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East African Business Week (Kampala)

Kenya: Safaricom Braves Market to Register Profits

Cedric Lumiti

15 November 2008

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Nairobi — Mobile service provider Safaricom defied increasing market competition to post a Kshs 8.9billion pre-tax profit in the first half of this year.

This was a two per cent increase as compared to what the company registered in the same period in 2007. Safaricom Chief Executive Officer, Michael Joseph said in Nairobi that he foresaw a crucial second half especially with heightened sector competition and high inflation levels which have changed the people's spending habits.

According to the results, profit after tax grew to Kshs 6.2 billion, an increase of 5.5% over the previous year's profit of Kshs 5.8billion. But the profit failed to revive the dwindling share price of the firm at the Nairobi Stock Exchange (NSE). At the close of trading on the day of the results, Safaricom shares were trading at Shs3.80, down from a high of Shs4.30 the previous day.

He attributed the growth in profits to a 50 per cent growth in subscriber base to 11.9556 million customer compared to 7.9 million in the previous year.

The popular M-pesa service was also a major contributor to growth and has attracted a subscription of 4.1million registered customers. Joseph said turnover rose 20 per cent to 34.5 billion in the first half of this financial year. He said the firm continues to contribute taxes to the exchequer as part of its responsibilities.

"The effective tax rate was 30.7%, a drop from 30.8% in the previous year. The total overall direct and indirect taxes paid to the Treasury for the period was Kshs 11.6billion compared to Kshs 12.5billion paid in the previous year."

Despite the high inflation rates caused by the post-election violence and the global financial crisis, Joseph attributed the relative increase in costs in the period to the increase in the cost of running the network that experienced high energy consumption, the planned effect of the aggressive customer acquisition strategy and the cost of customer retention initiatives.

Mobile penetration, which is currently around 39 per cent, is expected to increase over the next four years to a level of around 60 per cent.

"This implies that there is high potential for further industry subscriber expansion over the next few years," Joseph said acknowledging the high competition induced by rival telephone companies.

With the introduction of new players and a changing regulatory landscape, Joseph expects new challenges to Safaricom and the industry as a whole.

"A more competitive industry landscape is expected to place downward pressure on Safaricom market share of gross additions in the medium term," he added.

The company's main competitor, Zain Kenya has engaged in an aggressive marketing exercise that has seen a larger increase in its subscriber base. Though the company has remained mum on the current subscriber base, it is estimated that Zain might have netted another 3 million subscribers in the last two months alone thanks to revolutionary products currently on offer.

Another competitor, Econet Wireless is expected to roll out in two weeks time in what will herald market rivalry and increased competition as the four players try to chase a share of the Kenyan market.

Orange Telkom launched two months ago and is said to have made critical strides breaking into the already saturated mobile phone market.

Joseph said: "Increased competition and the competitive environment going forward may result in additional tariff pressure; however this should stimulate and increase usage accordingly. There could therefore be a potential future impact on ARPU going forward."

Safaricom's capital expenditure is expected to remain relatively high over the next few years, which is consistent with the strategy of expanding the GSM coverage footprint in rural areas and capacity levels in key urban areas.

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