Last Thursday, June 8, Telkom released its expected poor results for the financial year ended March 30 2012. On the basis of its half-year results, only optimists would have been buying or holding the shares on its investment fundamentals. In particular, they could hardly have expected a final dividend to be declared relative to its huge planned capital expenditure.

When the half-year results were reported the share was trading around R29, and its historic price-earnings ratio (based on 12-months’ headline earnings per share) was 11. With a high probability that bottom-line earnings per share would be well down over the full year – a probability that has been realised – I figured that the p:e was challenging.

Surprisingly, perhaps, the share price didn’t begin to crumple until February this year, after which it did indeed begin to collapse.

At the end of May it was trading around R24. Savvy investors, I guess, had followed the adage to go away in May because at the end of the month, they came back in droves. On May 31, trading volume on in Telkom shares boomed – more than 40m shares were traded on a single day – double the previous record over the past five years.

And, following the publication of the latest results the share is now trading around R20. Savvy month-end sellers; not so savvy buyers.

I didn’t buy Telkom shares when they were listed. Even then I was uncertain about management mainly because of customer dissatisfaction, a symptom of poor management. Then Telkom disposed of its stake in Vodacom, a flawed decision at a time when the mobile market was in a strong growth phase. Now, when the mobile market is more mature and much more competitive, Telkom is back in. Well, its much changed management may know more about what is good or bad strategy.

I don’t know if customer satisfaction has improved. I was forced to write to chairman Lazarus Zim to stop the company from charging for lines which had been stolen six months earlier. The lines, a year later do not yet exist, but I’m more than happy using a cellphone and a broadband connection on wireless via Internet Uncapped.

As you will have read, seen and heard Telkom’s management has defined its strategies and how it plan to implement these strategies. All this will cost a bundle of money – hence no dividends to shareholders for some years perhaps.

And hovering behind is the ominous shadow in note 15 of the report which summarises the contingencies. Imagine, if, as is possible the Competition Tribunal imposes an administrative penalty of 10% of its annual turnover? This maximum probably won’t happen and we also don’t know how the company will fare in its long list of litigation actions against it.

The reality in my view: Telkom is trying to travel a pot-holed road, lined with dangling telephone lines. At a share price of around R20, based on the latest headline earnings per share of 324,7c (basic earnings were only 10,4c), the p:e of 6 tells me the share is over-priced. If the price indeed reflects its value, I still wouldn’t touch the shares until the company has proved it can implement its costly plans.

Ben Temkin