EQUITY RESEARCH

Telecommunications | CEEMEA Telecom Services | 11 June 2012

TELKOM Mounting risks, trough multiples

Telkoms reinvestment strategy is ambitious, but visibility on returns is poor. We see high execution risk in its mobile venture, and see it absorbing R10bn of value from here. Also the absence of credible cost cutting will likely impair fixed returns. We see limited value at current levels, and remain 3-UW, and cut our price target to R19 from R27. Mounting risks = trough multiple warranted. Telkom is extending its network transformation plan, started in 2007. We see challenges to the updated growth/investment plan, and detail these in the body of the note. In short, we are incrementally cautious on mobile, and remain sceptical on the upsell to its corporate customers. This, coupled with cost inflexibility (c70% of employees are unionized), implies high execution risk for future returns. Dividend cut needed as KT talks fail. The company believes that legacy fixed line cash flows and the dividend cut (saves R0.8bn) provides sufficient funding for its reinvestment programme (R18-21bn over three years). Also, it ruled out a near-term need to tap debt/equity markets. Based on our EFCF forecasts, we see limited scope for dividend resumption over the next three years. Valuation reflects execution risk. We estimate Telkom trades on 6.2xFY13 P/E and 2.2x EV/EBITDA vs. CEEMEA peers on 8.1x and 4.2x respectively. We cut our forecasts, largely due to higher mobile losses over the next three years, but also accelerated depreciation in fixed line. Our downside and upside valuation boundaries are R1727/share.

Stock Rating

3-UNDERWEIGHT
Unchanged

Sector View

2-NEUTRAL
Unchanged

Price Target

ZAR 19.00
lowered -30% from ZAR 27.00

Price (07-Jun-2012) Potential Upside/Downside Tickers Market Cap (ZAR mn) Shares Outstanding (mn) Free Float (%) 52 Wk Avg Daily Volume (mn) Dividend Yield (%) Return on Equity TTM (%) Current BVPS (ZAR)
Source: FactSet Fundamentals

ZAR 20.68 -8% TKG SJ / TKGJ.J 10770 520.78 55.31 1.5 7.0 5.21 56.96

Price Performance 52 Week range

40 36 32 28 24 20 16 Jul- 11 Oct- 11 Jan- 12

Exchange-ZAR ZAR 37.80-19.80

Apr- 12

Link to Barclays Live for interactive charting

TKGJ.J: Financial and Valuation Metrics ZAR

FY Mar EPS Previous EPS EV/EBITDA Dividend yield P/E
Source: Barclays Research.

CEEMEA Telecom Services 2013 3.35E 4.17E 2.2x 0.0% 6.2 2014 3.23E 4.57E 2.2x 0.0% 6.4 2015 3.87E N/A 2.1x 18.7% 5.3 JP Davids, CFA +44 (0)20 3134 3437 jp.davids@barcap.com Barclays, London Sara Mather +27 1189 56943 sara.mather@absacapital.com Absa Capital, Johannesburg Jonathan Dann +44 (0)20 3134 3525 jonathan.dann@barcap.com Barclays, London

2011 4.85A 4.81A N/A N/A 4.3

2012 3.25A 3.38E N/A N/A 6.4

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 20.

San Dhillon +44 (0)20 3134 3484 san.dhillon@barcap.com Barclays, London

Barclays | Telkom

COMPANY SNAPSHOT Telkom SA Limited Income statement (ZARmn) Revenue EBITDA EBIT Finance costs - net Pre-tax income Tax rate (%) Net income EPS (reported) (ZAR) Diluted shares (mn) DPS (ZAR) Margin and return data EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) Operating CF margin (%) ROIC (%) RONTA (%) ROA (%) ROE (%) Balance sheet and cash flow (ZARmn) Tangible fixed assets Intangible fixed assets Cash and equivalents Total assets Short and long-term debt Other long-term liabilities Total liabilities Net debt/(funds) Shareholders' equity Cash flow from operations Capex and acquisitions Free cash flow NOPAT Valuation and leverage metrics P/E (reported) (x) EV/EBITDA (x) Equity FCF yield (%) EV/sales (x) Price/BV (x) Dividend yield (%) Total debt/capital (%) Net debt/EBITDA (x)
Source: Company data, Barclays Research Note: FY End Mar

CEEMEA Telecom Services 2012A 33,079 8,546 2,408 -527 774 0.0 -216 3.25 511 0.00 2013E 33,625 8,511 3,025 -550 2,475 28.0 1,711 3.35 511 0.00 2014E 33,810 8,640 2,939 -554 2,385 28.0 1,648 3.23 511 0.00 2015E 33,837 9,001 3,364 -505 2,859 28.0 1,976 3.87 511 3.87 CAGR 0.8% 1.7% 11.8% N/A 54.6% N/A N/A 6.0% 0.0% N/A Average 25.8 9.0 6.3 3.8 6.8 5.4 6.3 5.4 5.1 CAGR 3.5% 0.6% 28.2% 3.4% 0.0% 0.0% -1.2% -12.5% 6.6% 5.8% N/A -10.7% -4.8% Average 6.1 2.2 9.3 0.6 0.3 4.7 13.8 0.4

Stock Rating Sector View Price (07-Jun-2012) Price Target Ticker

3-UNDERWEIGHT 2-NEUTRAL ZAR 20.7 ZAR 19.0 TKGJ.J

Investment case Why a 3-Underweight? High exposure to legacy telecommunications services, limited cost flexibility and mobile EBITDA losses pose risks to EBITDA margins. Upside case ZAR 29.6 We expect Telkoms mobile business to destory value. In the upside case where EBITDA breaks even (ie no value destruction) we see upside to almost R30/share Downside case ZAR 16.8 Based on a trough PE multiple of 5x earnings, we see valuation near R17/share. Upside/downside scenarios
41 34 27 20 14 7 08- Jun- 11

25.8 8.5 2.3 -0.6 11.7 5.3 7.5 5.3 -0.7

25.3 9.0 7.4 5.1 3.3 4.0 6.0 4.0 5.5

25.6 8.7 7.0 4.9 4.9 3.8 5.6 3.8 5.0

26.6 9.9 8.4 5.8 7.4 8.3 6.2 8.3 10.8

36,155 3,555 1,168 52,568 7,344 26 22,427 3,933 30,141 6,704 -4,675 2,029 2,810

38,023 3,594 1,498 55,179 7,844 26 22,955 4,103 32,223 7,424 -7,394 30 2,178

39,287 3,620 2,218 57,205 8,344 26 23,015 3,883 34,190 7,411 -6,991 420 2,116

40,134 3,622 2,462 58,133 7,344 26 21,634 2,639 36,499 7,929 -6,485 1,444 2,422

29.6 ( 43.1% ) 16.8 ( - 19% ) Downside Case 19.0 ( - 8.1% ) Price Target Upside Case

07- Jun- 12

Source: Barclays Research

Line loss (% and 000s)

0 -20 -40 -60 -80 -100 Line loss (000s) Growth (%) 2012 A 2013E 2014E 2015E 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5

6.4 2.2 19.2 0.6 0.4 0.0 14.0 0.5

6.2 2.2 0.3 0.6 0.3 0.0 14.2 0.5

6.4 2.2 4.0 0.6 0.3 0.0 14.6 0.4

5.3 2.1 13.7 0.6 0.3 18.7 12.6 0.3

Source: Company Data, Barclays Research

11 June 2012

Barclays | Telkom

Trough multiples warranted, execution

BT Group share price collapsed in 2008/09 as it slashed its dividend (FY08: 15.8p, FY10: 6.9p) and warned on the profitability of its global expansion (BT Global Services). In mid 2009, the companys forward PE multiple troughed at 4.7x. Since then, both earnings and the multiple have recovered, as the company has delivered ahead of expectations on cost cutting (see Telkom: Limited power to cut costs). Figure 1: BT Group Forward PE
16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 Dec-03 Dec-04 Dec-05 Jun-04 Jun-05

Trough 4.7x PE Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
3

BT GROUP - 12MTH FORWARD PE

Source: DataStream

For Telkom, as it embarks on its investment and growth lead turn-around we see material execution risk. Our concerns include:

Its will get worse, before it gets better Telkom, by its own admission (Results presentation), has a history of poor execution. Ahead of its replacement of its network, the run-off of legacy (and higher profitable) revenues will remain pervasive. Indeed fixed traffic revenues interconnect, which are in structural decline, make up a third of group revenues. Execution on investment, extending 2007 NGN plan At its NGN investor day in March 2007 1, the company said it planned a multi-year overhaul of its Operational Support Systems (OSS) and create an IP Network infrastructure. The company confirmed on its FY12 call that the core network has been upgraded, but it is unclear what progress if any was made on OSS. We believe the management team needs to present a clear plan on how its network investment/deployment can be measured, to rebuild credibility. The company concedes, that it the KT deal does not complete it will need to make senior hires to address its strategic aims. Need to win in mobile, limited reason to believe this will be the case The company targets revenue share of 12-15% by FY16. As we set out in our initiation piece, we see major challenges this being achieved. We forecast revenue share of <5% by this point. We remain sceptical on the easy-win from an upsell to fixed corporate customers. Indeed, we note that Turk Telekom, a best-in-class fixed operator (>80% share in

https://secure1.telkom.co.za/apps_static/ir/pdf/financial/docs/NGN%20for%20analyst%20day%20draft6.pdf

11 June 2012

Barclays | Telkom

corporate fixed line) has had limited success with its mobile operation Avea (established 2004). In the consumer space, we expect Vodacom and MTN to remain dominant.

No clear plan to address low penetration. Fixed line penetration is just 7.9% in South Africa, limiting the addressable broadband market. This compares unfavourably with markets like Egypt and Turkey, as we highlight below.

Figure 2: Telecoms Fixed line penetration of households

140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Germany Switzerland Netherlands Portugal Belgium Austria Turkey France
4

Italy

South Africa

Source: Company data, Barclays Research.

Focus on growth rather than costs high levels of unionisation (c70%) limit scope for wholesale changes to employee costs. These make up 35% of fixed segment opex. The company remains inefficient by global standards with 191 employees per fixed line versus peers like Turk Telekom at just over 600. Also we continue to see electricity price rises presenting an R255m headwind by FY13. The company believes it has a 15 months window before it needs to take radical intervention on costs.

Price target cut

We update our mobile forecasts and take a more cautious view on future cash profitability. Our revised DCF based price target is now R19/share (was R27/share). Indeed we now see a breakeven valuation for the mobile business as a blue sky scenario. Further, in the absence of a meaningful cost programme to de-risk the companys reinvestment programme, we near term downside risk to ZAR16.8/share (trough multiple earnings multiple of 5x).

11 June 2012

Spain

Egypt

UK

Barclays | Telkom

Figure 3: SOTP, ZARm

Method Fixed line Mobile Other Total EV Net debt, 2013E Post retirement medical benefits Equity Value Number of shares (m) Price target (ZAR)
Source: Barclays Research

EV 33,351 -5,519 -9,407

Stake, % 100.0 100.0 100.0

Value (ZARm) 33,351 -5,519 -9,407 18,425 -4,103 -4,309 10,013 521 19.0

WACC (%) 12.8

Growth (%) -1%

DCF OpFCF multiple

Figure 4: Telkom Mobile valuation

2014E Avg subscribers ARPU Revenues EBITDA Margin Depreciation Other EBIT Tax Capex Working Capital movements FCF -2,218 0.0 -1,974 -120 -3,530 -1,797 0.0 -1,725 -100 -2,688 -1,195 0.0 -1,270 -152 -1,524 -496 0.0 -893 -119 -417 -323 0.0 -929 -133 -232 -44 0.0 -967 -107 0 171 0.0 -1,017 -100 252 596 2,532 118 3,590 -1,436 -40.0 -782 2015E 2,983 120 4,313 -863 -20.0 -935 2016E 3,444 123 5,079 -102 -2.0 -1,093 2017E 3,973 125 5,953 595 10.0 -1,091 2018E 4,373 126 6,636 830 12.5 -1,152 2019E 4,673 128 7,164 1,075 15.0 -1,118 2020E Terminal year 4,873 130.0 7,602 1,368 18.0 -1,197 Total

PV FCF
Source: Barclays Research

-2,740

-1,838

-918

-221

-109

91

216

-5,519

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Barclays | Telkom

SA fixed market ABC revenue trends deteriorate, KPIs mixed

Global fixed-line operators generate ABC (access, broadband and call) revenues from access lines, broadband and IPTV. We term these Revenue Generating Units (RGUs). For Telkom, ABC revenue growth deteriorated 4.5pp to -5.7% in 2H12. This as call revenue growth deteriorated -11% yoy (1H12: -5%, 2H11: -11.1%, 1H11: -15.4%) while we estimate broadband revenue growth eased to 6.2% (1H12: 9.1%, 2H11: 13.5%, 1H11: 23.4%). RGU growth was +0.7%, as access line losses eased. Specifically we note:

Line losses ease, calling plan subscribers adds stable. Telkom reported line losses of -14k in 2H12, an improvement on recent trends (1H12: -39k, 2H11: -40k, 1H11: -33k). The drive to convert customers to calling rate/annuity revenue streams saw calling plan subscribers net adds stable yoy at +21k in 1H12 (1H12: +15k, 2H11: +21k, 1H11: +47k). However, calling plan revenue declined 8.6% yoy in 2H12 reflecting increased penetration and as customers shifted to lower priced products (1H12: +1.5%, 2H11: +10.4%. 1H11: +10.2%). Figure 6: Telkom PSTN line loss and growth (000s/%)
0 -10 -20 -30 -40 -50 -60 -2.0 -3.0 -4.0 -5.0 -6.0 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 0.0 -1.0

Figure 5: ABC, ARPU and revenue growth per RGU (%)

2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12

-70 -80

ABC revenue growth (%) RGU growth Implied rev growth per RGU (%)
Source: Company data, Barclays Research

Line losses (000)

Source: Company data, Barclays Research

Growth (%)

RGUs growth stable. RGU growth including broadband improved 20bps to 0.7% in 2H12 as broadband net adds offset line losses (1H12: +0.5%, 2H12: +1%, 1H11: 0.2%). However, broadband net adds eased in 2H12 to +32k (1H12: +44k, 2H11: +52k, 1H11: +52k). We note that Vodacom added 72k mobile broadband subscribers over the same period.

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Barclays | Telkom

Figure 7: Calling plan subs and revenue growth (000s/%)

900 800 700 600 500 400 300 200 100 0 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0

Figure 8: Telkom fixed RGUs (000s)

3,500 3,000 2,500 2,000 1,500 1,000 500 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 10.0 1.9 6.9 FY13E Call 2H12
7

Calling plan subscribers (000) Subscription based calling plan revenue growth (%)
Source: Company data, Barclays Research

Voice RGU's
Source: Company data, Barclays Research

Broadband RGU's

Telkoms ABC revenue decline deteriorated to -5.7% in 2H12 (1H12: -1.2%, 2H11: 6.0%, 1H11: -8.9%). This as call (traffic) revenue growth declines offset access and broadband revenue growth. Call revenue pressure (2H12: -11%, 1H12:-5%, 2H11: 11.1%, 1H11: -15.4%) was a function of lower minutes of use due to fixed to mobile substitution. Figure 10: Telkom fixed ABC revenues (ZARm)
25.0 20.0 15.0 13.9 12.0 11.1

Figure 9: Telkom fixed Price per minute (ZARc)

60 50 40 30 20 10 0 1H10 Local 2H10 1H11 2H11 1H12 2H12

10.0 1.4 5.0 0.0 FY10A FY11A Access FY12A Broadband Long distance Subscription based plans 6.8 1.6 6.8 1.8 6.9

Source: Company data, Barclays Research

Source: Company data, Barclays Research

11 June 2012

Barclays | Telkom

Figure 11: Telkom broadband net adds and growth (000s/%)

90 80 70 60 50 40 30 20 10 0 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

Figure 12: Broadband market composition (000s)

4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 4Q10 1Q11 2Q11 Fixed 3Q11 4Q11 1Q12

Broadband net adds (000)

Source: Company data, Barclays Research

Growth (%)

Mobile

Source: Company data, Barclays Research

11 June 2012

Barclays | Telkom

South African mobile market 8ta flailing

Telkoms mobile unit continues to struggle, with net adds easing during 2H12. Management expects to reduce mobile EBITDA losses by approximately 20% in FY13 (FY12: R2.2bn), while investing between R2bn and R2.5bn in capital expenditure. Meanwhile, Vodacom posted lighter underlying service revenue growth in the quarter, as a result of the higher prevalence of low end usage prepaid customers. Additionally, lower out of bundle spend in the contract segment saw contract ARPU decline 10% in FY4Q12. Its service revenue growth on an underlying basis was +5.6% during the quarter, a 2.3pp deterioration on 3Q12. MTN underlying service revenue trends remained robust during the quarter, as contract subscriber growth remains impressive.

Telkom mobile net adds ease Telkoms 8ta reported net adds of +343k in 2H12 (1H12: +667k, 474k between its launch in October 2010 and the end of March 2011). Within the mix, Telkom added +157k prepaid and +187k postpaid subscribers (1H12: +442k and +225k respectively). Vodacom reported net adds of 2.58m in 4Q12 (calendar 1Q12), driven by low cost handset deals and refocused distribution channels (3Q12: 2.82m, 2Q12: +1.18m, 1Q12: +1.2m, 4Q11: +1.2m). Subscriber growth continued to be driven by the prepaid segment, with net adds of 2.49m (3Q12: +2.72m, 2Q12: +1.06m, 1Q12: +1m, 4Q:11: +1.1m). Postpaid subscriber growth continued to ease in the quarter, with slower net adds of 91k (3Q12: +99k, 2Q12: +119k, 1Q12: +194k, 4Q11: +134k). MTN reported net adds of 702k in 1Q12 (4Q11: +1.1m, 3Q11: +1.2m). Within the mix, postpaid net adds were improved at +170k (4Q11: +146k, 3Q11: +133k) supported by hybrid package and telemetry SIM sales, while prepaid nets adds were sequentially weaker at 532k (4Q11: +919k, 3Q11: +1.04m). Reduced consumer spend impacts voice market. Vodacom posted underlying service revenue growth of +5.6% on our estimates in FY4Q12, a 2.3pp slow down on the prior quarter (3Q12: +7.9%, 2Q12: +6.6%, 1Q12+7.4%, 4Q11: +7.5%). This on the back of softer spend in both the prepaid and contract segments. MTNs reported subscriber and APRU data implied service revenue growth of 3.6% in 4Q (underlying c7%), broadly in line with 3Q11 (+4.0%). For additional colour on the market, and the potential for competition to disrupt, see our recent report SA Connect: Iliad contagion risk (2 March).

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Barclays | Telkom

Figure 13: South Africa mobile subscriber share, %

100 90 80 70 60 50 40 30 20 10 0 1Q09

Figure 14: South Africa mobile Cumulative net adds, 000s

12,000

12.6 13.8

15.5

15.6 14.9 14.6 14.0 13.9 34.2 33.4

13.7

10,000 8,000 6,000 4,000 2,000

32.7 32.1 35.9 35.8 35.9

33.6 34.0

54.6 54.1 48.6 48.1 48.8

49.2 50.4 50.1

49.4

0 -2,000

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12E

3Q12E

4Q12E

-4,000 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12E 3Q12E 4Q12E
Vodacom MTN Cell C 8ta
Source: Company data, Barclays Research

Vodacom

MTN

Cell C

8ta

Source: Company data, Barclays Research

Figure 15: South Africa mobile Service revenues, ZARbn

25.0

Figure 16: South Africa mobile Service revenue growth, %

14.0 8.8 9.2 8.2 8.3 8.5 9.5 20.0 7.8 8.2 8.0 7.7 8.0 7.6 15.0 10.0 12.8 12.2 12.1 11.9 11.9 11.6 11.3 5.0 0.0 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12E 3Q12E 4Q12E 11.0 11.5 22.3 11.8 12.2 13.0 7.6 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12E 3Q12E 4Q12E
10

Vodacom

MTN

Vodacom

MTN

Source: Company data, Barclays Research. Due to the timing difference in Y/E reporting we capture Vodacoms FY1H 2011 as calendar 1H10.

Source: Company data, Barclays Research. Due to the timing difference in Y/E reporting we capture Vodacoms FY1H 2011 as calendar 1H10.

Usage trends a mixed bag. Vodacoms outbound usage was stable at 6.8% yoy in FY4Q12 or 6.47bn minutes (3Q12: +6.9%, 2Q12: +31.8%, 1Q12: +36.8%). We estimate that Vodacoms blended outbound price per minute fell 5%, with prices near 114c. MTNs 2H11 outbound usage increased 8.9pp to 18.8%. We estimate that effective price per minute fell 14.8% to 115c.

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Barclays | Telkom

Figure 17: South Africa mobile Voice prices, ZARc

190 170 150 130 110 90 70 50 1H09 2H09 1H10 2H10 1H11 MTN 2H11 1H12E 2H12E MTR rate

Figure 18: South Africa mobile Outbound min growth, %

40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12E 2H12E
11

Vodacom
Source: Company data, Barclays Research

Vodacom
Source: Company data, Barclays Research

MTN

Data growth trends mixed. Vodacom reported total data revenue growth of 14.7% in 4Q12 (3Q12: +15.1%, 2Q12: +18.2%, 1Q12: +24.7%, 4Q11: +21%). Non-SMS data revenues were 16.4% of service revenues in 4Q12 (3Q12: 15.1%, 2Q12: 15.6%, 1Q12: 16.1%, 4Q11: 14.2%). Non-sms data growth was 17.8% from 19.3% in 3Q12. At MTN, data revenues, including SMS, made up 22.8% of service revenues in 4Q11(1H11: 21%, 2H10: 19.2%). MTN reported total data growth of 23.3% in 2H11 (1H11: +14.1%).

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Barclays | Telkom

Conference Call Feedback

Telkom hosted a conference call on 8 June. Below we highlight the key points:

Staff costs Management would not give explicit guidance as to whether there is scope for staff costs to be reduced through retrenchments. Efficiency will be a focus of management. Competition in the mobile environment Management believe that they cannot compete with the mobile incumbents on price. They acknowledge the need to remain competitive on pricing but maintain that the focus will be on rolling out their own network (reduce roaming costs by bringing more traffic on net). Dividend Management acknowledged that should the KT deal have materialised, the dividend would not have been suspended. Management believe it was a prudent measure (given the ongoing Competition Commission Case and the capital commitments). The decision will be reviewed annually. Mobile losses Management do not expect the FY14 EBITDA loss to be significantly lower than the FY13 guidance (20% lower than FY12 loss of R2.2bn). Management have identified the need to reduce SAC and marketing costs in the mobile business. Potential for a rights issue Managements message was that, having suspended the dividend, they dont believe it will be necessary to ask shareholders for more cash. However they highlighted that the success of the mobile business poses a risk to this. Executive pa incentives Are based on a scorecard of metrics. The path to mobile breakeven is very important where applicable. Strategic partner Management highlighted that they will pursue a different plan to obtain the benefits of having a strategic partner that the KT deal would have afforded them. Customer service Some of the problems with customer service is structural according to management (cable theft, ageing network) which will be addressed as far as capital will allow. Hurdle rate for investments The companys WACC of 13% is the hurdle rate for investments. Investments are rolled out on a pilot basis.

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Barclays | Telkom

COMPS
Figure 19: COMPS
Ccy Incumbent - EU Belgacom BT Group Deutsche Telekom Elisa France Telecom KPN OTE Portugal Telecom Swisscom TDC Telecom Italia (blend) Telecom Italia (ordinary) Telecom Italia (saver) Telefonica Telekom Austria Telenor TeliaSonera Altnets/Other - EU C&W Communications Colt Daisy Iliad Inmarsat Jazztel Kabel Deutschland KCOM Mobistar Sonaecom TalkTalk Group Telenet Tele2 Virgin Media Ziggo ZON Multimedia Datacentres Equinix InterXion Telecity 11 June 2012 Share Price Now EUR GBP EUR EUR EUR EUR EUR EUR CHF DKK EUR EUR EUR EUR EUR NOK SEK GBP GBP GBP EUR GBP EUR EUR GBP EUR EUR GBP EUR SEK GBP EUR EUR USD USD GBP 21.11 2.05 7.80 15.13 10.30 7.66 1.28 3.19 350.80 37.35 0.67 0.71 0.58 9.44 7.62 89.85 43.14 0.29 1.16 0.94 104.55 4.62 4.67 44.52 0.69 24.73 1.17 1.56 31.77 103.60 14.65 23.03 2.08 161.69 16.79 8.03 Mkt Cap (EUR b) 6.7 19.7 34.0 2.4 27.4 10.9 0.6 2.8 15.1 4.1 13.0 42.5 3.4 18.7 20.8 0.9 1.3 0.3 5.7 2.8 1.1 3.9 0.4 1.5 0.4 1.8 3.5 5.1 5.3 4.6 0.6 6.3 0.9 2.0 2011E 9.0x 8.7x 11.9x 11.7x 6.5x 7.3x 6.0x 26.6x 10.9x 7.9x 27.2x 25.5x 10.5x 7.0x 7.0x 22.6x 13.1x 22.6x 27.3x 9.4x 6.7x 6.9x 9.1x 9.7x nm 22.0x 18.9x 31.7x 32.5x P/E EV/EBITDA EV/OpFCF 2013E EFCF Yield (Normalized) 2011E 2012E Dividend Yield 2012E 2013E 2011E 2012E 2013E 2011E 2012E 9.4x 7.9x 13.3x 11.2x 7.9x 10.4x 1.9x 6.6x 10.1x 9.0x 5.1x 5.4x 4.5x 9.4x 14.1x 9.5x 9.9x 6.5x 10.3x 7.5x 12.6x 10.7x 8.1x 9.8x 2.0x 6.4x 10.1x 9.6x 4.9x 5.2x 4.2x 7.8x 12.6x 8.2x 9.3x 6.2x 4.6x 4.6x 4.0x 6.1x 4.0x 4.2x 2.7x 4.4x 6.2x 4.8x 4.0x 4.0x 3.8x 4.7x 5.0x 5.9x 5.7x 4.7x 3.2x 5.8x 8.3x 6.1x 8.3x 9.2x 5.3x 3.6x 2.8x 5.2x 8.8x 5.2x 5.4x 9.3x 4.7x 4.8x 4.5x 4.2x 6.1x 4.3x 4.7x 2.7x 4.1x 6.4x 4.8x 4.0x 4.1x 3.9x 4.5x 5.2x 5.2x 5.6x 4.7x 3.1x 5.4x 9.0x 7.5x 6.3x 8.4x 5.2x 4.0x 2.8x 4.8x 8.2x 5.0x 5.1x 9.2x 4.6x 4.9x 4.4x 4.2x 6.0x 4.3x 4.5x 2.8x 4.2x 6.3x 4.9x 4.1x 4.1x 3.9x 4.4x 5.3x 4.9x 5.4x 4.6x 3.0x 5.2x 8.0x 7.6x 5.2x 7.1x 5.0x 4.0x 2.9x 4.6x 7.6x 4.6x 4.9x 8.4x 4.5x 9.9x 7.0x 11.0x 7.8x 7.9x 7.3x 9.8x 6.4x 7.0x 4.5x 10.1x 11.4x 7.3x 7.3x 7.4x 7.0x 7.9x 9.7x 9.6x 10.7x 8.1x 20.5x 6.1x 15.8x 14.3x 25.1x 18.3x 6.7x 5.8x 7.6x 36.3x 10.3x 10.3x 13.3x 15.6x nm nm nm 8.6x 7.7x 8.2x 9.8x 7.5x 9.4x 4.0x 9.1x 12.8x 6.4x 7.1x 7.2x 6.8x 8.4x 16.5x 7.9x 9.1x 7.6x 5.6x nm nm 13.6x 15.9x 7.9x 6.0x 5.7x 6.7x 14.7x 9.0x 11.3x 13.8x 9.5x nm nm 2013E 2011E 2012E 2013E

8.7x 11.7% 9.3% 9.4% 10.3% 10.3% 9.4% 7.6x 0.7% 15.5% 13.3% 4.0% 4.6% 5.3% 8.2x 19.8% 14.1% 15.5% 9.0% 9.0% 9.0% 9.1x 7.9% 7.6% 8.5% 8.6% 9.5% 9.4% 7.6x 19.4% 15.7% 12.7% 13.6% 11.7% 9.7% 7.6x 19.3% 12.2% 18.7% 11.1% 11.8% 11.8% 4.5x 272.3% 245.2% 253.0% 9.0x 8.8% 15.0% 16.7% 40.8% 14.9% 14.9% 12.7x 8.8% 6.4% 9.2% 6.3% 6.3% 6.6% 7.3x 14.4% 13.5% 15.2% 11.6% 12.3% 12.5% 6.9x 39.7% 23.6% 20.0% 6.9% 6.5% 6.4% 7.0x 37.5% 22.3% 18.9% 6.1% 6.1% 6.1% 6.7x 45.8% 27.2% 23.1% 9.3% 9.3% 9.3% 8.2x 21.3% 18.4% 14.5% 13.8% 10.6% 10.6% 10.8x 14.1% 8.3% 11.0% 5.0% 5.0% 6.3% 7.0x 10.5% 10.7% 11.0% 5.6% 7.4% 8.5% 8.5x 3.9% 11.2% 7.9% 6.6% 7.4% 8.1% 7.5x 5.4x 27.8x 23.2x 15.9x 13.5x 7.5x 6.0x 6.5x 6.3x 12.4x 7.8x 9.1x 12.9x 8.6x nm nm 22.3x 3.6% 3.4% 7.0% 6.7% 9.5% 3.4% 1.0% 11.2% 16.4% 11.3% 8.9% 7.9% 7.7% 8.2% 7.4% nm nm nm 5.9% 11.9% 3.4% 4.1% 10.1% 12.7% 3.9% 14.1% 6.3% 7.7% 5.0% 6.5% 15.4% nm 11.5% 15.7% 1.3% 1.5% 7.3% 11.8% 14.7% 19.4% 17.6% 6.5% 10.3% 10.3% 6.5% 18.0% 1.0% nm 0.8% 17.8% 8.9% 8.9% 0.4% 0.3% 0.4% 5.6% 6.2% 6.5% 3.4% 6.7% 11.2% 5.8% 6.4% 7.5% 15.0% 11.7% 12.9% 6.0% 6.0% 6.0% 5.8% 6.6% 7.6% 13.4% 14.2% 12.6% 12.5% 12.5% 12.5% 1.1% 1.1% 1.1% - 4.8% 4.3% 7.7% 7.7% 9.6% nm nm nm nm nm 0.8% nm nm 1.4% 13

6.7x 6.2x 35.7x 30.7x 12.0x 13.0x 18.7x 13.2x 17.1x 13.8x 8.6x 8.2x 8.6x 7.8x 9.2x 12.0x 7.9x 7.1x 29.1x 20.4x 9.8x 8.2x 13.9x 9.8x 23.9x 13.7x 20.6x 15.7x

nm 41.8x 13.6x 12.6x 30.1x 26.2x 10.7x 9.2x 26.6x 20.8x 16.4x 13.2x

Barclays | Telkom

EMEA Median Mobinil MTN MTS Orascom Telecom Egypt Telkom Turkcell Turk Telekom VIP Vodacom

EGP ZAR USD USD EGP ZAR TRY TRY USD ZAR

136.38 134.30 17.94 2.43 12.33 20.68 8.24 6.30 7.93 98.80

9.6 1.8 23.6 14.2 2.0 2.8 1.0 7.9 9.6 10.2 13.9

12.2x 12.6x 12.2x 3.8x 8.3x 6.4x 15.4x 10.7x 24.5x 14.0x

8.1x 10.3x 10.8x 6.5x 7.8x 6.2x 8.5x 8.1x 8.0x 12.1x

8.3x 35.6x 9.4x 10.3x 5.3x 8.0x 6.4x 8.5x 8.3x 6.7x 11.5x

4.4x 6.3x 5.0x 4.8x 3.2x 3.7x 2.2x 4.4x 5.5x 4.3x 6.8x

4.2x 6.1x 4.8x 4.6x 3.0x 3.6x 2.2x 4.1x 5.3x 4.2x 6.3x

4.1x 5.8x 4.4x 4.4x 2.8x 3.7x 2.2x 3.9x 5.2x 4.1x 6.1x

9.6x 13.7x 6.7x 9.6x 5.0x 4.3x 4.9x 10.1x 9.9x 11.7x 10.1x

8.2x 12.7x 6.9x 9.3x 3.9x 4.6x 17.0x 8.2x 9.3x 8.0x 9.5x

7.4x 11.7x 7.6x 7.7x 4.3x 5.0x 11.5x 7.4x 8.6x 7.4x 9.0x

8.9% 7.0% 8.9% 7.6% 23.1% 9.0% 25.8% 5.7% 8.3% 12.8% 8.2%

9.6% 4.4% 9.6% 9.6% 22.5% 12.1% 2.8% 8.2% 20.7% 7.3%

11.1% 7.2% 8.3% 10.1% 4.8% - 2.2% 2.1% 11.1% 5.6% 7.3% 9.1% 11.3% 5.6% 6.1% 7.8% 11.1% 11.2% 11.4% 11.4% 11.4% 3.5% 7.4% 10.7% 8.6% 11.3% 11.1% 19.5% 10.1% 10.1% 10.1% 7.9% 7.2% 8.3% 8.7%

Source: Barclays Research, Reuters; prices as of close 7th of June.

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Changes to estimates
Following the release of the 2H12 results we have cut FY13E FY15E EBITDA forecasts by c3.7%-1.8% , as we reflect our incrementally cautious stance on mobile, and due to higher depreciation in fixed line . Figure 20: Changes to estimates (2013E 2016E)
Year to March New Normalised Operating Revenue Total revenue Clean EBITDA Headline EPS from cont operations (c) - diluted Dividend per share (c) Capex Net debt/(cash) at end of the period EFCF Old Normalised Operating Revenue Total revenue EBITDA Clean EBITDA Headline EPS from cont operations (c) - diluted Dividend per share (c) Capex Net debt/(cash) at end of the period EFCF % Change Reported Operating revenue Total revenue Clean EBITDA Headline EPS from cont operations (c) - diluted Dividend per share (c) Capex Net debt/(cash) at end of the period EFCF
Source: Barclays Research

2013E

2014E

2015E

2016E

33,625 34,225 8,511 335 7,394 4,103 30

33,810 34,310 8,640 323 6,991 3,883 420

33,837 34,337 9,001 387 387 6,485 2,639 1,444

34,124 34,624 9,441 461 461 5,644 2,018 2,797

32,905 33,205 8,838 8,838 417 167 6,726 4,300 616

32,970 33,270 9,090 9,090 457 229 6,292 4,129 1,223

32,913 33,213 9,169 9,169 472 472 5,803 3,659 1,838

33,112 33,412 9,346 9,346 495 495 5,126 3,576 2,693

2.2 3.1 -3.7 -19.7 -100.0 9.9 -4.6 -95.1

2.5 3.1 -4.9 -29.4 -100.0 11.1 -6.0 -65.7

2.8 3.4 -1.8 -18.0 -18.0 11.8 -27.9 -21.4

3.1 3.6 1.0 -6.8 -6.8 10.1 -43.6 3.9

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Barclays | Telkom

Forecasts
Figure 21: Forecast profit and loss account
ZARm Reported Operating revenue Other income Total revenue EBITDA Non-recurring items Clean EBITDA EBITDA margin (%) Depreciation Amortisation Impairments Write offs Reported EBIT Non-recurring items Clean EBIT EBIT margin Investment income Gain on distribution of assets Interest Foreign exchange and fair value movement Profit before taxation Taxation Profit from continuing operations Profit/(loss) from discontinued operation Profit for the year Profit attributable to: Owners of Telkom Non-controlling interest (216) 126 1,711 71 1,648 69 1,976 82 2,356 98 2,810 117 2012A 33,079 579 33,658 8,546 167 8,546 25.8 4,608 701 569 260 2,408 402 2,810 8.5 238 765 1,107 774 595 179 (269) (90) 2013E 33,625 600 34,225 8,511 8,511 25.3 4,786 700 3,025 0 3,025 9.0 160 710 2,475 693 1,782 1,782 2014E 33,810 500 34,310 8,640 8,640 25.6 5,028 673 2,939 2,939 8.7 180 734 2,385 668 1,717 1,717 2015E 33,837 500 34,337 9,001 9,001 26.6 4,990 647 3,364 3,364 9.9 180 685 2,859 801 2,059 2,059 2016E 34,124 500 34,624 9,441 9,441 27.7 5,057 633 3,751 3,751 11.0 180 523 3,408 954 2,454 2,454 2017E 34,444 500 34,944 9,890 9,890 28.7 4,944 619 4,327 4,327 12.6 180 442 4,065 1,138 2,927 2,927

Capex Capex to Sales (%) OpFCF OpFCF Margin (%)

Source: Company data, Barclays Research

4,783 14.5 3,763 11.4

7,394 22.0 1,117 3.3

6,991 20.7 1,649 4.9

6,485 19.2 2,516 7.4

5,644 16.5 3,797 11.1

5,182 15.0 4,708 13.7

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Barclays | Telkom

Figure 22: Forecast Revenue

ZARm Telkom South Africa Mobile Other International iWay Africa Other South African Trudon (yellow pages) Swiftnet Data Centre Operations Corporate centre Eliminations Total
Source: Company data, Barclays Research

2012A 30,638 1,200 368 1,180 128 1,406 78 (1,919) 33,079

2013E 29,803 2,518 339 1,156 138 1,518 72 (1,919) 33,625

2014E 28,880 3,590 315 1,133 148 1,594 68 (1,919) 33,810

2015E 28,160 4,313 293 1,111 157 1,658 65 (1,919) 33,837

2016E 27,652 5,079 272 1,088 165 1,725 62 (1,919) 34,124

2017E 27,066 5,953 253 1,067 173 1,793 58 (1,919) 34,444

Figure 23: Forecast EBITDA

ZARm Telkom South Africa Mobile Other International Other South African Eliminations Total
Source: Company data, Barclays Research

2012A 11,813 (2,425) (45) (917) 120 8,546

2013E 11,461 (2,050) (34) (865) 0 8,511

2014E 10,990 (1,436) (31) (883) 0 8,640

2015E 10,491 (863) (29) (598) 0 9,001

2016E 10,164 (102) (14) (608) 0 9,441

2017E 9,907 595 5 (618) 0 9,890

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Figure 24: Forecast Cash Flow Statements

ZARm EBITDA Income tax paid Net Interest paid Other Cashflow from operating activities Capex Other investments Assets disposals (acquisitions) Cashflow from investing activities Net change in loans Dividends paid Finance lease capital repaid Share buy back/purchase of treasury shares Acquisition of non-controlling interest (Increase)/decrease in net financial assets Cashflow from financing activities 2012A 8,546 (920) (80) (842) 6,704 (4,675) 0 105 (4,570) (1,253) (812) (177) 0 0 (493) (2,735) 2013E 8,511 (693) (250) (145) 7,424 (7,394) (7,394) 500 0 (200) 300 2014E 8,640 (668) (304) (257) 7,411 (6,991) (6,991) 500 0 (200) 300 2015E 9,001 (801) (255) (17) 7,929 (6,485) (6,485) (1,000) 0 (200) (1,200) 2016E 9,441 (954) (93) 48 8,441 (5,644) (5,644) (500) (1,976) (200) (2,676) 2017E 8,546 (920) (80) (842) 6,704 (4,675) 0 105 (4,570) (1,253) (812) (177) 0 0 (493) (2,735)

Net cashflow

(601)

330

720

244

121

(601)

Cash at beginning of year Net foreign currency/other effect Net cash and cash equivalent at end of period

1,773 -7 1,165

1,165 0 1,495

1,495 0 2,215

2,215 0 2,459

2,459 0 2,580

1,773 -7 1,165

Net debt Net debt at start of the period Changes in debt and shareholder's contribution Net foreign currency/other effects Net debt/(cash) at end of the period
Source: Company data, Barclays Research

4,907 -652 (322) 3,933

3,933 170 4,103

4,103 -220 3,883

3,883 -1,244 2,639

2,639 -621 2,018

4,907 -652 (322) 3,933

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Barclays | Telkom

Figure 25: Forecast Balance Sheets

ZARmn Property, plant and equipment Intangible assets Investments Deferred expenses Other financial assets Finance lease receivables Deferred taxation Non-current assets Inventories Income tax receivable Current portion of deferred expenses Current portion of finance lease revceivables Trade and other receivables Other financial assets Cash and cash equivalents Current assets Total assets Share capital Treasury shares Share based compensation reserve Non-distributable reserves Retained earnings Reserves of disposal groups classified as held for sale Non-controlling interests Equity and liabilities Interest-bearing debt Other financial liabilities Provisions Deferred revenue Deferred taxation Non-current liabilities Trade and other payables Shareholders for dividend Current portion of interest-bearing debt Current portion of provisions Current portion of deferred revenue Income tax payable Other financial liabilities Credit facilities used Current liabilities Total equity and liabilities
Source: Company data, Barclays Research

2012A 36,155 3,555 2,260 47 48 244 53 42,362 993 26 128 5,696 2,195 1,168 10,206 52,568 5,208 (771) 1,887 23,383 0 434 30,141 5,897 26 4,916 1,132 747 12,718 4,291 23 1,289 1,892 1,995 87 129 3 9,709 52,568

2013E 38,023 3,594 2,260 47 48 244 53 44,270 993 26 128 6,069 2,195 1,498 10,909 55,179 5,208 (771) 1,887 25,394 505 32,223 6,397 26 4,716 1,132 747 13,018 4,519 23 1,289 1,892 1,995 87 129 3 9,937 55,179

2014E 39,287 3,620 2,260 47 48 244 53 45,560 993 26 128 6,086 2,195 2,218 11,646 57,205 5,208 (771) 1,887 27,293 574 34,190 6,897 26 4,516 1,132 747 13,318 4,279 23 1,289 1,892 1,995 87 129 3 9,697 57,205

2015E 40,134 3,622 2,260 47 48 244 53 46,407 993 26 128 5,921 2,195 2,462 11,726 58,133 5,208 (771) 1,887 29,519 656 36,499 5,897 26 4,316 1,132 747 12,118 4,098 23 1,289 1,892 1,995 87 129 3 9,516 58,133

2016E 40,157 3,553 2,260 47 48 244 53 46,362 993 26 128 5,972 2,195 2,583 11,897 58,259 5,208 (771) 1,887 30,148 754 37,227 5,397 26 4,116 1,132 747 11,418 4,196 23 1,289 1,892 1,995 87 129 3 9,614 58,259

2017E 39,876 3,453 2,260 47 48 244 53 45,981 993 26 128 6,028 2,195 3,007 12,377 58,358 5,208 (771) 1,887 30,852 872 38,048 4,897 26 3,916 1,132 747 10,718 4,174 23 1,289 1,892 1,995 87 129 3 9,592 58,358

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Barclays | Telkom

ANALYST(S) CERTIFICATION(S)
We, JP Davids, CFA, Sara Mather, Jonathan Dann and Maurice Patrick, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analysts account. Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting payment or reimbursement by any covered company of their travel expenses for such visits. In order to access Barclays Statement regarding Research Dissemination Policies https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. and Procedures, please refer to

The Corporate and Investment Banking division of Barclays produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. Primary Stocks (Ticker, Date, Price) Telkom (TKGJ.J, 07-Jun-2012, ZAR 20.68), 3-Underweight/2-Neutral Guide to the Barclays Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the "sector coverage universe"). In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating 1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12month investment horizon. 3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Corporate and Investment Banking Division of Barclays is acting in an advisory capacity in a merger or strategic transaction involving the company. Sector View 1-Positive - sector coverage universe fundamentals/valuations are improving. 2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. 3-Negative - sector coverage universe fundamentals/valuations are deteriorating. Below is the list of companies that constitute the "sector coverage universe": CEEMEA Telecom Services Mobile TeleSystems (MBT) Orascom Telecom Holding (ORTEq.L) Turk Telekom (TTKOM.IS) Vodacom Group Ltd. (VODJ.J) 11 June 2012 20 Mobinil - Egyptian Company for Mobile Services (EMOB.CA) Telecom Egypt (ETEL.CA) Turkcell (TCELL.IS) MTN Group Limited (MTNJ.J) Telkom (TKGJ.J) VimpelCom (VIP)

Barclays | Telkom

IMPORTANT DISCLOSURES CONTINUED

Distribution of Ratings: Barclays Equity Research has 2346 companies under coverage. 43% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 55% of companies with this rating are investment banking clients of the Firm. 42% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Firm. 13% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 41% of companies with this rating are investment banking clients of the Firm. Guide to the Barclays Research Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period. Barclays offices involved in the production of equity research: London Barclays Bank PLC (Barclays, London) New York Barclays Capital Inc. (BCI, New York) Tokyo Barclays Capital Japan Limited (BCJL, Tokyo) So Paulo Banco Barclays S.A. (BBSA, So Paulo) Hong Kong Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Toronto Barclays Capital Canada Inc. (BCCI, Toronto) Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg) Mexico City Barclays Bank Mexico, S.A. (BBMX, Mexico City) Taiwan Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan) Seoul Barclays Capital Securities Limited (BCSL, Seoul) Mumbai Barclays Securities (India) Private Limited (BSIPL, Mumbai) Singapore Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)

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IMPORTANT DISCLOSURES CONTINUED

Telkom (TKG SJ / TKGJ.J)

ZAR 20.68 (07-Jun-2012) Rating and Price Target Chart - ZAR (as of 07-Jun-2012)
50

Stock Rating 3-UNDERWEIGHT Currency=ZAR Date 18-Apr-2012 22-Nov-2011 30-Sep-2011 14-Sep-2011 Closing Price 23.17 29.06 32.03 33.60 3-Underweight Rating

Sector View 2-NEUTRAL

Price Target 27.00 32.00 36.00 37.00

45

40

35

30

25

20

15 Jul- 09 Jan- 10 Jul- 10 Jan- 11 Jul- 11 Jan- 12

Closing Price Target Price ating Change R

Link to Barclays Live for interactive charting

Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Telkom in the past 12 months. Barclays Bank PLC and/or an affiliate beneficially owned 1% or more of a class of equity securities of Telkom as of the end of the month prior to the research report's issuance. Barclays Bank PLC and/or an affiliate trades regularly in the securities of Telkom. Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Telkom within the past 12 months. Telkom is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. Telkom is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We use a DCF and multiples-based SOTP to derive our price target. Our South African WACC is consistent with those used for Vodacom and MTN. We apply a perpetual growth rate of -1% in the terminal year. Risks which May Impede the Achievement of the Barclays Research Price Target: Telkom is encumbered with high exposure to legacy telecommunications services. The Group earns more than 60% of group revenues from fixed access and calls. The company is addressing this structural challenge by investing in corporate data services and mobile. Both of these markets present challenges. As such, we believe that cost flexibility is key to de-risking the investment case.

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CEEMEA Telecom Services (Cont'd) Maurice Patrick +44 (0)20 3134 3622 maurice.patrick@barcap.com Barclays, London Michael Bishop +44 (0)20 3134 5626 michael.bishop@barcap.com Barclays, London Roman Arbuzov +44 (0)20 7773 1320 roman.arbuzov@barcap.com Barclays, London

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