Expanding Fiber Networks And Cloud Platforms Will Empower Digital Inclusion

Key Takeaways

• Telkom's leadership in affordable data and large-scale migration from legacy users position it for substantial market share gains and high-margin, resilient revenue growth.
  
• Strategic network expansion, operational efficiencies, and integrated digital offerings underpin superior long-term earnings, free cash flow expansion, and enhanced shareholder returns.
  
• Competitive pressures, cost challenges, and economic headwinds are constraining Telkom's revenue growth, profitability, and ability to adapt effectively to a rapidly changing market.

Catalysts

Operates as an integrated communications and information technology (IT) services provider in South Africa, the United States, the United Kingdom, rest of Europe, and internationally.

• Analyst consensus expects robust mobile and fiber data revenue growth; however, this may significantly understate Telkom's runway given its leading low-end data price positioning and uniquely strong migration opportunity from millions of legacy 2G users, which could drive outsized market share gains, top-line acceleration, and high-margin revenue growth well above sector averages over several years.
  
• While analysts see potential margin improvement from cost control and asset monetization, this overlooks Telkom's demonstrated operational gearing and deep structural cost-out initiatives-its 470 basis point EBITDA margin expansion and working capital optimization suggest scope for a step-change in net margins, underpinned by scalable platforms and smarter, lower-intensity CapEx, that could re-rate group earnings much higher than currently forecast.
  
• The accelerating shift of South African businesses and consumers towards cloud, IoT, and digital platforms sharply raises demand for high-capacity connectivity and IT solutions, positioning Telkom as a uniquely integrated provider able to monetize data center, cloud, and fintech offerings, creating new recurring revenue streams and boosting group revenue and EBITDA resilience.
  
• Industry-wide digital adoption, remote work, and urbanization trends are likely to drive structurally higher broadband penetration and data usage per customer; as Telkom further expands its fiber and 4G/5G footprint, it is positioned to uplift average revenue per user and benefit from superior customer stickiness, supporting long-term top-line compounding and higher earnings quality.
  
• With market consolidation and infrastructure sharing accelerating, Telkom's InfraCo backbone gives it leverage to participate in M&A, partnerships, and shared networks, unlocking both one-off and recurring financial benefits that could sharply lower capital intensity and amplify free cash flow, paving the way for sustained dividend growth and rerating of the equity multiple.

Telkom SA SOC Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Telkom SA SOC compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Telkom SA SOC's revenue will grow by 4.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.3% today to 7.0% in 3 years time.
• The bullish analysts expect earnings to reach ZAR 3.5 billion (and earnings per share of ZAR 7.97) by about July 2028, up from ZAR 2.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 10.4x today. This future PE is lower than the current PE for the ZA Telecom industry at 22.1x.
• Analysts expect the number of shares outstanding to grow by 1.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.45%, as per the Simply Wall St company report.

Telkom SA SOC Future Earnings Per Share Growth

Risks

• The intensifying competition from fiber overbuild and digital adoption in urban centers, along with overcapacity in the fiber market, could trigger price wars and lower average revenue per user in Telkom's traditional and fiber broadband segments, significantly pressuring long-term revenue.
  
• Liberalization of the mobile spectrum and increasing commoditization of mobile data, coupled with global over-the-top service competition, is eroding Telkom's pricing power and may cap future mobile revenue growth, impacting the company's top line and limiting its earnings growth.
  
• Persistent cost pressures remain, evident in large staff and service fee increases in mobile, and a structurally higher operating cost base may limit Telkom's ability to expand net margins, especially when compared to more efficient and leaner competitors.
  
• The company's inability to effectively monetize its legacy copper assets as migration to fiber accelerates is resulting in sustained declines in traditional voice and broadband revenues, dragging on overall revenue growth and profitability.
  
• Ongoing macroeconomic risks in South Africa, such as high inflation and sluggish economic growth, may depress consumer and enterprise spending and increase bad debt risk, threatening Telkom's topline, net margin, and earnings stability over the long term.

Valuation

• The assumed bullish price target for Telkom SA SOC is ZAR63.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Telkom SA SOC's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR63.0, and the most bearish reporting a price target of just ZAR45.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ZAR50.1 billion, earnings will come to ZAR3.5 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 16.4%.
  
• Given the current share price of ZAR57.75, the bullish analyst price target of ZAR63.0 is 8.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.