Telkom turnaround is for real

Sanlam Investments portfolio manager Roy Mutooni says Telkom has found its stride and is expected to report high free cash flow generation in the short to medium term.

Mutooni explained that they took a sceptical approach following Telkom’s recent annual financial results announcement and still came away convinced that the company’s rebound was sustainable.

“Their ability to generate free cash flow was significantly greater than anybody on the market had seen before,” Mutooni told BusinessDay TV. 

Telkom’s free cash flow increased 555.2% to R2.8 billion, and adjusted headline earnings per share were up 102.4% to 583.2 cents.

Group revenue increased 3.3% to R43.9 billion, and earnings before interest, taxes, depreciation, and amortisation (EBITDA) were up 25.1% to R11.8 billion.

“We really quizzed management about how sustainable this is, and I came out feeling relatively confident that you should continue to see free cash flow generation in the short-to-medium term somewhere in the region of R3 billion per year.”

Mutooni said they previously expected Telkom to generate about R1 billion to R1.5 billion in free cash flow per year.

“This is a business that’s hit its stride really well and will continue to generate cash, so this turnaround is for real,” he said.

“The big thing is that they got rid of Swiftnet, which allowed them to pay down a lot of their historical debts. So they’ve got a clean balance sheet and strong cash generation.”

Mutooni said Telkom management was demonstrating this by resuming dividends and paying a special dividend to shareholders.

Telkom will return a total dividend of 261 cents per share, including an ordinary cash dividend of 163 cents per share and a special dividend of 98 cents per share from the Swiftnet sale.

Telkom CEO Serame Taukobong said the company has modernised its technology infrastructure and executed on a detailed strategy across its operations.

“The financial results for the 2025 financial year confirm that the business has stabilised and has built a platform for accelerated growth,” he said.

Telkom is heavily focused on its mobile and data products, which have both shown a strong performance over the last year.

Mobile subscribers grew by 13.4% to 23.2 million, and fibre data revenue surged by 15.5%, driven by a 3.4% increase in subscribers and a 12.4% uplift in average revenue per user (ARPU).

Taukobong said Telkom established a solid foundation from which to grow, leveraging its mobile and fixed networks, as well as its ICT capabilities.

The strategic medium-term objectives include an EBITDA margin of between 25% and 27%, supported by mid-single-digit top-line revenue growth.

Telkom expects to contain capital expenditure to 12% and 15% of revenue and ensure a strong balance sheet with a net debt to EBITDA ratio of 0.5x to 1.5x.

Telkom undervalued

Mutooni believes Telkom’s share is undervalued compared to the free cash flow yield.

“If you look at it from a free cash flow basis, which is how I think these capital-intensive businesses need to be looked at, it’s probably trading at about a 12% maybe a 13% free cash flow yield,” he explained.

Free cash flow yield is the ratio of the free cash flow divided by the share price. Therefore, free cash flow yield decreases as the share price increases.

“For a business such as this, it probably should trade closer to an 8%, 9%, or 10%, which means there’s upside,” Mutooni said.

At the time of the interview, Telkom’s share price was around R47. By publication, it was trading at around R52, meaning the free cash flow yield had decreased to 10.5%.

Mutooni predicted at the time that the stock would not see dramatic moves. However, Telkom’s share price has already increased by over 10%.

“The market wants to see sustained execution from management, so you’re going to see moves around results announcements,” he said.

“But the momentum is definitely there, and management understands the pressure that is on them now.”

Merchant West Investments director and fund manager, Piet Viljoen, said Telkom is the kind of stock value investors dream about.

It is unpopular, under-owned, asset-rich, cash generative, and has highly valued comparable assets, owned by credible players.

However, despite the positivity around Telkom, Zwelakhe Mnguni from Benguela Global Fund Managers said he would wait for a pull-back before buying the stock as it had increased significantly in the past year.

Ricus Reeders from PSG Hole in One Ruimsig concurred, saying a retreat from the current levels would provide investors with a buying opportunity.

Telkom Group Revenue

Telkom Group Net Income

Telkom Group EBITDA

Telkom Group Share Price