Safaricom: The making of a Sh101b cash cow

 

Safaricom CEO Peter Ndegwa.

Between 8am yesterday when it released its results and the time you are reading this article, the country’s most valuable company has earned at least Sh301 million in profit - before the taxman takes his cut.

Yesterday, Safaricom became the first company in East and Central Africa to hit gross profit that crosses the Sh100 billion-mark. The telco powered past earlier projections to record Sh101 billion before tax.

This means Safaricom earns Sh12.5 million every 60 minutes, or Sh300.6 million in 24 hours.

To put Safaricom’s net profit in further context, the country’s top four banks’ profits combined – KCB (Sh25.1 billion), Equity Bank (Sh22.6 billion), Co-operative Bank (Sh14.3 billion) and Standard Chartered Bank (Sh8 billion) – add up to Sh70 billion, and still fall short of the giant telco’s 2019-20 financial earnings.

The result is eight times the Sh8.9 billion the entire insurance industry earned last year.

The profits that beat market expectation came on the back of increased mobile lending and uptake of data services, the star earners of Safaricom’s revenue.

Shareholders will pocket Sh56 billion in dividend once they approve the accounts, with the National Treasury earning Sh19.6 billion.

But alive to the economic impact of the coronavirus pandemic, which has shuttered several business already, the telco for the first time refrained from giving future earnings projections due to uncertainties in the business environment.

Profit for the 2019-20 financial year grew 19 per cent from Sh62 billion recorded in a similar period the previous year.

M-Pesa continues to be the company’s golden goose, posting Sh84.4 billion in revenue last year up from Sh74 billion. It was boosted by new lending products, including Fuliza, M-Shwari and KCB M-Pesa.

“This growth was driven by savings and lending, which make up two-thirds of the total growth,” explained Safaricom’s outgoing CEO Michael Joseph.

“However, we have seen a slowdown in growth rates across withdrawals and payments, partly driven by a general economic slowdown, and this is likely to get worse as we face the coronavirus pandemic.”

The number of active M-Pesa users grew from 22.6 million to 24.9 million, with the company earning Sh294 on average from each user monthly.

Overall, service revenue rose by 4.8 per cent from Sh240 billion reported at the end of March 2019 to Sh251 billion this financial year.

Revenue from voice and SMS, traditionally the company’s bread and butter, declined by 1.4 per cent and 12 per cent to stand at Sh94 billion and Sh17 billion, respectively.

Safaricom attributes the decline to competitive pressures and customers’ migration to newer technologies, including messaging platforms like WhatsApp. At the same time, the introduction of measures to make it easier for subscribers to opt out of promotional SMSs resulted in Sh1.2 billion revenue drop.

While it would not project future earnings, the company noted that its plans to launch M-Pesa in Ethiopia, which has a population of above 100 million people and are awaiting regulatory approval.

“The agreement by Safaricom and Vodacom was meant to bring the M-Pesa brand to the rest of Africa and we have investments in the pipeline in Ethiopia awaiting the decision by the government of Ethiopia,” said Mr Joseph.

Long-term investment

Safaricom Chief Financial Officer Sateesh Kamath said the firm was also awaiting decisions by the Communication Authority of Kenya (CA) on the rollout of 5G, adding that the investment is long term.

“We are well positioned to deploy 5G, but our focus at the moment remains increasing our 4G footprint,” he said.

The company invested Sh36 billion in capital rollout last year, down from Sh37 billion. Safaricom CEO Peter Ndegwa said the uncertain economic conditions have clouded future investment prospects. 

“We are operating in unpredictable times due to the Covid-19 pandemic and many parameters that would normally be factored in for prudent guidance are constantly changing due to the social restrictions and economic measures being taken to manage the virus,” said Mr Ndegwa.

“As a result we have decided to postpone giving guidance for a few months until visibility on the situation improves.”

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