UPDATE 1-S.Africa's Telkom sees jump in full-year earnings on cost cuts, one-off items

Thu May 29, 2014 8:19am EDT

* Earnings seen up to 789 cents higher per share

* Shares add 5 pct (Adds analyst)

By Helen Nyambura-Mwaura

JOHANNESBURG, May 29 (Reuters) - South Africa's Telkom SA expects to post a nine-fold increase in 2013 earnings following a raft of belt-tightening measures and a hefty writedown the previous year.

The fixed-line telecoms company said on Thursday that headline earnings for the year ended March 31 were likely to be 772 to 789 cents a share, compared to a restated 86.2 cents per share a year earlier, and analysts will be looking closely to see how much of that is the result of the aggressive turnaround strategy introduced by Chief Executive Sipho Maseko.

Telkom formally reports its full-year earnings on June 13.

By shedding jobs, asking suppliers for discounts and cutting back on expenses, Maseko, the sixth chief executive at the state-controlled company since 2005, is aiming to cut 1 billion rand in annual costs over the next five years.

Telkom's shares jumped more than 5 percent to 38.30 rand by 1207 GMT, having added as much as 8 percent earlier. Johannesburg's All-share index was down 0.2 percent.

"That is what the market has been waiting for years. If management is actually delivering on (the cost cuts), then the market is really going to like it," said Reuben Beelders, portfolio manager at Gryphon Asset Management in Cape Town.

Telkom also said it would benefit from lower depreciation charges - the previous year's earnings were weighed down by a 12 billion rand ($1.1 billion) writedown - and by a one-time tax benefit of 246 million rand.

However it was unclear where the bulk of the company's savings came from as Telkom is not required to give details in this update.

"The indication is that management are heading in the right direction, but there are still a number of one offs in the numbers," said Beelders.

"In order to really determine the sustainable earnings, we are going to have a look at exactly where the improvement in the operating margin and in the operating line is coming from."

Telkom's operating margin has averaged 12.9 percent over the last five years, well below the 27 percent median of its two main rivals MTN and Vodacom, according to Thomson Reuters data. Return on equity was down 34 percent in the last 12 months, compared with a rise of 43 percent for the other two.

Telkom also said it received a boost from a decrease in mobile termination rates, after South Africa's telecoms regulator required operators to reduce the fees they charge one another to connect calls across networks.

The Independent Communications Authority of South Africa wants mobile termination rates at 10 cents by 2016 from 40 cents now as part of a government push to reduce call costs in Africa's most developed economy.

Telkom stands to gain from that because of the disproportionately high calls from its landline network to mobile phone operators such as MTN and Vodacom. ($1 = 10.4987 South African Rand) (Editing by Sophie Walker)

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