Safaricom IPO: Prospectus Peek

Thanks M

At the end of it all there are people who will but the company regardless of what is in the prospectus or will not buy. So does it matter?

IPO pool

Domestic pool
6.5 billion Shares total (runs from 26 march to 23 April)
- Individuals (retail) 3.38 billion shares (just 52%) minimum lot is 2,000 shares
- Qualified institutional investors (insurers, pensions and other entities recognized by the RBA) 2.73 billion shares (42%). Minimum lost is 100,000 then 10,000 after
- authorized dealers 130 million shares ( 2%) – minimum 2,000
- employees 260 m shares (4%) minimum is 2,000

International pool
- 3.5 billion Shares set aside and targeted at long term investors. (runs from 9th April to 23rd April)
- 30 million shillings ($461,000) per order minimum, and price will be set by book building

Inside Safaricom
Balance sheet assets of 68 billion $1 billion) in September 2007, but with negative nets (current assets 9b, 22b current liabilities). In March 2007, it was much better (CA 10b, CL 13B)
- The company owns no land or buildings

P&L: 9 month profit before tax of 16 billion, up from 12b a year ago – and company is on track for 21 billion pre-tax profit in 2008.
- Revenue has been increasing at abut 30% a year: operating expenses take up 40% of revenue; while SGA take another 10% (average annual increases have been 100% for marketing, 40% admin and 30% for staff each year)

Competition & subscribers
As at December ’07 the company had 9.2m subscribers, up from 5m a year before. Safaricom claims an 80% market share to Celtel's 18% (2.1m subs)
- But Celtel hurts: Average revenue per user (ARPU) at Dec 07 of 650 shillings (583 pre paid, 3,968 post), down from 816 shillings (705, 5,708) a year ago. This is due to adding new subscribers, with lower spending capacity in rural areas and reduced all rates following competition. They lost fewer customers (churn) ever since they allowed free replacement of lost SIM cards
- Also voice minutes (9 months): Dec 07 352 million, Dec 06 203 million
- Operating margin Sept 07 31%, Sep 06 36%: this has dropped as a result of chasing new customers with reduced tariffs and increased marketing expenses

Staff
- Key managers take home about 200 million shillings a year, while all employees take home 2 billion in compensation.
- Like at Kenya airways, foreign partner (Vodafone) will continue to appoint CEO and Financial controller (Michael Joseph contact runs through mid-2009)
- Has 1,145 employees ( ½ in customer care) in 2007, up from 535 in 2003

Odd points
- IPO budget includes just 5 million for PR and 2 million for advertising, but it sells itself
- Prospectus lists a shareholder PST who will appoint directors – cut & paste job?
- lead transaction advisor (Jimnah Mbaru & Co) bid just 0.05 cents for the job
- The dreaded word Mobitelea appears 4 times and the mysterious company owns 5% of Safaricom through (12.5% of Vodafone (K) limited’s 40%. It is mentioned in the context of a public accounts committees report (risk factor). But Standard Chartered’s 1% owner has not bothered anyone for years, so is it an issue really?

Short term outlook
- Dividend in 2007 was 4 billion shillings out of 17 billion profit, 3b the year before. But that is yet to be paid out - Telkom are owed 2.4 billion but that will be used to offset some of their debts to Safaricom.
- First AGM likely in September
- Weak shilling: and/or high interest rates are bad for the company in the short term

Long term
- Revenue of $677m in the last 9 months compared to $194m Celtel for 2007 – and an EBITDA of 44% to Celtel‘s 16% hmmm – whose managing Celtel? Will they dispute any of these numbers?
- Country risk: Derives all its revenue from Kenya, so if you don’t believe in Kenya, this is not for you
- Competition (5 mobile companies) but competition will hurt/affect all companies
- Threat to banks?: M-pesa (virtual money accounts & transfer service) has been registering about 6,000 applicants per day and has 700,000 users. But Vodafone owns the M-pesa solution and Safcom pays them.