Is Telkom a buy or sell?

By Candice Jones for Telkom
Johannesburg, 24 Oct 2008

For the first time in years, Telkom's share price has tanked below R100 and investors may find that with possibility of a windfall from the sale of Vodacom, the company is one to buy into.

Vodacom has been a generous dividend generator for Telkom's shareholders. At the end of the cellular operator's 2008 financial year-end, it declared dividends of R5.9 billion, most of which was transferred to Telkom's accounts.

With Telkom's price at last trade this morning sliding down 5.8% to R91 exactly, the company is proving to be a valuable proposition for investment.

“There is no doubt that Telkom is showing great value at the moment. When it does sell the Vodacom business, shareholders have the opportunity to gain a good dividend,” says Irnest Kaplan, MD of Kaplan Equity Analysts.

Telkom declared in early October that it would sell 15% of its stake in Vodacom in a R22.5 billion deal. Speculation is that shareholders will be looking at an estimated R17.5 billion dividend payout.

Show caution

However, Kaplan cautions that short-term investors may come up short, because there are no guarantees that the stock will increase in value over the next few months. “There is no way to know whether Telkom's share value will drop any more, or whether it will stay this low. It's also hard to say how long it will stay at these levels - it could be months, or years.”

He says investors hoping to take a long-term view would be well placed in plunging their pennies into the stock, since he is convinced it will have improved over the next three or so years. “The best approach with the shares right now would be to nibble and not take large bites.”

Telkom closed on Wednesday at R99 and yesterday dropped 2.23% to R96.70. The company has been belted a whopping 30.64% since the end of August. “The value of the share price really just indicates Telkom's fixed-line business is actually cheap,” adds Kaplan.

Foreign jitters

According to Kaplan, the current share slide has little or nothing to do with Telkom itself and everything to do with current global equity market sentiment. “People are getting nervous of equities. Most of the large cap businesses, like Telkom and MTN, are owned by foreign investors.”

With foreign investors looking to bow out of emerging markets and embrace their own currencies and what they perceive as more secure stocks, companies like MTN and Telkom will see a share value drop, he adds.

Kaplan notes that most of the ICT stocks are showing excellent value for investment; however, there is little security in the equities market at the moment. Those looking to buy in should do so with caution and with smaller outlay, he points out.

MTN has had a similar ride to Telkom over the last few weeks, going below the R100 mark on 16 October. MTN's last trade this morning was 4.21% down with a bid of R79.50. On Wednesday, it closed at R89 and yesterday dropped another 6.75% to R82.99.

Following a similar pattern to its fixed-line competitor, MTN has taken a 30.05% drop since the end of August. Neither MTN nor Telkom are showing any signs of recovery just yet.