Telkom (TKG) – The growth conundrum

Whereas previously growth was merely a matter of being the price leader and filling up their empty network, for Telkom growth going forward will necessitate capacity related capex investment over and above the capex required to build out the mobile network. We believe that Telkom is under pressure to scale the mobile business rapidly in order to secure itself as a sustainable mobile operator prior to the incumbents securing additional spectrum.
Once the incumbents receive spectrum, they will be in a better position to compete with Telkom on pricing. We foresee a period of intense mobile capex (possibly at the expense of the fixed line business) as Telkom attempts to scale its network and onboard roaming traffic in support of margin. Telkom is prioritizing mobile at a time when the sector is under significant pressure to reduce pricing, particularly on data. The poor mobile sector dynamics and higher capex intensity is likely to exacerbate the squeeze on free cash flow which could result in higher gearing or a review of the dividend.