Telkom SA Shares (JSE:TKG) Downgraded to Hold After Year of Exceptional Gains

Telkom SA shares (JSE:TKG) are moving lower today, down 3.7% on the back of a downgrade from HSBC that put the stock at ‘Hold' following a period of remarkable growth. This shift in sentiment arrives after the stock more than doubled in value over the preceding 12 months, prompting analysts to reassess its near-term potential, yet with a price target of 6,000, there continues to be upside expected.

The JSE-listed telecommunications company experienced notable price appreciation, reaching a 52-week high of 6,059. This surge represents a huge gain from its 52-week low of 2,568, reflecting strong market confidence driven by improved financial performance and strategic initiatives. However, the recent downgrade suggests the markets may believe much of the positive news is already factored into the current valuation.

A significant catalyst for Telkom's stock performance was the resumption of dividend payments in June, after a four-year hiatus. The company declared a final dividend of 163 cents per share and a special dividend of 98 cents per share, distributing a total of 1.3 billion rand to shareholders.

This decision followed a 62.3% rise in full-year earnings, with headline earnings per share increasing to 467.5 cents. Revenue also saw a boost, climbing by 3.3% to 43.8 billion rand, signaling a turnaround in the company’s financial health.

Under the leadership of CEO Serame Taukobong, Telkom has strategically focused on expanding its mobile and data services. By 2024, the mobile division had grown to over 21.5 million customers, contributing to a 2.1% revenue increase to R12.960 billion.

The company's forward-looking initiatives, such as the launch of 5G fixed-wireless access services in 2022 and ongoing plans to expand mobile 5G offerings, underscore its ambition to remain competitive in South Africa's evolving telecommunications landscape. These strategic moves have largely been viewed favorably by the markets.

Prior to the downgrade, analyst consensus leaned towards a moderately positive outlook, with a ‘hold+' rating. This consensus encompassed 60% ‘buy,' 20% ‘hold,' and 20% ‘sell' recommendations. HSBC's decision to downgrade Telkom SA to ‘Hold' with a ZAC 6000 price target suggests a more cautious outlook.

Looking ahead, the markets will likely scrutinize Telkom's ability to sustain its growth trajectory and capitalize on its strategic investments. While strong fundamentals and dividend resumption have been key drivers of past performance, the recent downgrade serves as a reminder of the importance of balanced expectations. The stock's future performance hinges on the company's ability to execute its strategic initiatives effectively and navigate the competitive dynamics of the South African telecommunications sector.