Highlights from Safaricom Briefing on Financial Results

Friday, 14 November 2008

Safaricom held briefing sessions to elaborate on the half-year financial results released on 12 November 2007. Andrea Bohnstedt reports on the key issues. In reviewing Safaricom’s results for the past six months released the day before Kenya: Press Release: Safaricom Publishes Half Year Results, CEO Michael Joseph praised his company’s performance as strong, especially against the background of difficult conditions. There are really two distinct, but coinciding environmental factors to consider: What is the impact of rising competitive pressures, and what is the fallout of a difficult economic environment, starting with the political crisis at the beginning of 2008, high consumer inflation, and now the global economic downturn, all of which affected disposable incomes? Some of the highlights from the briefing: Competition and Price Wars It was only towards the end of the six-month period under review that the new competition really kicked in, with Zain (rebranded from Celtel) becoming more aggressive, and Telkom Orange entering the market in September 2008, initially with operations only in Nairobi and Mombasa. There fore the full impact will probably only begin to show in the coming six-month period. For the period until October 2008, Safaricom stated that their market share had declined from 84% to 81%. They estimate that there are currently just under 15m subscribers in the Kenyan market, a figure derived from their own subscriber statistics, Zain’s official statistics, and estimates for Telkom Orange.   Industry projections estimate that mobile penetration will expand to around 60% of the population in the next four to five years, so the market effectively has the potential to double. Safaricom CEO Michael Joseph expects Safaricom’s market share to drop to around 65% of the market, even if he does not appear sure that there really is space for four competing operators: ‘There is room for most of us, even if I’m not sure there is room for everyone’. Commenting on the recent rounds of tariff promotions and reductions, Joseph states that while Safaricom certainly has the financial means to engage in price wars, he does not consider this a productive strategy: Telkom Orange will of course not be able to maintain their KES1 per minute offer indefinitely, and Zain’s Vuka tariff, Joseph says, affects the company’s margins. Although competition is going to become notably more aggressive, Safaricom is unlikely to relinquish its dominant position anytime soon. Joseph points to the company’s strengths:   An extensive network that can be leveraged for other products and services, A large distribution network with 350 exclusive dealers and 150,000 points of presence; Low gearing, giving Safaricom the capacity for significant additional borrowing; Despite rising pressure in the human resource market, the company has not yet lost any senior staff to the competition. So far, only a few people at lower levels have moved in, and staff turnover remains below 2%. Although other operators will compete with Safaricom in mobile banking and money transfers, Safaricom has a distinct first-mover advantage with its very successful M-PESA product. Money In and Out Safaricom’s new customers will have less money than those who subscribed earlier, so the average revenue per user (ARPU) will decline, as expected – mirroring the development in other countries, Michael Joseph noted. However, he emphasised that Safaricom planned to halt the decline in ARPU through marketing more data products to all clients, from corporate to retail subscribers and urban as well as rural client groups. Churn, i.e. the percentage of people who are considered as having left the network if they have not made or received a cal or sms for more than six months, is below target at 25%, low by industry benchmarks. Voice is still the largest contributor to revenues at 86%, compared to data and sms at 14%, but Joseph sees enormous potential in the mobile phone’s ability to compensate for the lack of access to computers and internet in this market. The potential in data revenue motivated Safaricom’s acquisition of a stake in OneCom to expand into fixed data through WiMAX and the fibreoptic cable. Safaricom is also a 20% shareholder in TEAMS. Joseph noted several factors that have been driving down margins in 2008/09:   High fuel prices and electricity prices are a common concern across business in Kenya Kenya: KAM Warns on Effects of Escalating Power Costs and have been driving up operating costs. To address this challenge, Safaricom now have about 40 sites with wind-generated energy, use solar energy in some sites, and have also tried to improve energy efficiency. The frequent power cuts experienced in Kenya simply are not, he says, conducive to business.   Safaricom are investing extensively in network capacity: Of a total investment programme of KES23bn in the entire financial year, around KES10bn have been spent so far. This is also in preparation for the fibre-optic cable link. Safaricom had intended to outsource their client services, but found, after comparing offers from countries including South Africa and India, that they would actually not have led to any cost reductions. Interestingly – and this probably raises some doubts regarding Kenya’s efforts to build up a business process outsourcing (BPO) industry – offers from Kenyan companies could not match the quality Safaricom was looking for. As a consequence, Safaricom invested in their own 800-seat call centre on Mombasa Road, due to open in December 2008. With regard to the financial results, this also meant the headcount had risen faster than initially planned. M-PESA – Mobile Wallet Even though it often appears as if Safaricom is literally trying to avoid talking about M-PESA too much, the product is clearly wildly successful: During the period under review, the number of M-PESA subscribers doubled. The company transferred KES9.6bn in September 2008, and the network now has 4,000 agents across the country. The launch of international remittances – still held up by regulatory problems   and merchant banking services is due soon. When questioned about Safaricom’s low-key approach to M-PESA, Joseph states: ‘M-PESA is a very important product for us, but even more important for our customers. Therefore we move very cautiously. The system simply has to work with 100% integrity.’ However, he brushes off any concerns that the banking sector would try to push for more regulation of the mobile wallet services in order to fend off the competition from the telecoms company: ‘We are not competing with the banks. Our average M-PESA transaction is KES3,000, and banks cannot compete with M-PESA charges of KES30 per transaction.’ In fact, he notes, while he expects most banks to come to the market with a mobile banking product within the next six months, Safaricom is entering co-operations with the banking sector: They already have a partnership with Equity Bank, which made its mark by pushing retail services to lower-income strata. Equity now acts as an M-PESA agent. Finally, M-PESA disbursements are now also available from the PESA Point ATM network. He is guarded about providing financial figures for the service. M-PESA does not yet add to the bottom line, he claims, and the investments in building the service had been significant, from providing new SIM cards to subscribers to consumer education and advertising. Safaricom expect to break even on a monthly basis with M-PESA in November 2008 for the first time, and to break even on a cumulative basis in June or July 2009. Looking forward, Joseph expects practically all mobile operators, especially in emerging markets, to have a mobile money transfer product within the next 12 months, but argues that Safaricom has the first-mover advantage. Share Price and Investor Relations Les Baillie, Safaricom’s former Chief Financial Officer and current Director of Investor Relations, provided some comments on the aftermath of Safaricom’s listing. Since going public on 9 June 2008, Safaricom has become the company with the largest number of shareholders, over 812,000, in Kenya – one of the reasons why Safaricom’s board did not decide to pay an interim dividend: It would simply be too costly, especially for the smaller retail investors, to mail that cheque as the cost per cheque of between KES30 and 40 would often in fact outstrip the interim dividend. While the share price development had of course been disappointing, Baillie was at pains to emphasise that there was and is no sign of panic selling. Since the end of June 2008, Safaricom, on an aggregate level, has lost 12,000 shareholders, around 1.5%. With regard to the distribution of investors, most movement happened in the category of a shareholding of 10-100m shares that showed the largest increase from June to October 2008. The category of investors with 1 to 10m shares showed a decline in numbers, as did that of investors holding more than 100m shares. The latter are largely foreign corporate investors. Most of them, Baillie argues, had to sell their shares to raise cash since their own investors wanted to take money out. So the reduction in this shareowner category is a reflection of the global crisis, and not a judgement of Safaricom’s performance. In fact, Baillie comments, most hedge fund investors not only acknowledge Safaricom’s share as one of the most attractively priced telecoms share in the market, but would also be very interested in buying it – except, under current conditions in the financial markets, simply do not have the cash to do so. What do investment professionals think about the financial results? Have a look at Robert Bunyi’s opinion: Kenya: Safaricom Results Pointing to Slowdown in Revenue Growth? 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