Talk about Yourselves
It must have been a small marathon: In four days, Safaricom CEO Michael Joseph and the company's Chief Investor Relations Officer Les Baillie rushed through three cities to met up with around 30 emerging market and telecom funds in a series of one hour meetings. A gruelling schedule, but they hope this concerted marketing effort has helped trigger the recent upswing in the Safaricom share price – Nairobi brokers indicated that the recent trades are mostly by foreign investors.
Road shows such as the latest one to London , New York and Boston are important marketing and PR exercise, Baillie argues. The meetings are less about hard and fast information: Fund managers go into these meetings well prepared as they have already worked through the corporate information available on the company's website and their analysts' input. ‘Everyone wants to know about M-PESA' laughs Baillie. Other than that, questions revolve around unsurprising issues: Safaricom's assessment of the competition, the revenue shares of voice versus data and M-PESA, capex and projections, the specific reasons for declining ARPU, borrowing plans, dividend payouts and so on.
Joseph and Baillie cannot really spill any beans: They have to be cautious not to accidentally disclose any material information that has not been made available to other investors and the public as insider trading regulations forbid this. But the real value of these meetings lies in the personal encounters: Many fund managers, Baillie argues, will not invest in a company unless they have met the senior management. So the effort of travelling to these meetings does pay off – and to date, amongst Kenyan listed companies, only Access Kenya does any road shows, in a reflection of the nascent state of investor relations management ( Kenya: Investor Relations Management: Practices in East Africa ).
Illiquid Market
Investor interest is strong, Baillie notes, and he thinks that the Safaricom's share price plunge was the combination of external factors rather than the intrinsic value of the share ( Kenya: Safaricom Confident on Investor Interest ).
A structural problem for the Safaricom share is that demand wildly outstrips supply. The market is illiquid, and any institutional investor who wants to invest just USD1m to USD2m typically cannot acquire such volumes in one transaction. On 18 June 2009, for example, turnover of the Safaricom share was relatively high at KES76m, slightly less than USD1m. On average, turnover was USD200,000. Few investors have been willing to hold out for days and even weeks for their local broker to accumulate the number of share that they want.
The explanation for this phenomenon partly lies in Safaricom's shareholders structure. To date, around KES4.2bn in shares are held by retail investors and they simply have no reason to sell. Unless the share prices moves back up to around KES5.5, they will hang on to their small shareholding, which effectively locked in the share price. Baillie hopes to ease this gridlock through efforts such as the road shows – if he can convince more corporate investors that the process of acquiring Safaricom shares is worth it, then this will nudge the share price up. Eventually, it will lead to a transfer of a significant amount of shares currently held by retail investors to institutional investors, and improve liquidity.
Retail Investor Focus Backfired
In the privatisation, it had been one of the Kenyan government's priorities to spread shareholding as widely as possible. The IPO had been very successful at this, but ultimately this policy decision backfired against just those small retail investors that government had sought to include. And it created a logistical nightmare: Safaricom is burdened with the costs of administering more than 800,000 retail investors. At the release of the half-year results, the company had decided against the payment of a dividend partly because simply getting the cheque to the many shareholders would be too costly (although of course Safaricom will offer shareholders the option to receive dividend payments by M-PESA). That companies are now allowed to use electronic means for official corporate communications has been a huge relief. But for the upcoming AGM, the company intends to book a stadium – that is the scale of the event. Safaricom had initially argued in favour of a KES50 share, but the Kenyan government was opposed to this idea. In the end, this was problematic decision: ‘It is costly for us, and not really beneficial for (small retail investors)'.
In addition to making the Safaricom share widely available amongst Kenyan citizens, the government had also sought to attract international investors. Again, at first, this was a success, too, as the shares earmarked for international investors had been wildly oversubscribed. But the profit-taking early exit of some funds contributed to the share price decline. Baillie estimates that the short-term profit takers have now been weeded out, and most international institutional investors left have a long-term approach. Incidentally, because of this, they are also not overly concerned over Kenya 's political risk: The emerging market funds on Safaricom's travel schedule by definition have a higher risk tolerance, and typically adopt a long-term perspective.
And partly, this is supported by Safaricom's singular market position. The company has shown its resilience in 2008 when faced with a triple combination of post-election violence, a surge in competition and a severe economic slowdown combined with high inflation: For the year ending March 2009, Safaricom only experienced a 20% drop in profits ( Kenya: Press Releases: Safaricom Releases Financial Results for Year Ended March 2009 ) . Competitors have tried to engage the company in an ultimately unsustainable price war, and no. 2 in the market, Zain, may fall victim to Zain Group's Middle Eastern management team who are reportedly in negotiations to sell off their Africa operations ( Ratio Blog: Africa Agenda: RIP Celtel, Belatedly. ). For now, Safaricom is sitting pretty – and the share price is finally beginning to reflect this.
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