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Tuesday, May 27, 2008

Safaricom sets record for Kenya’s blue chips

by Michael Omondi (Business daily)

Safaricom yesterday reported record profits and announced plans to boost coverage in the rural areas as a strategy of growing its customer base in the face of mounting competition.

Telkom Kenya and Econet Wireless are expected to launch mobile phone services later in the year , adding competitive pressure in a market Safaricom has dominated for nearly a decade.

With earnings before interest, taxes, depreciation and amortization or Ebidta (an accounting measure that is used as a proxy for true earnings and cash generation power of a telecommunication company) of Sh28.1 billion representing a growth of 15 per cent.

Safaricom for the third year running has emerged as the most profitable company in Kenya and among the best in sub-Saharan Africa. This is expected to raise interest in its shares, which are expected to begin trading at the Nairobi Stock Exchange in early June.

Net profit, which represents the money available to shareholders hit Sh13.8 billion, reflecting a 15.3 per cent increase.

The operating profit however grew at a modest rate of 3.8 per cent to Sh18.5 billion, revealing the extent to which the business was unable to reign in costs as its expansion plan gathers pace.

Safaricom’s revenue rose to Sh61.3 billion from Sh47.4 billion a year earlier, representing a 29.3 per cent growth.

The performance, driven by an increase in company’s subscriber base from 6.1 million in 2006 to 10.2 million in 2007, comes as competition intensifies in the cellular phone market with the entry of new players.

Econet Wireless, which is partly owned by India’s Essar, is set to rollout its mobile services in July, while Telkom Kenya, owned 51 per cent by France Telecom, is planning a rollout in September.

To maintain its profit momentum in the face of the competition, Safaricom is planning to widen its footprint in the under-served rural areas to boost its national coverage. The firm currently has a national coverage of about 60 per cent range compared to 84 per cent for its main rival Celtel Kenya.

“Having a national footprint is key to beating competition,” said Michael Joseph, the company’s CEO. “You don’t win this market by simply lowering tariffs and rolling out in a few urban centers.”

Kenya’s mobile phone penetration stands at 34 per cent of the population and is expected to increase to 60 per cent in the next four years as more rural dwellers sign up.

Besides boosting its coverage in the rural zones, Safaricom is counting on lower tariff rates and its new low airtime denomination of Sh20 to penetrate the price sensitive rural consumers.

The firm said it is targeting about two million new subscribers by the end of the year, on the back of renewed investment in infrastructure and a focus on the rural market.

Mr Joseph said that the new entrants would find it hard to eat into Safaricom’s market share, which increased to 84 per cent from 73 per cent in the past 12 months. His optimism is hinged on the fact that it would take the competition time to build a network the size of Safaricom.

“Our coverage and huge subscriber base will give us the much needed competitive edge,” said Joseph.

But competition is not about discouraged by Safaricom’s might.

Celtel, the number two player and who has failed to match the might of Safaricom as it reported a loss of Sh1.5 billion last year has set in motion an ambitious network upgrade plan that should push it’s population coverage from 84 per cent in 2007 to 95 per cent this year.

This will be backed by a multi-million shilling advertising blitz on a name change to Zain, as Celtel races to strike a chord with youthful subscribers, a market that Telkom Kenya is keen to tap into.

Econet Wireless made its intention clear, with the announcement that it has placed Sh9.3 billion order for GSM network followed by the onset of the recruitment drive for key staff.

Telkom Kenya has also placed its order and is set to unveil its network in September targeting major urban centers before spreading to the rest of the countryside, a strategy that Econet is also keen to employ.

This is a clear signal that the twin entrants are targeting the urban clientele that has over the past eight years driven Safaricom’s profits.

But Safaricom is not about to let the entrants eat into its urban market as it pursues the rural dwellers.

The commercial launch of its third generation 3G mobile technology on Monday, enabling roll out of multimedia services such as video and television on mobile and faster internet connection would help the firm capture corporate clients and high end customers.

And through its newly launched money transfer service, Mpesa, the firm hopes to fence in its subscribers and deny other operators getting access to its subscribers who are likely to get reluctant to switch networks easily.

“Mpesa is a not a huge revenue generating business but it makes subscribers stay with Safaricom,” said Les Baille, the company’s Chief Financial Officer.

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