Telkom may escape bottom line impact

By Nicola Mawson for Telkom
Johannesburg, 23 Nov 2006

Telkom's loss in the Supreme Court of Appeal is not expected to filter through to its bottom line, even though the company is expected to see margin pressure in the next two years.

The court yesterday ruled in favour of US-based IT firm Telcordia Technologies, after the suit was originally started in 2001. The loss is expected to cost Telkom about R1.5 billion.

Telkom faces increased competition with the advent of Neotel and is predicted to lose about 15% of its fixed-line business in the short- to medium-term. This, and increased capital expenditure as it gears up its next-generation network, are expected to place pressure on margins.

However, most analysts seem unconcerned about the margin pressure, with consensus being that the company's margins are likely to be at around 40% for the next two or so years.

Telkom's most recent results for the half-year showed a margin of 42%.

Increased costs

One analyst, speaking on condition of anonymity, says employee costs are expected to be 11% higher in the coming year. In addition, the company's administrative costs are expected to be 9% higher.

Excluding depreciation and amortisation, the company is expected to see costs increasing by about 10%. As a result, he says, the group, as a whole, is likely to see net profit erosion of about 4% over the next two years.

Merrill Lynch's mid-November report on the company states it is concerned about "escalating operational expenses", which could result in lower margins in the next financial year.

However, Telkom's recent results came in higher than expected, and another analyst - who also asked not to be named - says this is despite several once-off costs.

"Like for like, the results are not as comparable as they would appear."

Telkom had indicated a margin of between 37% and 40% would be in order. The company reported a margin of 42%, beating the expected mid-range of 38.5%.

The analyst says as the company increases its revenue base through capital expenditure, its margins are unlikely to collapse.

Court ruling

Yesterday's court ruling is not expected to place further pressure on the company's bottom line. Telcordia originally claimed $130 million and 15.5% compound annual interest against Telkom - about R1.5 billion to R2 billion.

However, analysts say Telkom is unlikely to fork out this figure. One analyst says this is an absolute worst-case scenario, as Telkom has counter-claims against Telcordia.

At R2 billion, this would amount to about R3.60 a share.

Another analyst says the figure may be around R700 million, which he does not believe will impact the company's future profitability. Instead, this could reduce the company's net asset value by the final award amount, which is still subject to arbitration.

This is substantially less than the R2.8 billion that was wiped off Telkom's market capitalisation in trade yesterday. By early morning, this amount had reached R3.5 billion, before recovering slightly.

Over five million shares changed hands yesterday before Telkom's share closed R5 down on the day's opening price of R135. By 10.15am, the share was trading at R129.30, 0.54% down on the morning's opening price.