Eroding Fixed-Line Revenue And Fierce Competition Will Shrink Margins

Key Takeaways

• Continued declines in legacy fixed-line revenue and growing competitive pressures threaten margins, while sector-wide fiber uptake and mobile gains are unlikely to offset losses.
  
• High capital requirements, inflationary lease expenses, and reduced asset sale benefits constrain cash flow, limiting capacity to fund growth amid market saturation and technological disruption.
  
• Strong mobile and fiber growth, disciplined spending, and asset monetization are driving margin expansion, cash flow improvement, and long-term earnings resilience.

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.

• The market is overlooking that Telkom's legacy fixed-line and ADSL revenue base will continue to erode faster than its fiber brand can scale, with connectivity ratios already under pressure and sector-wide evidence of distressed fiber asset economics. This persistent decline in high-margin legacy services will weigh on group revenues and operating margins over the long term.
  
• Despite successfully winning market share in mobile through aggressive pricing and a focus on low-end high-volume bundles, Telkom's pricing advantage is not sustainable. The intensification of competition from well-capitalized players like Vodacom and MTN, combined with a potential price war or narrowing discount, threatens Telkom's mobile ARPU and market share, ultimately compressing earnings growth.
  
• Structural shifts toward digital-first and OTT solutions will accelerate the decline of traditional voice and SMS, leaving Telkom increasingly exposed to lower-margin, data-centric offerings. Combined with ongoing regulatory intervention on data prices, the long-term trend is toward weaker group profitability and margin compression.
  
• Telkom faces rising external lease costs and lower realized benefits from its asset sales, with the Swiftnet transaction and sale of properties removing a source of easy cash flow uplift. As routine normalized property sales decline to much lower annual levels, and lease expenses grow with inflation, free cash flow generation will be pressured, limiting the group's ability to fund growth without increasing leverage.
  
• The industry is maturing, with market saturation and slow growth in the South African telecom sector making subscriber growth difficult. Simultaneously, required capital expenditures for next-generation networks and infrastructure will remain high, but the slow asset turnover and risk of technological leapfrogging by rivals could erode Telkom's relevance and negatively impact return on invested capital well into the future.

Telkom SA SOC Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Telkom SA SOC compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Telkom SA SOC's revenue will grow by 2.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.3% today to 7.5% in 3 years time.
• The bearish analysts expect earnings to reach ZAR 3.5 billion (and earnings per share of ZAR 7.98) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from 10.4x today. This future PE is lower than the current PE for the ZA Telecom industry at 21.9x.
• 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

• Sustained mobile revenue growth and market share gains, particularly among price-sensitive, data-focused customers, indicate Telkom is successfully capitalizing on long-term trends of increasing mobile and data consumption, which can support improved revenues and stable or increasing net margins.
  
• The company's disciplined approach to capital expenditure, including the smart use of roaming contracts and targeted investment in mobile infrastructure, suggests an ability to maintain robust growth while keeping capex and associated debt in check, which supports healthier free cash flow and stronger earnings over time.
  
• Ongoing cost transformation programs, including structural working capital and credit risk management initiatives, have led to significant improvements in EBITDA margin and free cash flow, and are forecast to continue driving margin expansion and bottom-line growth for the long term.
  
• Telkom's prudent execution on fiber-to-the-home expansion-focusing on maximizing connection rates rather than simply passing more homes-positions the company to benefit from the secular shift to fiber without overextending its balance sheet, potentially boosting revenue per user and net margins as digital demand accelerates.
  
• The strategic monetization of non-core assets (such as Swiftnet and real estate), along with a notably reduced net debt-to-EBITDA ratio, gives Telkom financial flexibility for future investments and returning capital to shareholders, which can positively impact shareholder value and earnings sustainability.

Valuation

• The assumed bearish price target for Telkom SA SOC is ZAR45.0, which represents the lowest 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be ZAR47.1 billion, earnings will come to ZAR3.5 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 16.4%.
  
• Given the current share price of ZAR57.75, the bearish analyst price target of ZAR45.0 is 28.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.