Zain in Kenya

Vuka Verdict:


Zain introduced the Vuka revolutionary flat rate call package of 8 shilling per ($0.10) minute to call all other networks in October 2008. After an initial surge in customers. What do the numbers bear out?

Rough dialing

- Zain gained a million customers 3.08 million (up from 2.1 million)
- Zain lost revenue $162 million (~13 billion) down from $194 million
- Zain lost big money: Net loss was $90 million in 2008 compared to a loss of $21 million in 2006. the ~Kshs. 7.2 billion is perhaps the largest corporate loss in Kenya for a single year

Zain outlook

- The 2009 numbers should be much better as marketing costs of Zain’s Vuka were quite heavy for the last quarter of 2008 and by which time customer numbers were still growing. But with just 5% of the entire Zain group customers, Kenya may be an expensive group to manage in what they consider to be a competitive market with low revenues [Average revenue per user/ARPU was $6 (down from $7)]. Zain claims 18% market share to Safaricom’s 77% and 5% for Orange
- Zain owned 80% of the Kenyan operation, up from 70% in 2007
- If Zain can state the population of Kenya is 38.5 million (up from 37.5 in 2007), is there need for an expensive Government census which will take place later this year?

Spotlight on foreign investors

after Morgan Stanley & Safaricom

Rift Valley Railways: This week as the patience of the governments of Kenya and Uganda reached new highs, local stakeholders finally got rid of the managing director. More stories are now coming out on the (lack of) financial strength of the backers of the railway. The East African newspaper has (consistently) had the best coverage of the railway management over the last two years.

About a year ago, the former MD gave a talk on the difficulties he faced in reviving the railway and the way forward for the 25 year program.

Tiomin is another ‘foreign investor’ who never had financing that was sufficient enough for them to launch their operations in Kwale, even after the government and the courts gave them go ahead

Zain is the new brand of the former Celtel Group that is expanding all over Africa. But according to their group financial results for the half year, Kenya is the only African country where they did not gain subscribers over the last year. At June ’08, Kenya had 1.9 million subscribers compared to 2.4 million in June 2007. Compare that to Uganda 1.8m (up 100%) and Tanzania 2.8m (up 48%). Half year revenue and loss was $79.4 million and $26.4m compared to %100m and a loss of $4.2 million at the same point in 2007 Safaricom is blamed for defending their market turf

Google have bought into Mobile Planet a leading local provider of value added mobile services (and also a Safaricom partner).

Kutwa Tuesday: Reverse Safaricom IPO and other such tales

Safaricom needs a reverse stock split to get rid of their unhappy shareholders.
- Anyone who has less than 10,000 shares by December should be paid off by the Government or Vodafone at the IPO price of 5 shillings or market price, whichever is lower at the end of the year. Investors will not sell their shares at a loss and the least they can do is recoup their money from this mess (excluding their loans)

Kenol tweak: 36.67 million shares change hands worth 3.3 billion shillings on Friday. Meanwhile kenol/kobil stations have the most expensive fuel in Nairobi. Diesel has hit 101 shilling per litre ($1.55), while petrol is at 108, that’s about 6 shillings more than my station of choice.

Cola tweak: After enduring a difficult first quarter, coca cola is having a bit of a tumble in the second quarter due to to EABL’s Alvaro – at least in urban areas where it has become the non-alcoholic drink of choice for many previous soda (and juice) sippers. Coke has unleashed another multi-million shilling giveaway promotion to win back customers


alvaro cases at Nakumatt

Celtel tweak - More celtel confusion; The ink is not dry on posters for their newest promotion and already the terms have changed (for the better) [for customers to get free calls will now cost 65/= ($1) a day down from 99/=].

August will be a significant month for the mobile sector as Celtel switches to the Zain brand, Safaricom release their first quarterly results after the IPO, and Econet should finaly/hopefuly roll out operations.

Media tweaks: All journalists and correspondents practicing in Kenya must be registered with the Media Council of Kenya – and to do so they must each pay Kshs. 2,000, while foreign journalists will have to pay 10,000 ($154) per year [those on short term assignment of up to 3 months pay 5,000]. Amounts due by 30/9. Television radio and newspaper organizations also have to pay a quarterly fee depending on the number of media outlets

- Standard tweaks Two weeks after the launch of the new Standard, their strap line of the standard has changed;


new standard at launch


standard yesterday

Sunday Nation tweaks now has the best of best of Whispers - favorite columns of the late humorist Wahome Mutahi and some articles of the New York Times

From the blogs
- Pointer for Access Kenya shareholders to read
- There are only 60 lions (adult) in the Mara – but that's an improvement by 50% from year 2001
- How bad are things for those who took IPO loans for Safaricom? Ssembonge shows that small investors are hurting more than bigger borrowers.
- Cautionary tales on life insurance from Tujuane
- Peer pressure: tales of GDP growth of rates of 8% in Ghana and
21% in Angola
- Link to a puff piece in memory of the former finance minister
-US Airways to remove all in-seat movies from their planes, while Emirates is targeting to remove all paper (in-flight magazines and publications) to save a ton of weight on the new A380 (to compensate for a ton of water for showers in first class (from airliners.net)

Opportunities

African Banker Awards. deadline for nominations if 31 July in the following categories: African Banker of the Year, African Bank of the Year, African Investment Bank, Best Development Bank in Africa, African Microfinance Bank, Best Issuing House, Most Innovative Bank, Deal of the Year, Socially Responsible Bank of the Year, Best Global Bank in Africa, Award for Gender Sensitivity

Jobs
from the daily papers last week
- Aircraft Leasing Services: captains, first officers for Embarer 135. als@als.co.ke
- HR director at Housing Finance. Apply through deloitte esd@deloitte.co.ke by 1/8
- MD of KCB Rwanda. Apply to recruitement@kcb.co.ke by 8/8
- KPMG Uganda: Internal Audit Services manager, Senior Internal Auditor, Internal auditor, forensic auditors. Apply to talentrecruit@kpmg.co.ke by 1/8
- Corporate affairs manager of Nation media group.
- Independent sales agents at Standard Chartered Bank. Apply to Susan.Ombati@ke.standardchartered.com by 31/7

Others vacancies at Kencall, Kenya Airways, and Family Bank [Credit officer, Procurement Officer, Works Officer, Accountant, Accounts Assistant, Administrative Assistant, Assistant Manager, Audit Manager, Branch Accountant]

Beach plots too good to be true? Lots of land available in Mombasa for real estate investment from Datkit agents including 3 acres creek in new Nyali with 120m sea frontage, 1.3 acres over looking Nyali golf club, 5 acre lots in kikambala, 14 acre beach plot next to Neptune beach, 25 acre beach plot next to kaskazi hotel with 168m beach front, 1/3 acre residential plots in shanzu (2nd row from beach)

Safaricom 7s

Safaricom IPO Day 24: Commentary - Strong market rebound. Someone is buying everything up below 7.00. We have based out. Deals 3,070 Turnover 305.67 million [$4.63 m] Average 6.94 High 7.00 Low 6.80 Last7.00 Volume 44 million shares Commentary and data from Rich.co.ke - NSE data vendor [with Free real time prices between 0930 -1500]

End of day : 64.65 million Shares, closing at 6.95 (up 2.2%)

Celtel Kenya gets a new CEO (7th?) [Rene Meza from Paraguay] as Celtel wins an award for best telecoms operator in Africa at the 2008 Business in Africa Awards held in London.

Rift Valley Railways gets two new shareholders [Prime Fuels and Mirambo Holdings]. Meanwhile both Kenya and Uganda governments are getting impatient and workers went on strike [they have now just got their June salaries]

The Vision 2030 Delivery Secretariat is seeking - director general, directors [social & political pillars, enablers & macro, economic pillar, and Strategy, marketing, empowerment and communication] chief officer [monitoring and evaluation] officer [project finance] project accountant, executive secretary. apply to psplanning@planning.go.ke by 31/7

The trouble with Celtel

are free calls enough?

[I am not a customer, but I have probably bought and discarded three of their SIM cards to coincide with some ongoing promotions. Too many people I call are on Safaricom, and until number portability comes along, (carrying my number to another networks) I am stuck with Safaricom]

Beside number portability, there are other things they need to sort out; Celtel has been losing customers (23% down from a year ago), executive staff (compared to the ‘stable' team at Safaricom and direction. The change of brand from Kencel to celtel to Zain only benefits paint and marketing companies (but there’s already a 'Z' brand in Tanzania and a couple of other African countries)

My biggest peeve with them is there are too many products; these are never promoted long enough to mature or register with subscribers and potential customers.

This week
- For internet/data users - they have Uhurunet - unlimited internet service, whose equipment is a USB modem costing 6,000 shillings [$95] and 3,000 [$48] per month for unlimited internet which is not bad [and this compares well against Safaricom]

- For callers: Earlier this week they launched a six-month tariff with free airtime for people who purchase cheap phones (targeted at rural subscribers). And now from the skunkworks group we learn that they have another new tariff with Free calls from 6 a.m. to 6 p.m. every day (top up with 100 shillings to take advantage) - will this be the one that gives them an edge over Safaricom? That's the problem with Celtel - great products, big marketing budget, but jumbled messages that confuse subscribers. In the last year they have advertised their lowest rate at 6 shillings (Mambo 6), 4 shillings (to 3 preferred numbers) and now 3/= ($0.05)per minute. That is three times cheaper than Safaricom, but who has the masses and who has the right message?

Other tales

- Opportunity: Nominate a worthy Kenyan to the Generation Kenya program

- From Uganda and GTV comes pre-paid premium TV - subscribers can pay for their GTV pay TV packages using scratch cards

Experian Kenya: joining the Kenyan credit reference pool is Experian in partnership with Quest Holdings.

- Day 19 of the Safaricom IPO has 4,121 deals, worth 342 million ($5.42 million) Closing 7.20 High 7.40 Low 7.00 Last 7.20 and volume of 47.5 million shares. It’s well supported and Buyers must be sniffing out a conclusion to the de-leveraging process. Commentary and data from Rich.co.ke - NSE data vendor [with Free real time prices between 0930 -1500]

Safaricom @ NSE Day 3

Wednesday 11/6

8,712 Safariom trades, with a turnover of Kshs. 1.27 billion ($20.4 million)
Price 7.00
High 7.10
Low 6.90
Last 7.00
Shares volume 180,879,400

Commentary: Very constructive session. Market is now underpinned at 7.00, support is 6.65. Demand side was robust today

Courtesy of Rich.Co.Ke [NSE data vendor]

Celtel Zambia:
From Bloomberg reports on day one of Celtel Zambia trading. Celtel Zambia, which sold 1.04 billion shares before listing for 640 kwacha ($0.20) apiece, climbed as much as 85 kwacha to 725 kwacha, according to Lusaka Stock Exchange data.

What to do with refund cheque?

Safaricom now at 7 shillings

- Keep buying until the Vodafone stand is known
- Keep buying unless you want a 20 shilling dividend cheques
- Keep buying because Zain/Celtel is struggling (the Zain reports they have 23% less customers than a year ago)
- KCB right maybe, Housing Finance not likely

Celtel Zambia: Prospectus Peek

After taking a peek at Safaricom prospectus, take a look at the Celtel Zambia one (Thanks M for mailing it in) with two weeks to go in the calendar.

January 2008, showed that cross-border diversification may not be a bad thing, even for Kenyans - and if you have the money and the chance, you should do it. Stanbic Uganda has performed quite well, though the weakening Uganda shilling eats into improved dividends.

In this IPO, retail investors from outside Zambia are not included, nor are there provisions for other country nationals except as international institutional investors. For Kenyans who take part, we are one of the countries who have double tax treaties with Zambia – hence reduced tax on dividends. However Celtel has never paid dividends as it has ploughed back all profits into operations.

Comparing mobile giants: it’s best to compare Celtel Zambia to Safaricom Kenya as they are both market leaders and backed by multinational mobile partners. Zambia is larger than Kenya, but with about 1/3 of the population (12 million) Celtel Zambia has about 1.9m customers representing 78% market share and covers 71% of the country (Cell Z and MTN are competitors). It had 2007 revenue of $252 million and an average monthly ARPU of $13 - similar to Safaricom’s (~800 shillings per month).

Beneficiaries: While the benefits of safcom went to the Kenya government, the benefits of this (sale of 20%) will go to Celtel parent. Stanbic bank are also going to do well as lead manager, distribution agents and one of the receiving banks. IFC owns 10% of the company and is expected to sell its shares after the IPO which itself costs about $5 million.

On offer: 1 billion shares on offer at 640 kwacha per share ($0.18 or Kshs. 11.50). The minimum subscription is 700 shares (about 8,000 shillings). Employees get a 20% discount on the price.

Directors: A Kenyan connection is former PS (part of 1990's dream team) and IFC executive Mwaghazi Mwachofi on the board of Celtel. It is refreshing got see that all directors other portfolios are listed in teh prospectus and that they have to declare that they have not censured/criticized by any regulator/ authority or been involved in bankruptcy, or liquidation.

Management fees: The company pays between 3.6% and 4.8% of annual revenue to Zain/Celtel parent. Safaricom pays Vodafone 0.5% of revenue and 6% of procurement costs as what has been a sensitive issue for the company but seems to be the norm with multi-nationals.

Stock exchange not retail or liquid: Zambian exchange appears not to be very liquid – it has 9 listed companies worth $100m, and $72m worth of deals were done last year in just 6,196 trades. The listing of Celtel should improve those numbers.

Regional IPO Tales

Undugu gani huu?: One of my favorite entertainment sites is Bossip with its catchy headlines, like Making it Rain on These ****, Jesus Take The Wheel, and ** sit down, all of which apply in this case, but the best way to answer this story is BROTHER PLEASE! - while Uganda and Rwanda have joined thousands of Kenyans embracing the investment vehicle that is the Safaricom IPO, it appears the Bank of Tanzania is preventing Tanzanians from buying shares in Safaricom through the Dar es Salaam Stock Exchange. (hat tip RO)

Africa investment resource: africanshareholder.com is a great site to keep up with investment happenings in Africa.

Celtel IPO On: Sadly, not in Kenya, but in Zambia starting at the end of April – with 20% of the local subsidiary on offer.

Executive privilege: one reason that ministerial seats/portfolios are in great demand in Kenya is the power that comes with then such as the authority to insert one’s buddys' names on state corporation (parastatal) boards and these become law once they run in the weekly Kenya gazette. Sometimes one can even create new boards such as the new Brand Kenya Board which has been formed to market Kenya in the fields of tourism, investment, creditworthiness and international relations.

Safaricom Success

Mr. Michael Joseph, the Safaricom CEO, gave a talk over the weekend on leadership and the successful transformation of the company from a moribund department of a dying parastatal (Telkom Kenya) to arguably Kenya’s most successful company. The Q&A session also brought out more candid answers particularly on challenges he and the company faced as well as the performance of its competitors. And since Safaricom is not (yet) a public company, this is perhaps the closest thing to an AGM of shareholders for the company until 2009.


Safaricom CEO, Michael Joseph

The Beginning
The Company started in 2000. Vodafone (40%) put in $20 million while Telkom (Government of Kenya) who were supposed to chip in with $30 million, didn’t put down any cash, giving only their dilapidated network infrastructure and 17,000 existing, and angry, customers. The company had 5 employees led by the CEO who had done a similar start-up in Hungary. However three days after the company launched its network collapsed, damaging its reputation for network quality.

Today
Safaricom’s revenue is comparable to East African Breweries and Kenya Airways. It is several times larger than its competitor, has 900 employees and 4.6 million subscribers (the company also envisions Kenya as having 16 million potential subscribers).It has invested 55 billion shillings, all internally generated, constructing its network, which now covers about 20% of the geography of the country.

Success factors
Safaricom made several key decisions early on, but was helped by the collapse of Telkom landlines and, in hindsight, some blunders by Kencell (now Celtel) which launched around the same time and which initially had a larger subscriber base in the early years. These include:

- Focus on prepaid customers The company felt that in a country without a strong credit background industry, consumers would only spend what they had. Also the CEO felt that they would need these mass-market subscribers to support corporate customers who were more lucrative. Today they have 90% of the corporate market, which Kencell set out to target initially.
- Billing per second for calls while Kencell billed per minute. Safaricom sacrificed about 20% to 40% revenue per call but again, it won more customers who preferred to only pay exactly for airtime they used. There was much debate about which method was superior, but ultimately Safaricom won out
- Having great customer service which was free and available 24 hours a day. While customer service is only paid lip service in Kenya he felt this would be important as consumers ventured into the new mobile phone industry. Meanwhile, Kencell’s customer service was available only during working hours and was not free. The CEO knows it is difficult to get through to customer service but that’s because the company gets an average of 25,000 calls a day sometimes double. Yet 95% of these calls are simple, how-to questions (e.g. send SMS, change tariff) everyday questions, answers to which are found in phone brochures.

Marketing
Even though the company is 40% UK owned, all their products and advertisements cultivate a Kenyan image utilizing the beauty of the Kenyan landscape and Swahili words (sambaza, bamba etc.) to reinforce how Kenyan the company is.



CEO was very dismissive of Celtel (a pan- African company) advertisements whose adverts have nothing Kenyan about them and faults their marketing strategy for assuming all Africans are homogeneous. Earlier, Kencell also introduced (French) Sagem phones to Kenya, which no one had heard of while Safaricom used Motorola and Siemens as their basic phone models.

Competition
Safaricom’s average revenue per user (ARPU) is 2 X Celtel’s and has not dropped in three years even as subscribers have more than doubled, leading the CEO to conclude that most Celtel customers are primarily Safaricom customers. Even though the company has network difficulty in some places e.g. industrial area, Safaricom has never shaken the impression, wrong he feels, that Celtel has a better network or clearer calls. He also says Celtel has a very high cost structure since they have ½ the revenue but only 1/10 of operating profit before finance charges.
- The CEO is not worried about competition from CDMA wireless as long as it is in the hands of Telkom Kenya which is still a bloated giant (17,000 employees servicing 240,000 customers)
- He is also not worried about 3rd or other mobile operators, or new service providers, but accepts that they will change the industry

Financing
The first time the company took on a loan, conditions were very stringent and the loan could have been recalled e.g. if cash flow dipped. But the second time they went borrowing (12 billion for network expansion) the company was so established, they were able to dictate terms to the banks. They borrowed at 1% above the T-bill rate while also retiring old debt. He also said Kencell (Celtel) had much higher finance charges since they had borrowed and were still paying back an expensive foreign currency loan from their then parent company (Vivendi.)

Other
Peculiar Kenyan call habits: CEO denies he ever made this infamous statement attributed to him. However he admiited he doesn’t understand why phone traffic between 8:00 p.m. & 8:40 p.m. on week nights is four times higher than normal, even though cheaper call rates are also available on weekends and at other times during the day.
Gift of gab: The most profitable call sites in Kenya are Garissa and Mandera. Safaricom has also set up call sites to meet high demand at remote refugee outposts such as Kakuma and Dadaab. Kenyans are also high users of text messages (next to Philippines) while Nairobi has the highest density of mobile calls in the day time (higher than New York) partly because landlines are poor.
Social responsibility: The company spends 200 million shillings a year on corporate social responsibility projects through its foundation and its biggest sponsorship will be the 2007 Mombasa cross country ($250,000).
Recruitment: Safaricom only employs graduates, yet somehow 70% of them fail a pre-employment test the company administers. They are now recruiting overseas and the average age of employees is 24 (seems young).
Premium rate services: CEO hates these companies who run promotions that charge 20 and 50 shillings above normal Safaricom rates. He has to let some of them use his network, by law, but makes it as expensive as possible for them to do so
Bad stats: When the company launched, it found that most of the government statistics on income, expenditure, and population were, and still are, wrong as shown by the number of subscribers the company has.
Honesty and integrity are the best virtues he has learnt to have on his job. This has enabled him to perform his job and shielded him from unreasonable requests/offers from politicians and business people and if there had even been a whiff of anything less, he would have been asked to compromise himself or the company.
Next CEO: He’s reluctant to retire even though he knows its inevitable. His last contract was renewed, after a long battle between forces from Central and Western Kenya who each wanted their own candidate, but were unable to agree, leaving him as the comprise candidate. He will prepare for retirement by stepping back as the face and spokesman of Safaricom slowly and we will soon see other senior managers at the company take on more public role in the future.

Future
- CEO wants the industry measure and focus to change from ARPU to ARPU margins
- Call costs will come down and there will be more price completion (perhaps even 5/= per call) as new competitors and technology become factors down. He expects Safaricom profits to drop from next year and may have to start cutting costs to stay competitive.
- Safaricom will have a new big product by year-end, which will change our lives. The company will also add a new tariff this year

Safaricom IPO
IPO was planned to happen this year, but the Cabinet rejected the proposal until Telkom is first privatised. The reason is that Safaricom is Telkom’s only valuable asset, and they did not wan to diminish Telkom’s IPO value and prospects. So the 25% sale will be in2008 and will be bigger than Kengen’s, by far, according to the CEO.

Restructure Telkom using Safaricom

(In an interview in the financial post (Feb. 14) Safaricom MD admits that he hopes that one day, Safaricom (Owned 60% by Kenya Govt/Telkom, 40% by Vodaphone) will go public and that Econet does not have much of a chance, especially if they have to build their own network. He also admits to some failures such as GPRS and a phone re-cycling project. Also, 98% of Safaricom’s customer base are pre-paid, and while he wishes to lower the cost of making calls, he points out that 26% of airtime goes to taxes.

The government should sell out of safaricom and use the cash to restructure Telkom and invest in other communication or development areas. Of Telkom’s 16 billion debts, a significant amount is owed to Safaricom and Kencell, and those can be re-negotiated. Telkom is losing out, as it can’t afford to compete in de-regulated markets as more competitors are licensed. There are investors willing to partner with Telkom but only after it undertakes a costly retrenchment and restructuring in which can be funded with cash from a safaricom public offering.

In 2002, Safaricom had revenue of 9 billion (753m profit), and in 2003 it was 14 billion (with 2 billion profit). According to Joseph, in first 6 months of 2004, the government received 1.2 billion in corporate income tax from Safaricom as well as 3.5 billion in duties and fees (on phone calls, SMS, new lines etc). Safaricom has paid over 25 billion in taxes to date and the government will continue to earn between 5 billion and 10 billion a year from safaricom in annual taxes even after privatisation.

The government is sitting on value and goodwill of its share of Safaricom and should use this opportunity to invite the public to also invest in the sector. Safaricom will probably be the most over-subscribed offering in the history of East Africa (surpassing Kenya Airways and Kenya Commercial Bank) and will enable the government to restructure Telkom Kenya.

Celtel names new CEO

Celtel, Kenyan’s 2nd largest mobile operator has named Mr Gerhard May as its new chief executive, replacing Mr John McDonald who oversaw the firm’s transition from KenCell to its current business name Celtel.

Why Not 5 mobile companies?

Safaricom published their 6 month annual reports (their year end in March 2005) and reveled that they earned a profit of Kshs. 2.6 billion between April and September 2004, which was up from the Kshs. 1.5 billion they earned from the same period last year.

There needs to be more competition in this lucrative sector, where Kencell and Safaricom earn super-profits from their high mobile (tariffs) charges that consumers pay. My question is why stop at 2 (3 if you believe in Econet) mobile operators?

I recommend that anyone who PAYS the $25 million should be licensed to operate a cellular/mobile phone company in Kenya. That way the government earns more revenue and mobile communications become more affordable as companies will lower prices and actually compete to attract more consumers. I believe Uganda has 3 and Tanzania 4 mobile companies. (And what happens if Kencell and Safaricom decide to merge one day? - we have seen telecom mergers of such magnitude in Europe and America)