Founder: Turnaround Talk
Telkom is the third biggest telecommunications company in South Africa behind MTN and Vodacom. Ellies is a medium-sized company that specialises in supplying electrical components and specialised electrical installations in businesses.
While household names, both of these companies face significant competition from larger companies and have suffered considerable performance issues while trying to come to terms with the disruption in the general business operating environment.
Are these performance issues an indicator that medium-sized companies cannot come to terms with the unique challenges impacting the South African business environment and a shift in consumerism that is taking place globally?
Put differently, is South Africa becoming a market where only large companies survive? Let’s find out.
Curro’s lesson in momentum
The article points out that, despite facing numerous challenges in SA, Curro managed to deliver strong financial results during a difficult period.
Given the nature of its wealthy consumer base, Curro has been affected by middle-class emigration and a general lack of spending power (not to mention the rise in interest rates and the subsequent effect on bond repayments for the average household). Despite these headwinds, Curro’s performance for the six months ended June has been remarkably positive.
The article adds that the key metric is recurring headline earnings per share (Heps), as this excludes a long-overdue education subsidy received by Meridian in the previous year. This metric is up by between 26.5% and 45.5%. South Africans will sacrifice almost anything to keep their kids in private schools, which probably says more about the quality of government school education than it does about Curro.
Aspen on the rise
Puns were irresistible when the news broke of Aspen’s acquisition of the rights to Viagra and other products in Latin America.
The article points out that the portfolio being acquired from Viatris has been valued by Aspen at $280 million, yet the price is $150 million cash plus a seven-year supply agreement with Viatris. The terms of this agreement have not been explicitly stated, which suggests that it must be favourable to Viatris, given the gap between the cash price and the value of the portfolio.
A valuation is always an educated guess. Owing to the complex structure of Viatris, the company cannot accurately determine the profits derived from this portfolio. The only thing Aspen knows is that the portfolio of drugs achieved annual sales of $92 million.
The article adds that the assumption is that the gross margin will exceed the 60% gross margin in its commercial pharmaceutical segment.
Image By: Curro
No one answers at Telkom
The article points out that Telkom is facing significant challenges as its legacy business continues to decline rapidly while new revenue initiatives struggle to compensate for the loss. Despite revenue growth of 3.8% and labour restructuring initiatives to try to cut costs, the company’s group Ebitda fell by 4.2% in the quarter ending June.
The positive aspects of Telkom’s performance include a 5.2% rise in mobile revenue and a 10.6% growth in “new generation” revenue at Openserve. There was a 24.2% drop in legacy voice services revenue in Telkom Consumer.
The article adds that Openserve faced challenges with a 29% decline in fixed voice revenue. In the BCX segment, the legacy Converged Communications business experienced a revenue drop of 12.8%.
With problematic pockets across the group, the good stuff tends to get outweighed by the bad stuff. For example, BCX’s Ebitda fell by a nasty 38.2% and the Ebitda margin was just 7.9%. Even Swiftnet, which operates in the towers business, faced challenges owing to terminations by a mobile network operator customer.
Lights are out at Ellies
The article points out that days are dark at the electrical components business and the numbers show just how bad things are. Revenue for the year ended April fell by 7.7%, and operating losses reached R46.9-million. This was affected by the company’s restructuring efforts, with a cost of R18-million and an expectation of R30-million in annual savings.
With interest expenses of R21.3-million, the attributable loss after tax soared to R85.4-million, nearly doubling the previous year’s loss. The balance sheet simply isn’t sustainable.
The article adds that the headline loss per share of 10.78 cents has taken the tangible net asset value per share to just 6c. With a market cap below R50-million and a plan to raise R120-million in fresh capital at 7c per share for the Bundu Power acquisition, Ellies shareholders will be heavily diluted to help the company stay alive.
Image By: Ellies
A race against time
In June, I wrote an article pointing to the fact that Multichoice’s current performance issues are directly related to the fact that it ignored Porter’s Five Forces which is an effective risk management tool that addresses business disruption.
It is clear that the ecosystem around Multichoice is being impacted by the shift in consumerism towards streaming services. Ellies should have also predicted the future impact of digitalisation and participated in their own exercise into analysing Porter’s Five Forces. It is now in a race against time to find a business stream that will replace the business it received through DStv installations.
This challenge is being felt around the world. CNN is shifting towards streaming as consumers in the USA are moving away from cable television. Companies that focus on cable television installations are also feeling the impact of this kind of consumerism.
The core of the issue
In the introduction to this editorial, I asked whether the South African business environment was becoming a space where only large companies have a future.
As this editorial has pointed out, there is a space for medium-sized companies. This status quo will continue, provided that medium-sized companies embrace two things.
Risk management will become increasingly crucial for all companies, particularly for medium-sized companies more likely to feel subtle shifts in their operating environment than larger ones.
Agility will also play an essential role in the future of these companies as it is easier for them to make quick adjustments in response to business challenges than larger companies, which may be primarily set in their ways and may take significantly more time to implement change.
Finally, the role of Chief Transformation Officers and Chief Restructuring Officers will become necessary. In a future editorial, we will look at the business functions of both of these executives to find out if there are any similarities.
