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Safaricom’s allure poses headache for big investors

By Dominic Omondi | August 10th 2021

Safaricom Chief Executive Officer Peter Ndegwa.[Wilberforce Okwiri,Standard]

Mobile phone operator Safaricom is indisputably the most profitable company in Eastern and Central Africa.

No company comes close to the telco, which recently made an incursion into Ethiopia after Addis Ababa liberalised its telecommunications sector.

Yet, Safaricom’s dominance does not end in the goods and services market but also stretches into the financial market.

Safaricom, which is majority-owned by South Africa’s Vodacom and United Kingdom’s Vodafone, controls over 58 per cent of the market capitalisation, or the total wealth, at Nairobi Securities Exchange (NSE), which was valued at Sh2.78 trillion at the close of the market last Friday.

This means that the remaining 64 listed companies at the Nairobi bourse share amongst themselves a paltry Sh1.09 billion. Safaricom’s dominance is not accidental. The telco issued 40 billion of its shares to the public in 2008 at a price of Sh5. But years of phenomenal growth driven by decent profits have seen Safaricom’s share price rise more than eight-fold to trade at Sh43.

Now, Safaricom’s success is making investors, especially insurance companies and pension funds jittery.

Although Safaricom has generally been robust, public watchdogs are wary of such extreme cases of concentration should a company go bust. This dominance has elicited sharp reactions from various experts, with some calling out the NSE for failing to mobilise investors to the bourse.

“There is nothing NSE is doing in my opinion. Because they need to do more work to enrol more companies to reduce that dominance,” said Ezekiel Macharia, the chief executive of Kenbright Holdings, a risk advisory company.

Mr Macharia, an actuary, now wants regulations within the Retirement Benefits Act and Insurance Act changed to protect funds belonging to pensioners and policyholders respectively from being exposed to just one stock such as Safaricom’s.

Normally, investors will use indices such as the NSE-20, which is the benchmark index for the 20 most valuable stocks or NASI, the All-Share Index.

But Safaricom controls a huge chunk of the NSE-20 index. And if you add stocks for Equity, KCB and East African Breweries, then you have something akin to an NSE-4.

“I suggest they (regulators) create a new index without Safaricom so that we see the true performance of this stock market because what we are just tracking is the Safaricom index,” said Macharia.

To protect the public, the regulators do not allow insurance companies and pension funds to put all your money in one stock. They have put a cap of 10 per cent.

However, said Johnson Nderi, a corporate finance advisor at ABC Capital, an investment company, agreed that there is regulatory pressure with most of these investors “underperforming their benchmark.”

“And it is not possible to make the portfolio to match the benchmark weights,” said Mr Nderi. Paul Mwai, CEO AIB Capital, an investment bank, while agreeing with Macharia was, however, quick to note that most of the fund managers were yet to breach the limit.

Moreover, he said, it was highly unlikely that the fund managers would hit that limit given that they were only allowed to put 30 per cent of their portfolio in stocks, with the rest going to government securities and other assets.

The blame for the drought in the listing has shifted to NSE, though Mwai insists it is not unique to Kenya.

Part of the reason was the reluctance by the government to sell down on its shareholding to inject some liquidity in the market.

The privatisation of public entities has also slowed down, with the government yet to constitute the Privatisation Commission.

But even more critical has been the role of private equity funds that have been making a beeline for Kenya. Britam and ICEA Lion are the latest to tap into this capital stream.

“For people looking for money, they find the conversation of private equity easier,” said Mwai.

There was a time when investing in the stock market was the in-thing. With stocks absorbing billions of shillings from local and foreign investors, share prices went through the roof.

The combined share prices of the 20 blue-chip companies listed at the NSE hit an all-time high of 5,800 points at the beginning of 2007. The market, as they say, was bullish.

The NSE-20 share index - the weighted average share price of the 20 most valuable companies - briefly touched a low of 2,500 points in 2009 before it rallied back to a high of 5,491 points on February 23, 2015. Then the securities market began to unravel. The NSE-20 began an uneasy descent and has since fallen below the psychological mark of 2,000. There has also been under-performance of once strong listed companies, such as the Nation Media Group.

Some 14 stocks, including Mumias Sugar, ARM Cement, Kenya Airways, Unilever, Access Kenya, Rea Vipingo, Marshalls East Africa, Hutchings Biemer, have either been suspended or delisted in the last 10 years.

Others are the National Bank of Kenya, Deacons, A Baumann and Company Ltd, KenolKobil, CMC Holdings, and Atlas.

And with investors burning their fingers, most of them have stayed away from the capital market.

For businesses that want capital to either start or expand, they have gone to banks for credit. In 10 years to May 2021, credit to the private sector has grown by 187 per cent to Sh2.87 trillion from Sh1 trillion.

Market capitalisation, or the total wealth at the NSE, on the other hand, has grown by 129 per cent to Sh2.64 trillion from Sh1.15 trillion.

AIB’s Mwai said equity funds could actually help companies to reduce their stock of debt, which means that the two are not at odds.

However, he is worried by the fact that government securities have been issued above the inflation rate, resulting in what is known as the crowding-out effect.

“There is no incentive for investors to take risk and go to the stock market,” said Mwai, noting that many of them would rather put their money in government securities.

The Homeboyz Entertainment in December 2020 might have ended a four-year listing drought at the bourse, but it barely shook the market capitalisation.

Before, the last initial public offerings (IPO) on the NSE were by Deacons East Africa and Nairobi Business Ventures in 2016.

Listings at NSE have over time been few and far between. Before 2016, the other new listings at the market were in 2014.

This is despite efforts to get more firms to raise capital at the market, with the NSE management pushing for the government to privatise most of its companies.

The listing of Homeboyz by way of introduction came through the Growth Enterprise Market Segment (Gems).

Gems was set up in 2013, targeting small firms and expected to bring more activity to NSE, including increased listings.

It has, however, only attracted six such entities whose shares have been on a disappointing run and have largely failed to excite the market.

These are Home Afrika, Flame Tree Group, Kurwitu Ventures, Nairobi Business Ventures (NBV), Homeboyz Entertainment and Atlas Development.

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