Tough call as Safaricom profits take swan dive

It was not clear what went through the mind of former Safaricom’s CEO Michael Joseph as he sat among journalists and investors listening to his successor announce a historical drop in earnings of the company he steered to be the most profitable in the region.

But it was certain that he was glad not to be the one in front of the cameras to respond to investor queries on the firm’s latest performance, at least going by the fact that he walked out minutes before the question-and-answer session began.

His successor Bob Collymore, had the hard task of announcing the half year financial performance in which the company’s profit after tax for six months to September fell by 47.4 per cent to Sh4 billion. Over the same period last year, it reported Sh7.6 billion.

“It is not possible to compare the two periods fairly because the business environment has significantly changed,” said Mr Collymore going ahead to defend his new team.

Failure to manage costs

“Under the new environment, we believe that what we are announcing here today confirms that our strategy to diversify our product offerings to non-voice services, was timely and sound.”

The new team which he unveiled in April, five months after taking over from his predecessor in November 2010, has set the push for data market as the new lifeline with advent of a free fall voice-tariff regime.

But it’s the failure to manage costs in light of falling revenue and volatile currency market that resulted to what equity analysts said was a surprise drop in profitability.

Their sentiments were reflected on Thursday, the first day of trading of its stock after the results announcement, with the share price touching its 12-month low of Sh2.70 a piece.

It later regained to close the day at Sh2.90 per share. The firm operating and general administration expenditure went up by 23 per cent with revenue going up by only five per cent.

“The firm needs to grow its revenue at a faster pace than its costs,” said Mr Renaldo D’souza, an equity analyst at Genghis Capital.

Analysts point to the fact that with its huge requirement for the dollar, the firm could have taken a hint from Kenya Airways and hedge to protect itself from the volatile foreign exchange market.

This would have saved it at least Sh1.4 billion that it lost over the period due to a local currency.

The firm also cites the Communications Commission of Kenya (CCK) fees accumulations on its network and the 0.5 per cent universal licence fees for its escalating costs.

On November 7, a day before the results announcement, Mr John Tombleson stepped in the shoes of Mr Chris Tiffin, who was the finance director for the past three years.

Prior to his new posting Mr Tombleson was acting CEO and finance director of Vodafone Qatar. Safaricom is 40 per cent owned by Vodafone. His critical duty will be to match revenue and cost growth helping the firm regain its profit trajectory.

That though, analysts say, may take time. “I cannot see Safaricom earning the Sh13 billion in profits this year, investors should expect about Sh10 billion. Last year, the firm reported a 13.2 per cent decline in profits having returned a net profit of Sh13 billion compared to the previous year’s Sh15 billion despite growing its revenues.

To be fair, the business environment for the two periods was incomparable. Calling rates dropped to Sh1 per minute down from Sh8 per minute. In the first half of 2010, the dollar sold at an average of Sh80. But in the period under review, the dollar was averaging close to Sh100.

Fuel, a major cost element had also increased by over 36 per cent.

“There aren’t many costs you can control in such an environment. The firm’s other cost reduction will be administrative to complement the other savings on infrastructure sharing, licence fees and the increase in calling rates by 33 per cent,” said Mr Eric Musau, a research analyst at Standard Investment Bank.

The company also has to invest in its infrastructure if it is to retain its customer base.

A quality report released by the regulator, CCK, last year shows the company met only three of the required eight quality standards.

It had only met hand over success rate, call set-up time and signal strength with similar report released in September showing a double improvement.

“The report is, largely, a fair commentary on the extensive investments we have made in our network in the past few months to improve customer experience on our network,” Safaricom’s corporate affairs director Nzioka Waita said in statement released then.

The dip in profitability means that Safaricom has ceded its position as the most profitable listed company in East Africa to commercial banks, with Equity Bank and Kenya Commercial Bank having reported Sh4.74 billion and Sh4.1 billion respectively in after tax profit for the half-year results.

It has also made it cut its spending on marketing by a quarter as well as other non-core expenses in a cost trimming exercise to be felt by media companies, advertising agencies and dealers.

“We will continue to focus on our controllable costs to mitigate the inflationary and exchange rate pressure and protect our margins. Key focus areas include process re-engineering, streamlining of transmission and leased line costs and the introduction of a managed service model for network operating expenditure,” said Mr Collymore.

The government is also paying the price of the decline having earned Sh1.4 billion less in taxes.

In the six months to September, Safaricom paid Sh1.38 billion in taxes, down from the Sh2.8 billion last year.

This having been the new team’s first measure of performance, the nose dive in profits will surely turn the heat on them.

But it is the firm’s over 800,000 shareholders who will be most depressed.

The dip has dimmed hopes of them ever earning above the 20 cents dividend per share which they have unreservedly termed as ‘peanuts’ in past Annual General Meetings.

It has, however, raised fears that they may get a smaller dividend cheque compounding their earnings decline given that the share price will already be suppressed.

“Safaricom will struggle to match up last year’s performance given the circumstances they are in,” said Mr Musau.

And with its three competitors, Airtel, yumobile and Orange bucking the trend to increase calling rate, Safaricom, which recently increased its calling rate by 33 per cent, will have to work extra hard to keep its SIM on customers handset.

Airtel charges Sh3 per minute, while yumobile has free call all-day long within its grid.

“We recognise that by providing affordable rates in the mobile industry, the company will help the government control inflation and empower Kenyans to increase their expenditure in health and education,” Mr Shivan Bhargava Airtel Kenya chief operating officer told Smart Company.

Airtel’s objective, Mr Bhargava added, is to increase mobile penetration and usage through affordability and network expansion in rural areas to offer Kenyans the freedom to achieve their goals and to drive GDP growth.

It was not surprising therefore when two days after announcing results, Mr Collymore was at Uhuru Park, launching a major consumer campaign whose peak was to have some of its customers flown by helicopters around the city, as the firm moved to lock-in its 18.1 million customers from falling victim to a nascent pricing dilemma posed by its rivals.

“Our continued success has been made possible through our unrelenting engagement with the customer as well as product innovation. It is this passion for our customers that will see us into future success,” said Mr Collymore.

But the firm has to content with rivals who have resorted to predatory pricing after CCK maintained that it would keep off the price-war.

“Our role as a regulator is to ensure that there is a level playing ground that can facilitate healthy competition. We don’t interfere in whatever strategies that individual operators choose to pursue,” the CCK’s acting director-general Mr Francis Wangusi told Smart Company.