Telkom (TKG) – Curb your enthusiasm

Telkom’s mobile business continued to impress with margins boosted by lower device sales during lockdown. We expect these margins to normalise in 2H21 once device sales recover. Risks remain, which include the margin impact of
next generation services for legacy substitution, rapidly declining high margin fixed voice, the cyclicality of BCX and the commoditisation of the enterprise services which it provides.

We believe that management’s endeavours to right-size the work force, re-prioritise fibre deployment, more adequately capitalise Gyro and address the under-valuation of Openserve are positive. Telkom continues to make significant progress in reducing the direct costs in mobile, supporting margin improvement to offset the dilutive impact of fixed substitution. The reduction in costs to provide fibre and the increasing monetisation of existing fibre assets are positive.

We remain concerned about Telkom’s ability to compete in mobile once the well capitalised incumbents receive spectrum. Telkom’s low exposure to 2G traffic does, for the time being, gives it an advantage by allowing it to allocate spectrum more efficiently towards 4G services.