The Spider

This is too good not to post…

Telkom – I’m Excited!!

As mentioned a few times in this blog, I am very excited to see what happens with Telkom (TKG) because I believe there is going to be some real value here for investors.

On Monday they reported headline earnings per share of 745.2c for the six months ended September – up 0.4% from 742.3c a year ago. Operating revenue was 9.8% higher at R29.884bn, but operating profit declined 9.3% to R6.676bn.

Basic earnings per share remained flat at 723.9c per share compared with 724.3c a year ago, which Telkom attributed to a decrease in operating profit due to a 16.9% increase in operating expenses partially offset by a lower taxation expense.

Cash flows from operating activities increased by 344.1% to R3.033bn.

CEO Reuben September said despite the difficult market conditions the group delivered a “pleasing” 9.8% growth in revenue.

Vodacom delivered a strong performance with revenue increasing 14% to R26bn and customers increasing 13.1% to R35.7bn.

“We are proud of the fixed-line’s revenue growth of 2.8% to R16.565bn. The fixed-line has become a preferred provider in the data market as a result of superior quality and speed is evident in the strong growth in data revenues,” he said.

Data revenues increased 12.2% to R4.459bn.

Now this is interesting…

“The need for the repositioning of the fixed-line in today’s extremely competitive environment is evident in the continuing decline in our traditional voice revenues,” he added.

Traffic revenues decreased 3.0% to R7.833bn. The fixed-line’s strength in the data market and need to combat fixed-mobile substitution led to the board recommending to shareholders on November 6 the sale of 15% of Telkom’s stake in Vodacom to the Vodafone Group and the further unbundling of the remaining 35% stake in Vodacom to Telkom shareholders.

The consideration for the 15% stake in Vodacom is R22.5bn less 15% of Vodacom’s net debt at September 30 2008 being R1.55bn.

Telkom 5 Year Chart

Shareholders are required to approve the sale to Vodafone, the unbundling of the remaining 35% and Telkom’s retention of 50% of the proceeds with the remainder being distributed to Telkom shareholders through a special dividend.

“I am excited about Telkom’s repositioning within the market. Our strength is our network, our corporate customer relations and our data solutions and we intend to utilise the proceeds to leverage this strength for the benefit of all shareholders. Our key focus areas are fixed-mobile convergence, data and content services and geographic expansion,” he said.

He added that Telkom intends to accelerate the expansion of its network including the next generation network (NGN), selectively build a mobile network and explore acquisitive opportunities.

“The ability to pull traffic back on to the fixed-line’s network through mobile service offerings and leverage the NGN for full convergence and high value add data services will enhance Telkom’s core defend and grow strategy.

“The next couple of years will see exciting changes for Telkom and our ability to provide premium services to our customers. We remain committed to improving services to our customers and generating returns for our shareholders.

“This will require substantial investment in our network and dedication from Telkom’s employees. We are firmly focused on becoming a leading information, communication and technology service provider in Africa,” he said.

Invicta Holdings 75% return?

I just got another report from some highly rated analysts and these guys are giving a punt to Invicta Holdings Limited (IVT).

For those who don’t know what Invicta do they are an investment holding and management company, controlling and managing assets exceeding R5 billion.

Their operations include:

• the importation and distribution of a comprehensive range of bearings, belting, seals, power transmission products, fasteners and geared motors
• the importation and sale of machinery and related spares for the agriculture, earthmoving, turf grooming and golf-car markets
• the distribution of a niche range of spare parts to the automotive industry and niche products to the
  motorcycle industry import and distribution of wall and floor tiles and related sanitary ware

Invicta released interim results for the six months to September 2008; revenue increased by 39% (27% of which is organic) while operating profit was up 50% and profit before tax 60%. At the earnings per share level however the increase was only 32% as a result of increased taxation, the effective tax rate now at 27% up from 17% at year-end 31 March 2008.

Dividends increased by 13% to 53 cents per share and the dividend cover is increased. The Board proposes that the dividend cover be increased at year end to 3 times cover from 2.5 times a prudent measure in their view given the current global financial market turmoil.

The Goldquest Hydraulics acquisition will strengthen their offering and ability to grow into the hydraulics market.

Prospects – key points:

• Turmoil in global financial markets, started to impact the group towards the end of the interim period
• Decline in volumes in the Engineering consumables and Capital Equipment divisions to be partly off-set by increased prices arising from a weaker rand
• Restructuring of Doosan should see meaningful contribution to profits in the future
• Management has adopted a cautious approach and will focus on working capital

The current price is at around R24 per share and the 12 month target price is R42.

Telkom to OUTPERFORM

A little over a month ago I wrote an article which was backed by Standard Bank (SBK) about the recommendation that Telkom is to outperform to a R200 target price.

I got another report with a few points to back it all up. I’ve taken some points from the report:

“Telkom provided further clarity on the sale of 15% of Vodacom to Vodafone, provided 75% of shareholders OK the transaction”.

We know that the SA government and the PIC are major stakeholders in Telkom and they have already OK’d the agreement. Basically, Telkom will pay R21 per share (gross) to shareholders and unbundle the remaining 35% of Vodacom.

Some points about the Telkom (TKG), Vodacom and Vodafone deal:

• Telkom will distribute 50% of the R20.95bn it will obtain from Vodafone for the sale of 15% of its 50% stake in the company. The implied special dividend will be R21 per share gross of tax.
• The tax liability is not known at present and will be communicated to the market in the January/ February circular to be issued by the company.
• Vodacom will be unbundled to shareholders and an application made for the listing of the company on the JSE at the earliest opportunity.
• The sale transaction, the distribution, the listing and the unbundling are inter-conditional, meaning shareholders holding 75% of Telkom’s equity must agree to all the transactions. The SA Government and the PIC, holders of 57.9% of the equity have already signed irrevocable undertakings to support the transactions.
• The transaction must also be ratified by the competition authorities in SA, ICASA (Independent communications authority of SA) and the Tanzanian competition authorities.
• Telkom will retain 50% of the proceeds to allow for the expansion into the mobile arena in South Africa and for the further development as an integrated data and voice service provider in SA and Nigeria, via Multi-links.