Safaricom shrugs off price war in Kenya to grow half year profits

Mergers, Acquisitions and Financial Results

Kenya’s most profitable company Safaricom last week released its first financial results since listing showing a widening subscriber base and increased sales but an earnings growth that had barely survived a vicious pricing competition in the market.

The mobile phone company was counting on data and value added services to earn more from each customer in future, said the chief executive, Michael Joseph, as he revealed that the company’s half-year pre-tax earnings grew by just two per cent — amounting to a significant decline in real terms.

Joseph said other efforts to shore up Safaricom’s income will include launching new products, establishing more retail outlets, cutting operational costs and expanding into the rural areas.

The announcement of the half-year results saw the company’s share price drop by 9.30 per cent to an average of Sh3.90 at the Nairobi bourse. The results showed that the ARPU had dropped by 24.3 per cent to Sh503 and pre-tax profits had increased by 2.2 per cent to Sh8.9 billion.

These disappointments came despite the group achieving a 20.4 per cent increase in sales and adding four million subscribers to its numbers. Expectations of an improved half-year performance had triggered a mini-rally of the share at the stock market, raising the price by about 39 per cent in one week.

However, Joseph said the company would not be pushed into making knee-jerk reactions to each of its competitors’ moves, adding that Safaricom had to strike a fine balance between maintaining growth of its bottom line and reducing call charges to lock in and win new subscribers.

“We will not strive to match every of our competitors’ moves. The temptation is to go out and compete but we have to take care of our bottom line,” he said. Analysts at African Alliance Investment Bank said the results did not match the general investor expectations, and hence the nosedive in the share price.

“The results were below investors’ expectations and show that there is little chance that company will exceed last year’s earnings per share of 35 cents,” said researchers at African Alliance.

The comparative pre-tax profit figure of Sh8.9 billion excluded two large “one-off” gains in the comparative period between March and September last year, which when included show a 14.8 per cent drop in Safaricom’s pre-tax profits.

The two “one-off” items include interest charges receivable from Telkom Kenya amounting to Sh1.2 billion and an unrealised foreign currency gain of Sh553 million arising from a revaluation of a dollar denominated loan advanced to Safaricom by its foreign shareholder, Vodafone.

The company’s after-tax profits also dropped by a similar margin to Sh6.2 billion from Sh7.2 billion in the first half of last year.

Safaricom’s chief investor relations officer and former company chief financial officer, Mr Les Baillie, defended the decision to exclude the two items from this year’s comparative profit figures.

“The CMA regulations dictate that we must report our financial numbers in accordance with International Accounting Standards. Accordingly the notice that will appear in tomorrow’s papers will show a decline in post tax profit of 14.7 per cent,” he said.

“From an investor perspective it is important for us to point out the two large one-off gains in the previous half year,” said Baillie.

Joseph attributed the drop in average revenue per user (ARPU) from Sh665 to Sh503 to high inflation that had eaten into subscribers spending power and ongoing recruitment of mainly rural subscribers with relatively lower disposable income.

Subscriber numbers have risen from 7.9m to 11.9m “It reflects the marginal effect of additional subscribers with lower spending profiles as the network is rolled out to rural areas,” said Joseph.

During the period under review, SMS and data revenues increased by 76.1 per cent in the six months to Sh3.7 billion, while revenues from call charges went up by 17.1 per cent to Sh29.7 billion.

The subscriber base increased by 50.3 per cent in the half year period to just under 12 million subscribers, giving Safaricom a strong market leadership with 81 per cent of the total subscriber base.

Total revenues increased by 20.4 per cent to Sh34.5 billion, driving up the earnings before interest, taxes, depreciation and amortisation (ebitda) by 15.6 per cent to Sh15 billion.

“The top line growth we have reported has been quite exceptional, bearing in mind that any percentage increase is based upon a very large starting number, in this case the Sh28.65 billion turnover in the previous first half,” said Baillie.

Business Daily