Commentary
Telkom, South Africas largest communications group announces preliminary
audited annual results for the year ended March 31, 2003. Consolidated operating
revenue increased by 10.0% to R37,600 million (US$4,759 million), operating
profit increased 55.4% to R6,514 million (US$ 825 million) and basic earnings
per share increased 33.5% to 292.6 cents (US$c 37.0) for the year ended March
31, 2003.
Group Financial Highlights
Group Operational Highlights
In 2003 the group delivered a strong operational performance. The fixed-line
business improved its competitive positioning with enhanced levels of service
and innovative product offerings. Cost savings were achieved across the group
and customer growth in the mobile business continued to be strong. The year
under review saw the following key achievements:
Subsequent to year-end, Telkom successfully concluded a three-year agreement with all its unions effective April 1, 2003. The agreement provides for a 9% wage increase in the year ending March 31, 2004, an 8% in the year ending March 31, 2005 and a 7% in the year ending March 31, 2006. In addition, the increase in Telkoms contributions to medical aid schemes will be limited to wage increases.
During the year the Minister of Communications and ICASA made further progress in the liberalisation of the telecommunications sector. A process has commenced to issue an additional license to provide public switched telecommunications services to a second national operator. An evaluation committee appointed by the Minister of Communications has recommended that two of the four bidders for this license be prequalified. The Minister has indicated that she expects to grant this license in the second half of 2003. In May 2003, the Minister of Communications announced the fees that would be required to obtain the 1800MHz radio frequency spectrum. However, the licences have not yet been issued.
Financial Review
Telkoms strong group results in 2003 are supported by solid revenue growth,
improvements in operational efficiencies, reduced capital expenditures and
reduced interest expense on lowered outstanding debt. However, the results are
impacted by two factors, namely: large non-core or one-off items in 2002 and
2003 and the fluctuations arising from measuring derivatives at fair value and
due to the volatility of the exchange rate during the year.
Group operating profit before interest and taxation increased 55.4% to R6,514 million in 2003 and, excluding the following significant one-off or non-core items, group operating profit before interest and taxation increased 29.8% in 2003:
The group utilises derivative instruments to hedge its foreign currency denominated debt, floating interest rate exposure and foreign operational and capital expenditure. In terms of IAS 39, Financial instruments: Recognition and Measurement the significant fluctuations in the currency resulted in a net fair value and foreign exchange loss of R1,285 million (2002: R635 million gain). The value of the Rand measured against the US Dollar increased 30.0% from R11.44 per $1.00 at March 31, 2002 to R8.01 at March 31, 2003. The value of Rand as measured against the US Dollar decreased 42.9% in the year ended March 31, 2002.
Group Operating Revenue
Operating revenue increased in both the fixed-line and mobile segments,
resulting in an overall increase of 10.0% (2002: 9.1%) to R37,600 million (2002:
R34,197 million). Fixed-line operating revenue, after inter-segmental
eliminations, increased 5.8% (2002: 5.8%) primarily due to increased average
tariffs and solid growth in data services. Mobile operating revenue, after inter
segmental eliminations, increased 27.5% (2002: 25.5%) primarily due to customer
growth.
Group Operating Expenses
Operating expenses increased 3.6% (2002: 13.8%) to R31,086 million (2002:
R30,006 million) due to increased operating expenses in the mobile segment.
These were partially offset by a 1.0% decrease (2002: 13.0% increase) in the
fixed-line operating expenses primarily due to reduced selling, general and
administrative expenses. The increase in mobile operating expenses of 23.4%
(2002: 16.8%) was primarily due to increased competition resulting in increased
incentive costs. Mobile payments to other operators also increased as a result
of the increased outgoing traffic and the higher volume growth of outgoing
traffic terminating on other mobile networks relative to traffic terminating on
the fixed-line network.
Investment Income
Investment income consists of interest received on trade receivables, short-
term investments and bank accounts. Investment income decreased 17.2% (2002:
8.2% decrease) to R424 million (2002: R512 million) largely as a result of the
following factors: a more rapid collection of trade debtors; lower interest
received due to lower average balances in investments and bank accounts and
reduced interest on the receivable owing from the South African Revenue Services
as they repaid R844 million on September 3, 2002 of their balance outstanding of
R1,081 million at March 31, 2002.
Finance Charges
Finance charges include interest paid on local and foreign borrowings,
amortised discounts on bonds and commercial paper bills, fair value gains and
losses on financial instruments and foreign exchange gains and losses. Finance
charges increased 62.9% (2002: 18.7% decrease) to R4,154 million (2002: R2,550
million) due to a significant increase in group net fair value and exchange
losses on financial instruments from a net gain of R635 million in 2002 to a net
loss of R1 285 million in 2003, partially offset by a 9.9% decrease (2002: 23.8%
increase) in interest expense to R2,869 million (2002: R3,185 million). The
decrease in interest expense was primarily due to lower balances on foreign
loans. The net fair value losses on financial instruments of R1,285 million was
primarily due to the fair value of derivative instruments for foreign loans and
purchases of foreign goods and services.
Taxation
Consolidated tax expense increased 20.2% (2002: 22.1%) to R1,049 million
(2002: R873 million). The consolidated effective tax rate was 37.7% in the 2003
financial year and 40.5% in the 2002 financial year. The high effective tax rate
in the year ended March 31, 2002 was primarily due to non-deductible expenses at
Telkom.
Net profit and earnings per share
Net profit increased 33.5% to R1,630 million in the year ended March 31, 2003
primarily due to increased operating profit in both the fixed-line and mobile
segments. These increases were partially offset by increases in finance charges
due to the net loss on the revaluation of derivative instruments.
Group basic earnings per share increased 33.5% (2002: 24.7% decrease) to 292.6
cents (2002: 219.2 cents) and group headline earnings per share increased 4.9%
(2002: 12.4% decrease) to 314.0 cents (2002: 299.3 cents).
Group capital expenditure
Group capital expenditure decreased 36.6% (2002: 8.9% decrease) to R5,712
million (2002: R9,004 million). Fixed-line capital expenditure decreased 42.4%
to R4,013 million (2002: R6,962 million) and was 13.5% (2002: 24.9%) of fixed-
line revenue. Fixed line capital expenditure was lower than the budgeted amount
of R4,932 million as a result more stringent investment criteria for capital
investment, savings resulting from the relative strength of the Rand against the
US Dollar and Euro and projects carried forward to the 2004 financial year. The
groups capital expenditure strategy has shifted to selective investment in the
fixed-line segment on a smaller scale based on customer demand and economic
viability. Capital investments will continue in growing business areas such as
data services and in network evolution, business improvements and business
operational support systems.
Despite African expansion, Cell C roaming investment, GPRS launch and the installation of 1800MHz equipment, mobile capital expenditure decreased 16.8% to R1,699 million (2002: R2,042 million) and was 17.2% (2002: 25.3%) of mobile revenue. Capital expenditure for the South African mobile operations was 13.4% (2002: 20.1%) of South African mobile revenue.
Consolidated capital expenditures in property, plant and equipment for the 2004 financial year is budgeted to be R6,429 million, of which approximately R4,977 million is budgeted to be spent in the fixed-line segment and R1,452 million in the mobile segment, which is the groups 50% share of Vodacoms total budgeted capital expenditure of R2,903 million. The increase in the fixed-line capital budget compared to the actual investment in 2003 is as a result of projects carried forward to the 2004 financial year and the increase in operational support systems investment as well as the provision for regulatory capital expenditure.
Group Cash Flow
Cash flows from operating activities increased 19.3% (2002: 32.5%) to R9,748
million (2002: R8,171 million) primarily due to increased operational cash
flows, tax refunds and decreased interest expenses. Cash flows utilised in
investing activities decreased 38.0% (2002: 7.2%) to R5,731 million (2002:
R9,250 million) primarily due to the reduction in group capital expenditure.
In the 2003 financial year, loans repaid and the increase in net financial
assets exceeded loans raised by R2,872 million. The groups repayments in 2003
include a net repayment of R1,371 million of commercial paper bills, a
repurchase of R689 million of the TL03 local bond, a repayment of the R359
million loan from European Investment Bank and the repayment of a R200 million
12.5% coupon unsecured loan. Vodacom repaid R1,379 million of its South Africa
debt, Telkoms 50% share of R690 million is included in loans repaid. Vodacoms
foreign debt increased R583 million as they utilised their extended credit
facility for Vodacom Congo, and drew down on a project financing facility;
Telkoms 50% share of R291 million is included in loans raised.
Funding sources
The group remains committed to the repayment of its debt and maintained its
investment grade credit ratings with Moodys (Baa3) and Standard & Poors (BBB-).
Net debt after financial assets and liabilities decreased 8.1% to R20,096
million (2002: R21,858 million). The balance sheet at March 31, 2003
strengthened, with a net debt to equity ratio of 109.5% from 129.9% at March 31,
2002. Total debt decreased 11.7% to R22,417 million (2002: R25,401 million).
As of March 31, 2003, 90.4% (2002: 86.2%) of the group debt was fixed rate debt and 9.6% (2002: 13.8%) was floating rate debt. In September 2003, a 10.75% unsecured local bond (TL03) with a weighted average yield to maturity of 10.9% matures. In May 2004 a 13% unsecured local bond (TL08) with a weighted average yield to maturity of 16.5% matures. The group intends to refinance its debt using operational free cash flows and new debt raised in the market.
Segment Commentary
The operating structure comprises two segments, fixed-line and mobile. The
fixed-line segment provides fixed-line voice and data communications services
through Telkom; directory services through our 64.9% owned subsidiary, Telkom
Directory Services; and wireless data services through our wholly-owned
subsidiary, Swiftnet. The mobile segment consists of a 50% interest in Vodacom.
Fixed-line
The fixed-line segment accounted for 77.7% (2002: 80.7%) of group operating
revenues (after inter-segmental eliminations) and 66.7% (2002: 56.7%) of group
operating profit, respectively, at March 31, 2003.
Fixed-line operating expenses In ZAR millions | Year ended March 31 |
||
2002 |
2003 |
% Change |
|
Subscriptions and connections | 4,410 |
4,595 |
4.2 |
Traffic | 17,168 |
18,001 |
4.9 |
Local | 4,876 |
5,616 |
15.2 |
Long Distance | 3,794 |
3,562 |
6.1 |
Fixed-to-mobile | 7,323 |
7,539 |
2.9 |
Johanesburg
23 June 2003
Date: 23/06/2003 08:00:34 AM Produced by the JSE SENS Department
23/06/2003 Source: JSE NEWS SERVICE