Kenya: Safaricom Share Price to Remain Volatile

Mergers, Acquisitions and Financial Results

Safaricom's share price will remain volatile until investors get a clear picture of how the ongoing price wars among mobile phone companies will impact on the company's revenue, market analysts said.

The share price hit its lowest point in the year when it touched Sh4.05 in Monday's trading at the Nairobi Stock Exchange, before crawling up to Sh4.35 in Tuesday's trading.

The price has been on a downward spiral since August when the firm was forced to cut its calling charges by 62.5 per cent in retaliation to a move by Zain Kenya, which had halved its tariff to Sh3 per minute.

Investors, mostly foreign and institutional, have given the share a cautious look, fearing that a reduction of revenue from voice calls, which contribute 80 per cent of the firm's income, would affect the market leader's profitability.

But without a clear picture of what the company intends to do they have been shying away from the stock, according to analysts from CFC Stanbic Financial Services.

"Safaricom has only come up with promotions which are not long-term," the analysts said.

The company cut its charges to as low as Sh2, from Sh8, for callers within the network. But the promotional offer ends on November 22.

Chief executive Michael Joseph has termed the rate as "unsustainable," but he has not given an indication what the long term tariff will be.

The price wars have also moved to the short service message (SMS) after the Communication Commission of Kenya (CCK) nudged operators to lower prices by reducing inter-connection charges.

Zain Kenya, Safaricom's main competitor, and Yu have also reduced prices on international calls.

Analysts at CFC Stanbic Financial Services said the move has "complicated matters."

If Zain can hold the rock bottom rates for a year or more, the analysts said, there is a possibility that Safaricom's revenues will fall significantly since it will be difficult for the firm to raise prices to previous levels.

Johnson Nderi, a research analyst at Suntra Investment Bank, said investors were likely to shy away from buying the stock until data on how the lower call charges have impacted the company emerges.

"It is extremely difficult to price the share of the company," said Mr Nderi.

While lower prices on calls may reduce revenue in the short-term, they can spur an increase in the length and volume of calls and act to cushion the firm's revenues, said Renaldo De-Souza, a research analyst with Genghis Capital.

Safaricom's income is also likely to get a boost from money transfer service M-Pesa, and data services which are emerging as the next battlegrounds, Mr De-Souza said.

But investment banks such as HSBC and Kestrel Capital have revised their rating of the company, while foreign investors who have been bullish on the stock have reduced their demand for the stock.