Behind Telkom’s surprising share price rise
21 March 2019
By: Staff Writer
MyBroadband
Over the last six months Telkom’s share price increased from R47.90 to R77.00 per share, easily outperforming the market and its peers like Vodacom and MTN.
What makes this growth particularly surprising is that it came amidst a strong decline in fixed-line subscribers and voice revenue.
BCX was also hard hit by the weak economic environment and declining voice demand, with a 4.3% decrease in revenue.
So, with increased competition, a struggling fixed-line market, and its business unit under pressure, it raises the question as to why Telkom is one of the darlings of the JSE.
Cannon Asset Managers CEO Adrian Saville, who picked Telkom as a good investment for 2019, explained that Telkom’s share price in 2018 did not reflect the value it offered.
“During 2018, the stock traded as low as R46 per share, where we regarded it as extremely attractive,” said Saville.
“Since then, the price has marched steadily higher to the current R77 per share. At this level, the earnings stream looks to be priced fairly, on an earnings’ multiple of 13x and a dividend yield of 4.5%.”
“We regard this as fair value for a utility business with a return on assets of 9.2% and return on equity of 11.7%.”
Telkom’s share price rise
Saville explained in January that the company traded on 10.5-times earnings with a 5.6% dividend yield.
“Telkom displays utility-like attributes in terms of performance, with a return on assets of 9.2% per annum and return on equity of 11.7% per annum. This makes for a reasonable investment,” Saville said.
Of specific interest is Telkom’s underlying property portfolio held through an entity called Gyro.
Gyro’s subsidiaries manage Telkom’s portfolio of 1,332 properties, which includes offices, client-service centres, residential dwellings, land parcels, and 6,500 masts and towers.
Effectively, Gyro is a “mega” real estate investment trust (REIT) that has a market value of R24 billion – equal to three-quarters of Telkom’s market cap of R31.6 billion.
“We expect this portfolio to be separately listed through the course of the next year or so,” said Saville.
“This spin off would represent a substantial capital recognition for shareholders, releasing R45 in property assets to add to the current market price of R64.”
“There is no indication from Telkom regarding the prospect of corporate action, but our view is that this is a possibility based on the nature and extent of the property portfolio. On this basis, the stock remains attractive.”
Telkom share price
The graph below shows Telkom’s share price growth over the last six month, a period during which Vodacom and Blue Label’s (a big shareholder in Cell C) share prices declined.