobile capex	R1.352bn	R1.659	R2.246bn	R1.430bn	R1.397bn	R3.105bn
Mobile as % of total	41%	38%	53%	41%	47%	56%

3. What is the real net debt picture?

Telkom says net debt to Ebitda improved to 0.9 times, from 1.3 times in March 2020.

It says its “conservative funding approach enabled us to report a healthy cash balance of R5.002 [billion] as at 31 March 2021″.

“We de-risked our balance sheet by repaying net loans of R1.132 [billion].”

	March 2021	March 2020	Variance %
Bank and cash balances	R5.002bn	R4.726bn	5.8%
Current borrowings	(R1.904bn)	(R2.967bn)	35.8%
Non-current borrowings	(R13.934bn)	(13.813bn)	(0.9%)
Net debt	(R10.836bn)	(R12.054bn)	10.1%

The repaid borrowings were a portion of its current loans. Non-current borrowings are effectively at the same level as they were a year ago.

Bank/cash balances are up by R276 million, but with a R3 billion increase in amounts payable to creditors, these bank balances should, realistically, be lower. This would push net debt to above levels from a year ago. It has guided net debt to Ebitda to be “less than or equal 1.0x” over the next three years.

It says “management believes that Telkom is in a position to reconsider the suspension of the dividend policy”.

“Therefore, the dividend policy will be reviewed, and a new dividend policy will be communicated on release of the FY2022 interim results in November 2021.”

Quite where cash flow for R1.8 billion in dividends is going to come from remains to be seen.

The pressure is on.

Read: Telkom is out of time

Listen to Anchor’s Martin Smith unpack Telkom and Netcare results in this MoneywebNOW podcast with Simon Brown: