Telecoms

The Company

Safaricom is the leading mobile network operator in Kenya with 68% market share of total mobile subscribers in the country. It controls 79% of voice traffic and 96% of mobile text messages. The company is the largest listed entity on the Nairobi Securities Exchange by market capitalisation, representing 25% of the market. It is 40% owned by the Vodafone Group of the UK and 35% owned by the government of Kenya. Safaricom offers voice services as well as SMS, data, device sales and a money transfer service dubbed M-Pesa. Voice contributes 60% of total revenues, albeit at a declining trend due to company efforts to diversify from this revenue line due to its price sensitivity. SMS, data and M-Pesa contribute 10%, 7% and 20%, respectively, to total turnover.

Revenue growth will be mainly driven by non-voice revenue. Kenya has a population of around 44m. The country’s mobile penetration stands at 77.2% on a mobile subscriber base of 30.4m active SIM cards. Data has a penetration rate of 51% and 37% of Safaricom’s mobile subscribers, while M-Pesa has reached out to 89% of Safaricom’s subscribers.

Safaricom operates a capital expenditure-intensive business. Its “Best Network in Kenya” initiative aims to modernise its 2G and 3G base stations and provide fibre connectivity to buildings in metropolitan cities over the next five year. Meanwhile, the company’s key business risks mainly stem from a regulatory perspective. It failed to meet the regulator’s quality-of-service criteria in 2012-13, achieving a compliance level of 50% compared with the minimum of 80%. This in effect led to the delay of its licence renewal after months of uncertainty.

The company delivered strong financial results in the financial year ending in March 2014 with solid growth recorded across all revenue lines. Total revenue grew by 16% to KSh144.7bn ($1.6bn).

Service revenue grew 17% to KSh138.4bn ($1.6bn), of which voice service revenue grew by 12% to KSh86.3bn ($983.8m), while non-voice service revenue sustained its growth trajectory by increasing 28% to KSh52.1bn ($593.9m) driven mainly by data and MPesa. Growth in revenues was driven by an 11% increase in Safaricom’s customer base to 21.6m and a 21.6% rise in M-Pesa revenues.

Direct costs grew by 10%, resulting in an improvement in the contribution margin to 64.1% as they continued to explore further cost-reduction initiatives focused on transmission costs, network operating costs and IT operational costs. The increase in revenue coupled with cost efficiency drove up earnings before interest, taxes, depreciation and amortisation margin to 42.1%, a 250 bps improvement. Depreciation increased 16.5% to KSh25.8bn ($294.1m) attributable to additional capital expenditure driven towards modernising Safaricom’s network. Financing costs declined 90.3% to KSh160m ($1.8m) on the back of repayment of short-term borrowings of KSh8.23bn ($93.8m) during the year. Overall, profit after tax increased 31.2% to KSh23.02bn ($262.4m) with a dividend of KSh0.47 ($0.005) recommended by the board, which represents an 82% payout ratio.

Development Strategy

he company’s focus in coming years is on delivering the best network in Kenya, growing mobile and fixed data penetration as well as deepening financial inclusion using M-Pesa. Safaricom plans on achieving these targets by expanding coverage of its 2G and 3G networks, offering 4G long-term evolution services, increasing smartphone penetration through cost-effective quality offers, commercialising Lipa na M-Pesa by growing the number of active merchants and growing the number of M-Pesa transactions per subscriber.

Safaricom faces competition from newly licensed mobile virtual network operators, which are pushing to provide more efficient mobile money and cheaper voice services. There is also pressure from the Communications Commission of Kenya to share its mobile agency network and infrastructure with other operators, which could minimise its competitive advantage.