MERGERS, ACQUISITIONS AND FINANCIAL RESULTS

Kenya: Safaricom profit climbs 37%

Kenya’s largest telecoms firm Safaricom posted a 37 per cent jump in pre-tax profits to Sh21 billion in the year to March 2010, propelled by a surge in data revenue that smoothened out a slow growth in the traditional voice business.

The robust growth, in a year when a turbulent first half of the year results had removed the shine from the firm’s performance, was also helped by aggressive cost-cutting measures that cut back operational expenditure by Sh1 billion, leaving it with enough headroom to tackle a new wave of competition in the market.

“Weak margins in the first half were reflective of an aggressive customer acquisition strategy (competition) and network running costs (inflation) in a soft economy,” said Ivan Kim, an analyst at Renaissance Capital.

“The cost-cutting initiatives introduced by management are however bearing fruit. The outlook for Safaricom is contingent upon growth in the data segment and M-Pesa as well as its ability to improve profitability,” said Mr Kim, in a note to investors.

The company proposes to pay a dividend of 20 cents per share to shareholders— a significant move that points to a more generous payout policy.  The Sh8 billion dividend is 53 per cent of the firm’s net profit of Sh15.1 billion. The company last year paid a dividend of 10 cents per share — Sh4 billion in total —equivalent to 38 per cent of the net profit of Sh10.5 billion realised.

The company’s dividend has been of concern to shareholders, especially those who bought small volumes during the 2008 IPO largely because of the company’s volume of 40 billion issued shares.

The company has been pondering options including consolidating the shares but has not dealt with regulatory hurdles. An improvement in the economic environment helped Safaricom successfully launch its foray into the data market, making 2009 the year when the telecoms operator departed from its heavy reliance on the voice market for revenue growth.

The growth in Safaricom’s revenues to Sh83 billion from Sh70 the previous year is the latest confirmation of the enduring power that the telecoms firm possessed in an operating environment subdued by the economic slowdown.

Safaricom chief executive Michael Joseph said the net income rose by 43 per cent to Sh15 billion, while EBITDA (earnings before interest, tax, depreciation and amortisation) jumped to Sh36 billion from Sh27 billion the previous year.

The firm reported a slowdown in the pace of revenue growth from the voice business, reflecting the decline of average revenue per user (ARPU) to Sh362 in 2009 from Sh376 in 2008 as competition for market-share pulled down tariffs and recruitment of new subscribers knocked on the doors of rural residents with less spending power.

Safaricom returned an above the market average blended ARPU of Sh458 even as its voice revenue per user per minute declined 11 per cent from Sh7 to Sh6.  This, however, was offset by an increase in minutes used by each customer.

The company’s decision to aggressively pursue consumers of data services paid off handsomely with revenue from that segment of the business, which includes internet services, M-Pesa and SMS rising 98 per cent to Sh15.7 billion.

With 9.5 million users on the mobile money transfer product M-Pesa, and a further 2.6 million using its data services, Safaricom is now expecting a 10 per cent growth in revenue from this segment of the business.

That target if realized even with the performance of other business lines will move Safaricom’s annual revenues close to the Sh100 billion mark. That growth target is informed by Safaricom’s recent investment in M-Kesho, the mobile-banking service that allows M-Pesa users to save money, earn interest and buy life insurance.

In particular, M-Pesa, which broke even during the period and contributed Sh7.5 billion in revenues, is being billed as the most important piece in Safaricom’s arsenal and on which future growth depends.

“It is clear the company is placing a big bet on data. Already we are seeing M-Pesa — a game changing technology — contributing to a 158 per cent increase in growth over the last year, representing significant opportunity for the company,” said Aly Khan Satchu of Rich Management.

The diversification indicates the firm’s changing strategic focus as it attempts to shield itself from looming competition and declining average revenue per user (ARPUS) figures from voice services.

The improved results set the mobile firm, still the country’s largest with 15 million subscribers and 78 per cent market share, with the task of defending its turf from a fresh wave of competitive forces as Zain rebrands to Bharti Airtel and a new regulatory environment threatens to change market dynamics.

Although many analysts have termed the first 10 years of the mobile firm’s growth as “super-normal,” a more fitting description to describe its gains for the coming period would be steady but sure growth.

“If you compare our results with those of our peers in similar growth markets, they are not super normal. Sub-Saharan Africa remains the fastest growing market in the world,” said Mr Joseph.

Many of the factors that led to Safaricom’s fast paced growth — the lack of effective fixed line infrastructure and the need for cheaper communication — have been largely resolved over the last few years, leaving mobile operators with the task of identifying value added services that will keep subscribers on their networks.

Source: Business Daily

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