Mark Ingham's Fun-damental analysis
“Flat is the new up in Telcos”
Share price: TKG:SJ 6546 cents
Recommendation: A Trading Buy in to weakness and Portfolio Buy, fair value at 6200 cents (ex final dividend)
Telkom is cum dividend until Tuesday, 27 June and so a final dividend for the year ended 31 March 2017, of 290,75253 cents, should strictly speaking be built in to the capital value of the stock for now.
However, from my experience, share prices don’t necessarily fully incorporate future dividend payments. Telkom being a case in point. The last date to trade for an interim dividend of 131,23874 cents per share was Tuesday, 29 November 2016 and yet the share barely reflected that before heading merrily upward to trade at over 7600 cents by mid-January.
This dividend phenomenon is partly explained by the fact that quite a lot of share trade is driven by punters who aren’t planning to collect a dividend and may be affected by momentum factors or who are in and out temporarily, including via CFD’s, to capture possible profit at the margin.
But for longer term investors, dividends will be an important consideration in determining the investment merits of a stock in a portfolio.
In 2017, the Telkom board amended the dividend policy to a total dividend of 60 percent of headline earnings for the year with an interim dividend of 40 percent of interim headline earnings. Therefore, the 421,99127 cents total dividend is approximately 60% of the 721,1 cents HEPS or, to put it another way, the dividend is covered 1,7x by HEPS.
Earnings prospects will determine how much Telkom is able to afford to pay out in future. Given capital expenditure requirements, at least R8 billion, which is approximately 70% of estimated EBITDA, there is little scope to be more generous with the dividend. However, Telkom has a strong balance sheet with net debt forecast to be R7 billion, which is a modest 25% of shareholder’s equity of R28 billion.
Nevertheless, I estimate only a modest earnings performance for the next three years. Whilst compound growth in revenue is estimated at between 4,5% and 5% per annum, growth in EBITDA will lag, at approximately 3%, whilst EPS is estimated to decline off what was a reasonably strong 2017 base. Assuming EPS in 2018 declines by 20% to 570 cents then the dividend would be 342 cents for the year. The 2017 dividend is as good as it is going to get for a while.
By 2020, I estimate Telkom earnings, at best, getting back to the level in 2017.
At a share price of 6546 cents, Telkom is on a forward PE ratio of 11,5x and a forward dividend yield of 5,2% or 4,2% net of the dividend withholding tax. This is reasonable value for money, even assuming a roughly 20% fall in the dividend.
I tend to view telecommunications stocks as “utility” type investments. Whilst earnings growth is elusive, there is at least the yield factor to consider.
Telkom though, under vigorous management, has been relatively resilient in the face of price-down pressure and competition. Indeed, the stock has outperformed the JSE All Share Index quite comfortably this past three years and done well relative to peers MTN and Vodacom. This is unlikely to be repeated but there is a reasonably firm underpin to the stock these days.
My fair value for Telkom is 6200 cents (excluding the final dividend) and the stock is a Trading Buy in to weakness and a Portfolio Buy.
Telkom, MTN and Vodacom based to 100 over three years
Telkom and JSE All Share Index based to 100 over three years
Telkom share price over three years
Wishing you profitable investing, until next time.
Mark N Ingham
Read more fundamnetals by Mark Ingam:
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