Telkom’s business rating downgraded

The agency downgraded Telkom's long-term rating from BBB to BBB- on Tuesday, citing its current business problems and poor profitability.

"We think the continued decline in fixed lines and losses in mobile will result in further profit erosion for South African telecommunications provider Telkom," the agency said.

Last month, Telkom chief executive Nombulelo Moholi resigned from the fixed-line giant. Her resignation was accompanied by that of board director Neo Phakama Dongwana. Board chairperson Lazarus Zim announced his retirement from the board in September.

Opposition parties called for Telkom to be privatised after the exodus. The government is the JSE-listed company's largest shareholder, with a 39.8% stake. The Public Investment Corporation has a 10.9% stake.

"The downgrade reflects our expectations of Telkom's gradual and sustained weakening of operating performance. We believe that the likely steady revenue growth from its fixed-broadband and mobile services are unlikely to offset, over the next two years, the sharp downward trend in its core fixed-line voice revenues."

The agency's view was based on the ongoing fixed-to-mobile substitution trend and rising pricing pressures from mounting competition, as well as a likely reduction in leased line revenues.

Decreasing profitability
Standard & Poor's said the downward trend in Telkom's profitability in fixed-line voice traffic and its high fixed-cost base and operating losses for mobile operations would likely affect profitability over the next two years.

"This, combined with a projected surge in capital expenditures, could result in sustained, very weak, free cash flow generation."

It expected a low to mid single-digit decline in sales from Telkom's core fixed-line business.

"Nevertheless, we expect the group to preserve robust credit measures …" the agency said.

Telkom could receive further lower ratings in the event of a more significant weakening in the company's business risk profile. – Sapa 

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