Reading the Safaricom Tea Leaves

Post two of three: Safaricom has been one of the most progressive companies in terms of investor relation’s management, largely because of the cost of their large shareholder base. They spearheaded move to avail electronic instead of printed annual reports and payment of dividend by m-pesa, as opposed to cheques which were unviable for many shareholder who had the bare minimum of shares. Another benefit of electronic reports is that they are easier for potential investors to obtain (some companies print as few reports as legally possible and they don’t circulate widely)

Inside Safaricom's 2010 A/R

Shareholders: - Safaricom has 787,363 shareholders down from 828,912 in 2009
- The Government of Kenya has acquired more shares in the company despite a stated move of divestment. This year they have 22 million more shares, going up from 35% to a 35.06% stake
- Overall there are more foreign buyers of Safaricom shares, but NSSF Rwanda may have exited
- Director Esther Koimett bought 517,600 shares, and chairman Nicholas Nganga has 850,100. Outgoing CEO Michael Joseph and Finance Manager Les Baille each own 2.5 million shares, while their replacements, Bob Collymore and Chris Tiffin have none
- Last years’ AGM (the first since NSE listing and prominently advertised as having no handouts or frills) was attended by just 2,182 shareholders.
- 180,000 shareholders got their 2009 dividend by m-pesa (mobile phone payment)

Performance - Revenue breakdown of the 83 billion ($1 billion) in revenue voice accounted for 75% (2009: 83.4%), with SMS and other data at 9.7% (2009: 8.8%), Mpesa at 9.0% (2009: 4.2%) and equipment sales at 4.4% (2009: 3.3%). Revenue growth was 8% for voice, 32% for SMS/Data and 158% for Mpesa n all categories was positive with voice at 7.8%, SMS and other data at 32.4%, 58% for equipment sales and 158% for Mpesa
- North Eastern Kenya region is growing by over 200% owing to improved security

Other Numbers - Earned Kshs 7.6 billion ($95 million) from m-pesa (up from 2.9 billion in 2009)
- Has Kshs 10 billion ($125 million) in cash and short-term deposits, up from 4 billion the year before. Safaricom earned interest income of Kshs 350 million in the year
- Borrowings comprise 6.28 billion from a consortium of banks, 2.3 billion from one bank, and 7.5 billion in corporate bonds
- Have 2,000 dealers and 200,000 retailers
- Pay income tax at 27%, compared to 30% before they listed at the NSE

Staff - Launch ESOP in 2009 with 101 million shares and which will be issued in 2013. 2165 staff (88% of total) have joined the scheme
- Key management were paid 522 million (up from 438m)
- Of their 2,470 staff the company has an almost equal ratio of male and female employees

Fibre/Data Investments: - are investing 890 million into Seacom: they paid 316 million and balance of 573 million is to be paid over the next 5 years
- Paid 2 million to TEAMS for a 22.5% stake (other shareholders are GoK and Telkom both with 20%)
- Paid KPLC Kshs 116 million as part of 290 million for use their power network for fibre distribution over the next 20 years
- Bought packet stream data networks, for wimax,for Kshs 373 million shillings, and has lent Kshs 600 million to One communication (in which they own 51%)

Customers - their internal customer delight index had a measure of 7.38 last year against a target of 7.76
- Its true that premium customers get better customer service - there is a platinum line at call centre to service platinum (high end) customers on a prioritized basis (i.e. even by calling regular customer service free help line, ‘100’ they get through and served faster
- Safaricom business has over 2,000 customers including airlines, media houses, banks
- Mobile data is responsible for 90% of data revenue
- customer growth (their measure) Safaricom took up 65% of new phone lines in last year
- website: Safaricom the most progressive companies in online investor relations in terms of results and investor briefing posted on the web site and now dividend payments by mobile phone. It now uses twitter & facebook accounts, to promote its services and also try and (slowly) responsd to numerous customer service and product queries posted online

Rival disclosures: Safaricom’s main rival is Zain Kenya - and while it is not a listed company, the former Zain parent was listed on the Kuwait Exchange, and used to produce some extensive reports on their African operations - ranking individual countries by revenue, profit, subscribers - which was information that the local Zain office did not typically share. Similar information can also be gleaned from Orange of France about their Telkom Kenya operation.

Zain Africa sold to Bharti Airtel of India and while a financial quarter is yet to pass since the takeover, it appears they may follow the trend, as they are also a listed company with segmented reporting requirements. For Kenya in July 2010, they note that:

- Airtel Kenya has been given additional frequencies that enable it to offer 3G services
- All operators will have the right to borrow funds from the universal service fund (a fund that will comprise 1% of mobile operators annual turnover) and to use to set up infrastructure in the identified rural areas.
- Kenya companies are Bharti Airtel Kenya B.V. (name changed from Celtel Kenya BV), and Bharti Airtel Kenya Holdings B.V. (name changed from Celtel Kenya Holdings BV)

Reading the Access Kenya Tea Leaves

one of three
Over the last few years’ shareholders have voted to allow their companies to reproduce abridged financial statement summaries in the newspaper. One of the benefits of these resolutions would be to reduce costs of administering to thousands of shareholder, who previously were entitled to receive a full copy of a company’s audited results by mail.

Now companies have the full accounts on their websites for shareholders, to download, with a summary of the annual general meeting notice, dividend, chairman statement, and financial summary that appear in daily newspapers.

Limited numbers of the accounts are still printed and kept at the company premises, and distributed to analysts, partners, or to any shareholder who requests one. However most shareholders do not have Internet access or computers to read these PDF’s and may miss out on some details of events at the company.

Three companies are about to have their annual general meetings in the next few days, and have all converted to the digital format in lieu of printed copies. Kenya Airways and Safaricom both had their financial year-end in March 2010, while Access Kenya has had a good year (2009), but their meeting was delayed by boardroom wrangles which saw a new chairman brought in, and later by a drop in first half 2010 results (announced earlier this month).

AGM - Auditors Deloitte continue in office (new Chairman Mr. Ndonye was a long time partner there)
- Shareholders will be asked to endorse a concluded deal to buy out the remaining 30% in Openview, which they describe as a company that sells IT equipment to enterprises and corporate customers. Openview had sales in 2009 of 165 million, up from 147m the year before, but it seems the minority owners opted to sell the company to AK (their right under original sale agreement), and a settlement was reached where payment was made by share transfers, but they also agreed to pay Kshs 38 million to settle some claims by AK group biz daily

Notes - Dividend of 0.3 shillings per share will be paid for 2009, amounting to about Kshs 62 million
- AK still enjoys benefit of listing as a group by paying 20% in income tax compared to subsidiaries and other Kenyan corporates, which pay 30%
- Borrowings are up to 724 million (57m in 2009), but overdraft has been reduced from 166 million to 30 million. The group still has an overdraft position of 128 million. The loans are from NIC Bank and CFC Stanbic for both US$ and KES, with the bulk of this borrowing is in US$ which is cheaper (3%) is cheaper than the shillings ones (7%), unless the shilling depreciated significantly. Interest expenses for the year were 44 million compared to 6 million in 2008
- Communications solutions limited charged 370 million as management fee and owes 364 million
- Fibre: AK paid 106 million as investment into TEAMS (62.5 shares)

Shareholders: Has 32,674 shareholders and while there are some top shareholder changes, the AK ESOP has increased stake in the company

Website AK has an active presence on twitter, but is hounded by claims of poor customer service. Also from Twitter: The board has indicated there is strong interest in acquiring the company from three Telco’s but Safaricom have denied being one of them
-@bankelele reading vacationing @alykhansatchu in the star - safaricom share dips back below IPO price as CEO denies interest in buying access kenya
- @jgmbugua MJ is lying. I have impeccable information that they have approached AccessKenya at least three times. TKL, Airtel interested too
- @coldtusker @jgmbugua @bankelele Maybe in the past but does #AccessKenya add real value to @SafaricomLtd today? [I say no]

Kenya's Top Banks

as at June 2010

Bank Assets Pre-Tax-Profit
1. Barclays Kshs 173 billion ($2.16 billion), profit of Kshs 4.75 billion ($59.3 million)
2. KCB assets of Kshs 207 billion ($2.59 billion), profits of Kshs 4.34 billion ($54 million)
3. Equity 117,578 4,282
4. Standard Chartered 131,348 4,037
5. Cooperative 133,322 2,848
6. Diamond Trust 54,109 1,508
7. Citibank Kenya 63,812 1,499
8. Commercial Bank of Africa 60,229 1,465
9 Investment & Mortgages 56,630 1,239
10. National Bank of Kenya assets of 59,390 million ($742 million) and profits of Kshs 1,200 ($15 million) - then CFCStanbic (falling out of the top 10), NIC, Baroda, Imperial, and Bank of India.

Notes- KCB is the largest bank (and group) but is less profitable than Barclays which is the most profitable bank
- Equity may be the most profitable bank by next year: Five years ago (2006) they had 1/6 (Kshs 500m) of Barclays profits (Kshs 3 billion), now mid-way into 2010, they are the country's 5th largest in assets, and 3rd in profits - and are about 7X large by both measures compared to five years ago, while KCB is 1.5X larger and Barclays is 0.5X larger than it was in 2006.
- Equity is perceived better in market terms than KCB though its half its size and has the same profits this year.

Changes since last year
- Credit sharing between banks is now being enforced
- Anti-money laundering law now in effect
- The Government of Kenya has set out to raise Kshs 31 billion ($388 million for infrastructure projects; Kenyan banks currently have almost half as much money invested in government securities as they do with loans to customers
- The new constitution passed this month means we will have currency without the face of a president (virtually all existing currency bear the portraits of Kenya's past presidents)

- Equity and several other Kenyan banks have decided to embrace and work with M-Pesa and other mobile money channels instead of fighting them
- Micro-finance institutions (MFI's) are stepping up into the commercial banking sphere

Incoming banks (all of which have micro-finance origins)
- Faulu Kenya
- Jamii Bora (formerly City Finance)
- KWFT

Gone banks
- Southern Credit (bought by Equatorial)
- S&L (absorbed into KCB)

Bharti Airtel in Kenya

Zain/Bharti shake market: On August 18, Zain Kenya announced new unprecedented low rates for voice calls and SMS in a new tariff war. The new rates for calls of Kshs 3/=(~$0.04) per minute and for SMS of Kshs 1/=(~$0.01), which apply across all networks and are available to all Zain customers, easily trumps their main competitor, and market leader, Safaricom whose rates hover around Kshs 8 for a phone call and Kshs 3.50 for an SMS (and 12/= and 5/= to other networks for the same).

True cheap rates: The new rates have been well received with very popular comments online and a rush by consumers to obtain Zain lines or re-activate old ones. CEO Rene Meza called this a new long dark journey to market dominance [i.e. from 10% now] and one they will tackle aggressively for the long term. But is it sustainable? The last time Zain engaged in a price war, they ended in a bloody loss, with Zain gaining customers but not market share and $90 million in the red.

Airtel Strategy : However Zain Kenya is no more. The push comes from new owners Bharti Airtel of India who completed their takeover of the Zain Africa Group last month and will rebrand the company (in Kenya) by October 2010. They have also set out to re-position the local telecommunications sector in tandem with Essar and France Telecom by lobbying the government for other changes to level the playing field in a market they believe is unfairly dominated by Safaricom and which denies Kenyans true freedom of choice.

At the official launch in July, Airtel executives the emphasized some of their strategies including:
- They are rural focused and will build a rural brand through farming related promotions and CSR activities
- Be a low cost operators; employ low skilled sales force
- Lobby for number portability
- Push for lower interconnection rates which will lead to affordable products
- Lobby for infrastructure sharing i.e. no need to have 5 cell phone towers in a small town (all incurring electricity, security, cement, other charges) town when 1 will do with all Telco’s sharing transmission and fibre
- Work with ecosystem partners, like HP and Eriksson, and have a BPO call centre

Will the government deliver on low connection fees, number portability and infrastructure sharing? At the launch Meza mentioned that the Communications Commission of Kenya (CCK) had lowered the interconnection tariff from about 4 to 2 shillings effective September 2010.

Short-term losses: Meza said they plan to grow revenue and subscribers, and margins and profits will come later from operating a lower cost structure. And in a back stab at the previous owners (and perhaps minority shareholders), he said for the first time in eight years they have shareholders with the right mind-set to allow them to take opportunities in the market, increase rural penetration and utilise the right technology - by investing Kshs 24 billion (~$296 million) in the next 18 months on rural cell phone sites, revamping their zap money transfer systems, increasing their outlets & distribution network, expanding their 2G network, and rolling out a 3G network by the end of the year (since the license fee was reduced this year, they will be able to cover more parts of Kenya than just Nairobi and Mombasa)

Improve on Marketing: Marketing has always been a weak point at Zain, who keep throwing out too many confusing promotions one after another after another. The Wednesday Nation had a full-page ad for the new Zain (3/= and 1/=) rates and on the adjacent page was a small story touting a tariff for Zain ‘Club 20’ subscribers who could now get free calls and unlimited SMS from 11pm to 6 a.m. within the Zain network only! And all this comes a month after they had launched anotherrevolutionarypromotion. Hopefully this will hopefully change with the recent marketing executive appointments and re-focused brand and strategy.

EDIT - Other Developments
- Zain accuses Safaricom of sabotaging its new price offer
- Safaricom reassures Zain over inter-connect capacity, and says their concerns are premature.
- CEO's e-mail exchange between Rene Meza (Zain) and Michael Joseph (Safaricom)
- Safaricom launches Masaa tariff with prices of Kshs 2-4 for Safaricom calls and Kshs 3-5 to other networks.
- Orange (France Telecom/Telkom Kenya) make their low cost pitch with Kshs 2 and Kshs 4 for on and off net calls respectively, with free on net calls from 10 AM to 5 PM for Kshs 100 per month ($1.25)

Scangroup & Ogilvy Redux

Scangroup shareholders today did their part and unanimously approved the proposed deal to buy into Ogilvy Africa as they also endorsed the creation and allocation of new shares to be swapped under the deal.

This will give Scangroup (thorough Ogilvy) an opportunity and footprint to enter about 8 African countries as a minority partner and links with 15 affiliates, and CEO Bharat Thakar mentioned that creation of a Pan-African agency was fulfillment of a long ambition and the only way to grow the company since the Kenyan (and east African) advertising market was saturated.

The deal still hinges on approval of South Africa authorities for the share swaps (otherwise Scangroup/WPP will have to pay $5 million to complete the deal). By using shares to complete the deal, Scangroup's war chest of cash at WPP is still available and ready to be used to seek majority stakes from these new Ogilvy partners around Africa.

Briefcase VC

What’s briefcase VC?

In Kenya we are familiar with briefcase NGO’s and briefcase contractors. 'Briefcase' is a not so nice was of describe someone who has access to power but does not invest resources in business. A briefcase NGO has no programs or operations, and exists merely to solicit funds from donors, while a briefcase contractors wins government contracts/tender (through the influence of a power network) which he/she has no capacity to implement, then sub-contracts these to compete firms (without access).

A Briefcase VC (venture capitalist) is probably a tourist on holiday, who calls around or approaches vibrant local tech companies with unsolicited offers to invest in them - but has no funds or capacity (beyond a website) to do so and no recent deals to speak of, and unfortunately are able to put hungry young companies through hoops as they restructure and comply in the hope of getting funding that it unlikely to materialize.

Shares Portfolio August 2010

Market picking up steadily since last quarterly review in May 2010

The stable
Diamond Trust ↑
Kenya Airways ↓
KCB ↓
Kenol ↓
Safaricom
Scangroup ↑
Stanbic (Uganda) ↓
Uchumi ↔

Review:
- Best performer: Scangroup Safaricom up 25% this quarter
- Worst performer Kenya Airways down 10%
- In: Kenol
- Out: None
- Increase None
- Decrease None
- Unexpected gains/losses: None

Events & Outlook:
- Performance: The Portfolio is up 8% in the last three months while the NSE Index is up 10%.
- Got dividends from all the banks, which are improved performance this year. Dividend included that from Stanbic Uganda but its still a problems to cash as Stanbic Kenya is incapable of partnering with Stanbic Uganda to ease the encashment process – even better would be for Stanbic Kenya though CSFS to facilitate more share buying perhaps reinvestment of dividends to buy more Stanbic UG shares
- Sat out the KCB rights issues whose results came out today (August 10). The Bank had set out to raise Kshs 15 billion ($189 million) from shareholders but yielded 83% of that – 12.45 billion
- Scangroup’s investment in Ogilvy Africa
- Kenol rebounded from problems at battle with government to report some much improved first half profits.
- Looking forward to buying Safaricom shares, and attending their (no SWAG) AGM
- Uchumi is yet to re-list despite exiting their receivership phase
KQ leased 737 from KLM
- Privatization: The Kenya Government is short on cash but their privatization basket is still empty. Nothing has come yet from National bank and East African Portland cement, while the next infusion of cash is likely to be from Kenya Power & Lighting Company. Meanwhile the Kenya government bond market has been much more active than the equity one.

Government Contracting to SME's

The Government of Kenya is collectively the biggest spending entity in the whole country. Yet provision of goods and services to the government is often over-looked by small and medium enterprises (SME). Many do so for a variety of reasons, some of which are late payments for good/services delivered, demands for bribes from government procuring officers, costly and time-consuming red tape procedures.

However the opportunities are there for small companies to take. It is wrong to look at this collectively because different ministries, parastatals, agencies are governed under different rules of administration and purchasing. Over the last few years the procurement process has been streamlined at many government bodies. More tenders are advertised to the public giving more opportunity for new bidders, Corruption is not as blatant and the avenues for redress in this regard have opened up. Also there are opportunities in technology that new upstart companies can grab if they are prepared for the process.

A glance at some recent GoK procurement awards at the website of the public procurement oversight authority (PPOA) shows some technology related awards including:
- Direct loading of Safaricom airtime for senior staff at the Kenya Revenue Authority - won by Safaricom (Kshs 7.8 million)
- Provision of documentation software at the Kenya Ports Authority – won by Sap Africa (~Kshs 5.7 million)
- Installation and commission of security software at Kenya Forest Services (Kshs 14.9 million)
- Supply of a network operations for Kenya Education Network- won by Lantech Africa (~Kshs 176 million)
- Provision of data capture at the High Court registry – won by DPH Software Services (Kshs 69.9 million)
- Support of the digital village sat the Kenya ICT board – won by Intelecon Research & Consultancy (~Kshs 25.9 million)

The steps to winning & executing a tender are:

- See advert in the papers
- Pay a stipulated fee to obtain bid documents Kshs 2,000 to 10,000 ($125)
- Return bid documents by a specific date and witness the opening of tenders. Bidders are often asked to provide copies of company profile, financial accounts, list of other similar contracts executed (referees/proof of performance)
- Winner gets limited purchase order (LPO)
- Winner delivers goods
- Winner receives payment

There are variations to this process; sometimes bidders are asked to return only a technical proposal (to demonstrate their understanding and expertise) subject to which those short listed are now asked to provide financial proposals. The lowest bidder at this stage should win though sometimes weighting the technical and financial scores arrives at the winner.

Sometimes a winning bidder may experience delays in procuring goods, or as a result of other factors beyond their control. The end result is that their payment may be delayed. This cash flow cycles often cripples many small business hindering their opportunity to take up new orders while waiting for old payments to be received.

This is where banks products such as solid loop, a contract finance loan, from consolidated bank can assist an SME. However, one major improvement in the PPOA rules is that a government entity cannot put out a tender for a good or service that is not budgeted for and which it has no funds for – and this cuts down on a situation where a company may provide a service that will not be paid for several years.

GoK gives you wings
So government procurement should be looked at in a new light, and many more vibrant emerging companies should seek out as aggressively as they seek out private sector or multinational procurement orders. These can be areas such as payment processes, digitization /archiving of records and web & mobile developments

Media Moment: Newspapers Circulating in Africa

Half year Growth: Kenya’s Nation Media Group released their half-year results on August 2 in Nairobi. The results were impressive for a media house, and as their CEO (Linus Gitahi) noted, newspapers still show double-digit growth in Asia, Latin America and Africa.

At NMG Circulation numbers were up in terms of Nation copies distributed (up 6%, though no numbers cited), circulation revenue of the East African is 5% and business daily is up 10% - and overall the newspaper division had operating profits up 36% thanks to reduced costs.

NMG have also expanded in the region (Tanzania and Uganda), invested heavily in digital media, but pulled out of a magazine venture (EAMagazines) before it collapsed. (The venture has been revived with new owners, and one magazine True Love is now back in publication)

They have also reached out to the online community and social media - as the CEO mentioned Facebook several times noting the 100,000+ fans of their EASY FM radio station. Also, like with the Pan African Media Conference that marked their 50th anniversary, NMG reached out to the online community via invitations to bloggers to attend the announcement, and the CEO noted the presence of DJ CK (Chris Kirubi) and Aly Khan Satchu of Rich Management.

(The CEO’s half year presentation can be downloaded from the NMG investor page).

TV In –n- Out: The Indian Ocean Newsletter hinted that a new TV station and a new newspaper would hit the streets of Nairobi on August 1. No newspapers are out yet, but a 'new' TV station is now up on air. At recent, events the presence of staff with the 'GBS' name (not to be confused with the collapsed UK sports broadcaster GTV) have been noted, but few knew what that meant. Now the station is air with a very powerful signal – as the Good News Broadcast Service a.k.a GBS with a mix of news and Christian programming

However, still missing from free airwaves is CNBC Africa which is no longer broadcast on free TV in Nairobi and is only exclusive to satellite subscribers on DSTV

Kenya Times Falls: Also missing from many streets and the advertising radar is Kenya Times newspaper which has floundered ever since KANU lost the Presidency in 2002. Dalliances with potential new owners, editors, investors have not borne fruit, and last week there was a notice in the paper about the entire office and press of thew newspaper going under the auctioneer’s hammer. Today’s paper has another ad canceling that auction but it’s probably just a postponement of the inevitable unless …