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Performance
Financial overview

Financial information summary

   
31 March 
2018 
Rm 
  31 March 
2017 
Rm 
   
Gross operating revenue  41 018    40 970    0.1   
EBITDA  10 544    10 941    (3.6)  
EBITDA margin (%) 25.7    26.7    (1.0)  
EBIT  4 939    5 280    (6.5)  
Profit after tax  3 158    3 907    (19.2)  
Capital expenditure  7 909    8 654    8.6   
Adjusted free cash flow  501    (137)   465.7   
Net debt  6 741    5 020    (34.3)  
Basic earnings per share (cents) 602.3    749.1    (19.6)  
Headline earnings per share (cents) 597.0    731.4    (18.4)  
EBIT margin (%) 12.0    12.9   
Effective tax rate (%) 26.4    15.2   
Capex to revenue (%) 19.3    21.1   
Net debt to EBITDA (times) 0.6    0.5   
Return on invested capital (%) 10.7    14.4   

Group revenue flat with new generation revenue streams growth offsetting the decline in traditional revenue

Group revenue was flat at R41 018 million supported by a 47.2 percent increase in mobile service revenue and 1.6 percent increase in fixed data following a period of decline in fixed data in the prior year. This was offset by a decline in fixed voice revenues. Fixed voice is a traditional technology that impacts our business across the group as we see customers migrating from circuit voice to VoIP. For the first time, our new generation revenue streams such as mobile and data, are compensating for the decline in the traditional business.

New revenue streams offset pressures in voice

New revenue streams offset pressures in voice


Group EBITDA declined on higher labour costs

Group EBITDA decreased 3.6 percent to R10 544 million with an EBITDA margin of 25.7 percent. Operating expenses increased 2.6 percent due to a 4.0 percent increase in employee expenses driven by an average salary increase of 6 percent and market-related 50th percentile salary adjustments. This was partly offset by a lower headcount. Service fees and operating leases increased 6.4 percent and 6.8 percent respectively mainly due to an increase in consultancy fees, facilities management and recovering costs relating to mobile masts. We will continue to exercise cost discipline and ensure that we keep our operating expenses growth below inflation.

EBITDA

EBITDA


Group HEPS declined on higher effective tax

Headline earnings per share (HEPS) decreased 18.4 percent to 597.0 cents per share mainly due to the higher effective tax rate of 26.4 percent (FY2017: 15.2 percent) and a decline in EBITDA of 3.6 percent. Basic earnings per share (BEPS) decreased 19.6 percent to 602.3 cents per share.

Group capital investment for future growth

Capex investment was lower than the prior year at R7 909 million, with capex to revenue of 19.3 percent in line with our guidance. Mobile and fibre remain key capex focus areas with good returns – mobile service revenue grew by 47.2 percent and we achieved an active connectivity rate of 30.7 percent within three years of deployment of fibre to the home, which is in line with international trends.

Group capital expenditure

  
31 March 
2018 
Rm 
   31 March 
2017 
Rm 
     
Fibre  2 112     2 392     (11.7)   
Mobile  2 319     1 936     19.8    
OSS/BSS programme  294     741     (60.3)   
Network rehabilitation/sustainment  303     567     (46.6)   
Service on demand  1 292     1 251     3.3    
Core network  902     962     (6.2)   
Other  131     349     (62.5)   
Telkom  7 353     8 198     (10.3)   
BCX  503     366     37.4    
Other 
   VS Gaming        14.3    
   Yellow Pages  16        77.8    
   Gyro  29     26     11.5    
Capital expenditure included in PPE  7 909     8 606     (8.1)   
Capital inventory  –     48     (100.0)   
Total  7 909     8 654     (8.6)   

Strong balance sheet to fund future growth

Despite the increase in net debt, including financial assets and liabilities, to R6 741 million from R5 020 million, we remain lowly geared with a net debt to EBITDA ratio of 0.6 times. The group cash balances improved to R2 698 million from R1 519 million in the prior year. The growth in borrowings is in line with our strategy to fund capital expenditure through long-term debt as we move to an optimal capital structure.

  
31 March 
2018 
Rm 
   31 March 
2017 
Rm 
     
Bank and cash balances  2 698     1 519     77.6    
Current other financial assets  163     126     29.4    
Non-current other financial assets  60     60     –    
Current borrowings  (2 247)    (1 541)    (45.8)   
Non-current borrowings  (7 165)    (4 744)    (51.0)   
Current other financial liabilities  (250)    (440)    43.2    
Net debt   (6 741)    (5 020)    34.3    
Net debt to EBITDA (times)   0.6     0.5      0.1    

Free cash flow recovered from a decline in the prior year

Adjusted free cash flow recovered from negative R137 million in the prior year to positive R501 million. The turnaround was due to a 14.2 percent increase in cash generated from operations, as we improved working capital management. In addition, the positive adjusted free cash flow benefited from a 8.3 percent reduction in capital spend year on year.

Adjusted free cash flow
   
31 March 
2018 
Rm 
   31 March 
2017 
Rm 
     
Cash generated from operations  10 171     8 910     14.2    
Interest received  327     453     (27.8)   
Finance charges paid  (731)    (469)    (55.9)   
Taxation paid  (1 493)    (1 181)    (26.4)   
Cash generated from operations before dividend paid  8 274     7 713     7.3    
Cash paid for capital expenditure  (7 773)    (8 479)    (8.3)   
Free cash flow  501     (766)    165.4    
Add back: Package cost paid  –     629     (100.0)   
Adjusted free cash flow  501     (137)    465.7    

The financial reports on pages 51 to 54 should be read in conjunction with the consolidated annual financial statements for the year ended 31 March 2018, available online at www.telkom.co.za/ir.

Condensed consolidated annual statement of profit and
loss and other comprehensive income

   
31 March 
2018 
Rm 
   31 March 
2017 
Rm 
  
Operating revenue  41 018     40 970    
Payments to other operators  2 606     2 618    
Cost of sales  6 256     6 498    
Net operating revenue  32 156     31 854    
Other income  607     734    
Operating expenses  22 219     21 713    
Employee expenses  10 917     10 562    
Selling, general and administrative expenses  7 132     7 237    
Service fees  3 054     2 869    
Operating leases  1 116     1 045    
EBITDA  10 544     10 875    
Depreciation of property, plant and equipment  4 780     4 752    
Amortisation of intangible assets  778     766    
Write-offs, impairment/(reversals) and losses of property, plant and equipment and intangible assets  47     143    
Operating profit  4 939     5 214    
Investment income and income from associates  203     219    
Finance charges and fair value movements  851     888    
Finance charges  893     618    
Foreign exchange and fair value movements  (42)    270    
Profit before taxation  4 291     4 545    
Taxation  1 133     691    
Profit for the year  3 158     3 854    
Other comprehensive income 
Items that will be reclassified subsequently to profit or loss 
Exchange losses on translating foreign operations  (22)    (61)   
Items that will not be reclassified to profit or loss 
Defined benefit plan actuarial losses*  (652)    (30)   
Defined benefit plan asset ceiling limitation  –     (6)   
Other comprehensive loss for the year, net of taxation  (674)    (97)   
Total comprehensive income for the year  2 484     3 757    
Profit attributable to: 
Owners of Telkom  3 052     3 797    
Non-controlling interests  106     57    
Profit for the year  3 158     3 854    
Total comprehensive income attributable to: 
Owners of Telkom  2 378     3 700    
Non-controlling interests  106     57    
Total comprehensive income for the year  2 484     3 757    
Basic earnings per share (cents) 602.3     738.8    
Diluted earnings per share (cents) 589.7     724.1    

* No deferred tax balance raised on the OCI movements due to the limitation of the Telkom deferred tax asset.

Condensed consolidated statement of financial position

   
31 March 
2018 
Rm 
   31 March 
2017 
Rm 
  
Assets 
Non-current assets  36 417     34 125    
Property, plant and equipment  30 377     27 918    
Intangible assets  4 492     4 720    
Other investments  100     40    
Employee benefits  627     635    
Other financial assets  60     60    
Finance lease receivables  262     310    
Deferred taxation  499     442    
Current assets  14 127     13 912    
Inventories  1 435     1 384    
Income tax receivable  54       
Current portion of finance lease receivables  112     237    
Trade and other receivables  8 126     8 156    
Current portion of other financial assets  163     126    
Current portion of other investments  1 509     2 388    
Cash and cash equivalents  2 728     1 612    
Assets of disposal groups classified as held for sale  –     12    
Total assets  50 544     48 049    
Equity and liabilities 
Equity attributable to owners of the parent  27 026     27 569    
Share capital  5 050     5 208    
Share-based compensation reserve  377     452    
Non-distributable reserves  1 579     1 376    
Retained earnings  20 020     20 533    
Non-controlling interests  359     337    
Total equity  27 385     27 906    
Non-current liabilities  10 240     7 004    
Interest-bearing debt  7 165     4 744    
Employee related provisions  2 388     1 536    
Non-employee related provisions  44     56    
Deferred revenue  464     529    
Deferred taxation  179     139    
Current liabilities  12 919     13 139    
Trade and other payables  6 878     7 516    
Shareholders for dividend*  58     25    
Current portion of interest-bearing debt  2 247     1 541    
Current portion of employee related provisions  1 340     1 397    
Current portion of non-employee related provisions  164     124    
Current portion of deferred revenue  1 589     1 570    
Income tax payable  363     433    
Current portion of other financial liabilities  250     440    
Credit facilities utilised  30     93    
Total liabilities  23 159     20 143    
Total equity and liabilities  50 544     48 049    

* Includes dividend payable to non-controlling interest of Trudon.

Condensed consolidated statement of changes in equity

   
31 March 
2018 
Rm 
   31 March 
2017 
Rm 
  
Balance at 1 April  27 906     26 365    
Attributable to owners of Telkom  27 569     25 975    
Non-controlling interests  337     390    
Total comprehensive income for the year  2 484     3 757    
Profit for the year  3 158     3 854    
Other comprehensive losses  (674)    (97)   
Exchange losses on translating foreign operations  (22)    (61)   
Net defined benefit plan remeasurements  (652)    (36)   
Dividend declared*  (2 223)    (2 202)   
Disposal of non-controlling interest  (3)    (3)   
Purchase of Telkom shares by subsidiaries  –     (28)   
Increase in share-compensation reserve  29     201    
Increase in subsidiaries share-compensation reserve  19     21    
Shares repurchased and cancelled during the year  (759)    –    
Increase in treasury shares  (68)    (205)   
Balance at 31 March  27 385     27 906    
Attributable to owners of Telkom  27 026     27 569    
Non-controlling interests  359     337    

* Dividend declared includes dividend to the non-controlling interests of the Trudon Group and the BCX Group.

Condensed consolidated statement of cash flows

   
31 March 
2018 
Rm 
   31 March 
2017 
Rm 
  
Cash flows from operating activities  6 084     5 542    
Cash receipts from customers  41 049     39 961    
Cash paid to suppliers and employees  (30 878)    (31 051)   
Cash generated from operations  10 171     8 910    
Interest received  327     453    
Finance charges paid  (731)    (469)   
Taxation paid  (1 493)    (1 181)   
Cash generated from operations before dividend paid  8 274     7 713    
Dividend paid  (2 190)    (2 171)   
Cash flows from investing activities  (6 634)    (6 637)   
Proceeds on disposal of property, plant and equipment and intangible assets  82     230    
Additions to assets for capital expansion  (7 773)    (8 479)   
Decrease in repurchase agreements  –     1 634    
Acquisition of subsidiary, net of cash acquired  –     (22)   
Other financial assets realised – BCX  31     –    
Investments made by FutureMakers  (24)    –    
Proceeds upon realisation of Cell Captive assets  1 050     –    
Cash flows from financing activities  1 729     69    
Loans raised  7 680     2 431    
Loans repaid  (4 685)    (1 539)   
Purchase of shares for the Telkom and subsidiaries long-term incentive share scheme  (68)    (234)   
Shares repurchased and cancelled  (759)    –    
Finance lease repaid  (18)    (43)   
Settlement of derivative liabilities  (546)    (673)   
Proceeds from derivatives  125     127    
Net increase/(decrease) in cash and cash equivalents  1 179     (1 026)   
Net cash and cash equivalents at the beginning of the year  1 519     2 542    
Effect of foreign exchange rate gains on cash and cash equivalents  –       
Net cash and cash equivalents at the end of the year  2 698     1 519