Chairman's report

Jabulane A Mabuza   Chairman

“As the chairman of Telkom, I acknowledge the complexities of turning around our performance. While we need to act with urgency, the trust of our stakeholders will only be restored over time and on delivery of sustained results.”

Introduction and overview

The 2013 financial year was a challenging one in the wake of the failed strategic equity shareholding transaction with Korea Telecom. The resultant discontent and loss in shareholder confidence led to a major overhaul of the Telkom board. These events revealed the extent of the deterioration of the relationship between government, Telkom’s major shareholder, and the Board. Subsequently, concerns were raised over Telkom’s strategic direction, management stability and long-term commercial viability. This has emphasised the importance of rebuilding mutual trust between shareholders and seeking alignment with our key stakeholders.

The financial results for 2013 are indicative of the challenges the Group faced over the period. Headline earnings of 87 cents per share and a return on equity of 2.1%, excluding the impairment charge, were reported for the year.

The Board took the decision to make a R12 billion impairment to the carrying value of the assets of the Group, bringing the net asset value per share to R34 (2012: R57). For a considerable period of time, Telkom’s shares have been trading far below their net asset value. The non-cash impairment also took into account the impact that changes in technology, competition from mobile operators and the evolving regulatory landscape have had on the Group’s financial returns, particularly on legacy assets, over the past decade.

As the chairman of Telkom, I acknowledge the complexities of turning around our performance. Bold decisions such as the one to impair the Group’s legacy assets are needed to achieve this. While we need to act with urgency, the trust of our stakeholders will only be restored over time and on delivery of sustained results.

My priority as chairman is to work with the Board and our new GCEO, Sipho Maseko on the following three core areas that I have identified:

Maintaining good governance and board stability

Effective corporate governance is largely dependent on the skills, experience and capabilities of the individuals on the Board. Their ability to work effectively with the management team is integral to enabling improved company performance and sustaining value for shareholders.

The Telkom board was reconstituted last year following a turbulent period. An intensive process was undertaken to appoint individuals with the requisite expertise, skills and track records to guide the Group through this time of change and uncertainty. In maintaining balance and diversity, it was necessary to reinforce the non-executive presence on the Board.

The appointments of Kholeka Mzondeki, Leslie Maasdorp, Clive Fynn, Susan Botha, Khanyisile Kweyama, Louis von Zeuner and Fagmeedah Petersen, should provide a level of comfort and assurance to our shareholders.

Following reconstitution of the Board we embarked on the process of appointing a new GCEO and identified Sipho Maseko as our preferred candidate. I am confident that he is the right person to lead the Group in its transformation.

The stability and determination of the current Board leaves me with no doubt of its ability to successfully fulfil its mandate and respond to the challenges that lie ahead.

Building a constructive relationship with government

The ongoing deterioration of Telkom’s financial performance underpins the need for measures that will transform Telkom into a commercially viable business. A constructive relationship with our major shareholder, the government, is critical to achieving long-term financial success. This is particularly important, given government’s other roles as industry regulator, policy maker and significant buyer of ICT products and services.

As a board we acknowledge the role that Telkom has to play in supporting South Africa’s socio-economic development. Going forward, we want to achieve alignment of strategic intent regarding our social obligations that does not jeopardise our long-term financial health. I cannot emphasise enough how critical it is to strike this balance. To do so will require an easing of regulatory constraints and the freedom to pursue a commercially-led strategy.

The onerous policy and regulatory burdens such as the current interconnection rate dispensation, the threats of Local Loop Unbundling (LLU), increased spectrum fees, service charters and pay phone obligations continue to place a significant financial burden on the Group.

Effectively addressing these issues is a top priority for the Board and management, and is paramount in realising a turnaround in Telkom’s strategic and financial position.

The Board is committed to the application of commercial principles to decisions regarding strategy. This has ramifications in the rollout of national broadband as, while we believe Telkom will need to play a leading role in this, we must ensure that our participation will be commercially led. As a commercial entity, Telkom needs to operate in viable segments of the market. In areas where it does not make financial sense for us to do business, we require the support of government.

Strategically repositioning Telkom

There has been much conjecture about the role that government will play in Telkom’s strategic direction, but I would like to be clear that it is the role of the Board and management to inform strategy. I do however recognise that in order to be successful, the support of our major shareholder is required.

Telkom is embarking on a transformation journey. We are in the process of reviewing the group strategy. This repositioning is aimed at improving the Group’s financial performance and providing clear strategic direction. The Board is committed to supporting management in taking the necessary steps to address the major challenges that have impacted the financial performance of the Group in recent years.

Telkom’s fibre infrastructure is unrivalled. To take advantage of this unique capability, we must ensure that we have the best available network in South Africa. In the year under review, we made great strides in our transition to becoming IP compliant. We continued to channel significant capital expenditure into the transformation of our networks. These investments will allow Telkom to fully exploit the convergence opportunity, which is the core of our value proposition over the long term.

We are aware that from a service perspective we need to improve our brand and reputation if we are to meet and exceed the needs of our customers. This can be achieved by upholding exceptional levels of service and affecting a significant cultural shift in the way we operate. We recognise that one of our material limitations is execution capability. This needs to be addressed with urgency, particularly in the ICT space, to regain our competitiveness in the consumer market and to expand our Business service portfolio.

Strategically repositioning Telkom through its transformation programme requires dedication and focus in executing those key projects that will unlock value over time. I am confident that our current management team has the capability to address the many challenges and opportunities that lie ahead.

South Africa needs a commercially viable and successful Telkom that will better equip us to accelerate government’s social objectives, benefit shareholders and meet the needs of all stakeholders.

Appreciation

Lastly, I would like to thank my predecessor, Lazarus Zim, as well as the following directors: Neo Dongwana, Jackie Huntley, Sibusiso Luthuli, Younaid Waja, Dr Sibusiso Sibisi, Nomavuso Mnxasana and Julia Hope, who served on the Telkom board during the past year, for their invaluable contribution to Telkom. I welcome our new directors to the Group and look forward to navigating Telkom through the year ahead.

Thank you to the management team, particularly the outgoing GCEO Nombulelo Moholi for leading the Group with sincere professionalism and dedication. On behalf of the Board we wish her all the best for the future.

I am immensely privileged to be chairman of Telkom at such an exciting time in its history. To all our employees, I recognise that many mistakes have been made in the past, but now is the time to look forward with clarity and determination to make this organisation one of which we can be proud. Thank you all for your loyalty and support over the past year.

Jabulane A Mabuza
Chairman