👋 Welcome to the Baobab Weekly by Mwango Capital, a newsletter that brings you a succinct summary of key capital markets and business news items from East Africa.

This week, we cover the new discussion paper by the CBK on crypto, the new CEO at WPPScanGroup and debt issues in Kenya. 

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Mwango Capital. Mwango Capital provides A+ quality analysis and research on the East African capital markets. Follow us on Twitter, join us on Telegram, check out our website. To sponsor our weekly newsletter, memes, or Twitter Spaces, reach us at hello@mwangocapital.com.

To Crypto or Not To Crypto?

Big step: The Central Bank of Kenya published a discussion paper on Central Bank Digital Currencies (CBDCs). This significant step in seeking public participation in digital currencies has been seen as a sign that there are changing winds at the Central Bank of Kenya given that the governor, Dr. Patrick Njoroge has on several occasions reiterated the bank’s anti-crypto stance. To the bank’s credit, throughout this period there have been reports that various stakeholder meetings and interactions with members of the public and practitioners in the space have been happening.

What are CBDCs? CBDCs are a digital version of cash issued by the central banks. CBDCs broadly cover government-issued digital legal tender but with universal acceptability in mind. In the age of 4IR and blockchain, most CBDCs generally tend to be implementations of common blockchain frameworks to variants of government-issued currency creating stores of values mapped to fiat and similar in practice to stable coins.

Around Africa: Last year the new Tanzanian president, Samia Suluhu urged the Tanzanian Central Bank to look into cryptocurrencies. Backpedalling from a total ban on cryptocurrencies in Nigeria, the Nigerian Central Bank introduced a CBDC dubbed the e-Naira in Oct 2021. This follows initiatives by other central banks around the world including:-

• Sand Dollar (Bahamas)
• Bank of England CBDC discussions
• UAE Multi-CBDC prototype
• ECB CBDC discussions
• Federal Reserve discussion paper on CBDCs

Call for Comments: CBK notes that there are two use cases of CBDCs in Kenya, retail payments and cross-border payments. They are calling for public participation via comments no later than May 20th, 2022 via email or web. Coincidentally, this is the same deadline the Federal Reserve has on the same topic and activity 🤔

CBK’s call for comments

Federal Reserve’s call for comments

M&A in the Kenyan Microfinance Space

Two deals in the space of one month have jolted into life the Microfinance space in Kenya. 

First, the National Treasury exempted digital lender Branch International from Sec 19 of the Microfinance Act for a period of 4 years to end-2025 in its acquisition of Century Microfinance Bank paving the way for a formal announcement from the Central Bank of this acquisition. Branch intends to acquire an 85% stake, for which it had to seek exemption since Sec 19 bars 25%+ individual holding. Century has an asset base of KES 350M while Branch has an asset base of KES 1.1B.  

The move is significant as this is the first time a digital lender seeks to acquire a traditional microfinance institution in Kenya. We reached out to the Co-Founder/CEO Matt Flannery for comment on the acquisition and this is what he had to say: 

Becoming a bank has been our vision from the beginning. That’s why we named it Branch.  We want to offer all citizens the level of service once reserved for the rich. We are rolling out this strategy all over Africa and we hope to complete the transition in several countries this year.  

Later, the CBK announced a 73% acquisition of Key Microfinance by LOLC Mauritius Holdings Limited after a Dec 2021 approval under Sec 19(4) of the Microfinance Act by the National Treasury. Key has a market share of less than 1% and has been in operation for more than a decade.

Last year, Uwezo Microfinance Bank was acquired by Salaam African Bank and Choice Microfinance was acquired by Wakanda Network.

Prudential Financial Completes ICEA Acquisition

Done Deal: Prudential Financial, an American Fortune Global 500 and Fortune 500 company, said that it has completed the acquisition of a minority stake in ICEA Lion through a separately managed fund called  LeapFrog Strategic Africa Investments (LSAI). This is part of the company’s eye to expand its presence in emerging markets and makes it the second such acquisition for the LSAI fund after investing in the Enterprise Group Limited in Ghana in 2017. 

From the company’s latest financial results:  

“Meanwhile, on the emerging markets front, we closed on an investment in ICEA LION Holdings, a highly respected financial services market leader in Kenya with operations in Tanzania and Uganda” – Charles Frederick Lowrey, Chairman, CEO & President of Prudential Financial.

LSAI:  LSAI is a USD 350 Million separate managed fund that was formed as an investment partnership in 2016 between LeapFrog Investments and Prudential Financial. The aim is to invest in high-quality life insurance companies in Africa. Prudential is a global financial services provider through providing products in the insurance and investment management space while LeapFro, which was founded in 2007, invests in exceptional businesses in Africa and Asia. The deal was announced in 2020 and was to see LSAI acquire a 24% shareholding in ICEA LION Holdings subject to various regulatory approvals and other conditions precedent, which seem to have been fulfilled. 

WPP ScanGroup Gets New CEO

New Sheriff in Town: Patricia Ithau was announced as the new WPP Scangroup CEO. Markets welcomed the move as its shares on the NSE edged 3.70% higher in intraday trade on the day of the announcement. This is a sign of fresh times for a company that has had a tough past year.

Rough Patch: WPP Scangroup’s challenges started with the suspension of its CEO and CFO on February 19 2021 for unspecified reasons. The ensuing investigations pushed the firm to postpone the release of its financial results for the year ended December 31 2020 to August 31, 2021. In August 2021, the firm said that nothing substantial was uncovered in the probe. 

FY 2020: The financial results showed an increase in net profit from KES 431.9M in FY 2019 to KES 469.2M in FY 2020 as a result of Scangroup’s disposal of its subsidiary Kantar Africa at KES 2.2B. This helped offset losses and register a 462.9M net profit in what would otherwise be a KES 1.7B loss from continuing operations. No dividends were declared for FY 2020. There was a KES 8 dividend in FY 2019 though. 

Profit Warning: Patricia has her work cut out for her as the company has recently issued a profit warning for the financial year ended 31st December 2021. 

Diversity: Other companies with women CEOs are: Limuru Tea, Eveready, DTB, KenGen, BOC, BK Group, and EABL.

Eveready Results Out

One of three: Eveready, one of three NSE companies – others being Car & General and Sasini – that have their FY ending on September 30; reported results for the year ended 30th September 2021. Eveready is a leading provider of portable power solutions in Kenya, operating in automotive, household, and lighting segments.

Results summary: This is how the company performed:

• Net sales dropped 32.8% YoY.
• Loss for the year was reduced by 49%. The company’s loss for FY 2020 was KES 69M, and in FY 2021, the company made a KES 35M loss.
• Cash flows at the end of the year were reduced by 57% YoY.
• The company is not paying any dividends this year..

Missed deadlines: The company had missed the CMA reporting deadline of 31 January 2022 due to what the firm called “unavoidable circumstances”. 

History: While sales have reduced 52.8% from 2019 to 2021, losses have reduced 88% which could be a sign of restructuring with a path to profitability. Between 2013 and 2021, the firm has turned a profit twice – in 2013, and in 2017. 

Kenya Among The Fragile Five

Debt-laden: Standard Bank Group issued a report this week that named Kenya among the “fragile five” in terms of debt of 18 countries. These are countries that face debt risks over the next two years. Starting with Kenya, the country faces debt-service costs that make up more than 33% of forex reserves and 43% of tax revenues and has a high concentration of commercial loans (28.8% of total debt in 2020-21).

The other 4: The other countries in the Fragile Five are:  

• Ghana: Commercial lenders own at least 50% of its debt and the spread of the Ghana-US Treasuries of over 1,000bps shows a country in debt distress. (Interesting how Standard bank says Kenya would be in the same bracket as Ghana save for the IMF program last year)
• Angola: 77.1% of Angola’s debt is held by commercial lenders. Standard Group points to weak investments in the oil sector and an ending IMF program as key red flags.  
• Ethiopia: Foreign exchange shortages, the ongoing civil war, and short-term debt service take up significant foreign-exchange reserves.
• Zambia: The country defaulted on its debt in the pandemic era in 2020 as commercial loans stand at 78.1%. There is a $1.4B IMF facility that came to the rescue which is tied to progress on the country’s debt restructuring under the Common Framework.

Uganda the silver lining: Uganda’s outlook is bright as the economy is set to recover strongly after the lifting of restrictions. It is forecasted to grow 4.5% in 2022 and 6.1% in 2023.

What Else Happened This Week?

🌍 $9B Africa Airlines Losses:: The African Airlines Association, in a report, noted that 2020 and 2021 losses of African airlines hit $10.21B and $8.6B on COVID restrictions. The losses are equivalent to 58.8% and 49.8% of 2019 revenues. [Africa Airlines Performance Update]

As a result of these uncoordinated measures, air passenger traffic from January to December was only 42.3% compared to the same period in 2019.  Capacity reached 52.7%. In January 2022, the capacity is expected to inch up by 6.3% to 59% while air passenger traffic will see a marginal increase of 0.3 from the previous month.

💸 Money Laundering in Tanzania: Proposed amendments on the Money Laundering Act tabled by Finance and Planning Minister Dr. Mwigulu Nchembato in the National Assembly seek to grant bail for people charged with money laundering. They are now inviting members of the public to issue comments on the proposals. In Tanzania, people can stay in jail for four or five years over money laundering as the offense does not have bail. [The East African].

“That is what complaints from most citizens are about. Someone could stay behind bars for four or five years over money laundering charges, adversely impacting his/her dependents. The amendment should also differentiate between theft and money laundering because some citizens have adversely suffered due failure to differentiate the two.”

🟢 Hunter becomes the hunted: Markets regulator CMA got the nod through a Court of Appeal ruling to investigate auditor Ernst & Young over Uchumi books. At the crux of the matter are transactions totaling KES 1.9B. CMA summons to E&Y executives in 2016 to shed light on 2014 and 2015 accounts were not honored. KPMG’s forensic audit for 2010 to 2014 Financial Years showed misleading information in the accounts. 

🍔The global brand of KFC, owned by Yum China Holdings, reported their full-year results and they seem unaffected by the #BoycottKFC. There was no mention of potato shortages or the issue of Kenya.  

🌍 African Markets:

Sentiments were mainly positive on the African equity markets this week. With NSX OI Namibia’s overall Index  edging up 3.9 basis points WoW the highest for the week ended 11th February. Namibia remains the most attractive market for investors returning 14.9% on a USD, Year to Date basis followed closely by Nigeria at 9.2%. The Ugandan Stock Exchange shed 0.9% of total investor value, the highest drop on the continent this week.

East Africa: East African markets were bearish for the week with average performance at -0.1%. Top performer was the Nairobi Bourse registering a 0.6% in investor wealth.

North Africa:  North African markets performance was fairly positive with the exception of the Egyptian markets which ended the week at -0.5% .

South of Africa: South African markets rallied this week registering an average performance of 1.3%. All markets in the South of Africa closed the week in the green with the best performer being Namibia followed closely by South Africa.

West Africa:  BRVM’s Composite Index, a regional stock index serving West African Economic and Monetary Union (WAEMU) countries: Côte d’Ivoire, Mali, Senegal, Togo, Burkina Faso et and Niger returned 2.06% Week on Week the best performer in West Africa. The Average performance WoW for West African markets closed at 0.7% .

📊 Charts of the Week:

Surging Oil Prices: Oil prices are surging [WTI +59%, Brent +54% over the last 1 year] as geopolitical tensions rise and economies try to get past the pandemic. 

COVID-19 Vaccination in Africa: Only 11% of people in Africa have been fully vaccinated, with 5.3% partially vaccinated. 61.7% of the world population has received at least one dose of a COVID-19 vaccine and 10.34B doses have been administered globally. [Our World in Data]

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Company Participants

• Chairman Michael Joseph
• Chief Executive Officer Peter Ndegwa
• Chief Finance Officer Dilip Pal
• Chief Corporate Affairs officer Stephen Chege

Video:

Show Notes:

• [00:01:03] – Introduction by Chief Corporate Affairs Officer
• [00:02:24] – Business resilience, and re-opening of the economy in the face of the Pandemic
• [00:04:06] – Regulatory space
• [00:04:42] – Headwinds
• [00:05:18] – Safaricom & M-Pesa Foundations’ Initiatives in support of the communities
• [00:06:29] – Board’s commitment to work with management to deliver value to shareholders, transform the lives of customers, employees, business partners, and the community.
• [00:08:23] – Sustainability
• [00:09:43] – Strategic focus
• [00:11:24] – Strategy execution
• [00:13:48] – Update on the investment in Ethiopia, risks, and opportunities
• [00:19:19] – HY22 Key Highlights
• [00:20:40 – Service Revenue
• [00:22:09]- M-Pesa & Fintech Solutions Growth
• [00:22:54] – International Money Transfer, and Lendings & savings
• [00:23:10] – M-Pesa Values and customers
• [00:24:09] – Innovation in digital financial services
• [00:24:21] – Customer Supper App & Business Super App
• [00:25:04] – Mobile data
• [00:26:29] – Fixed service revenue
• [00:27:19] – Net Income
• [00:27:54] – Borrowings & Capex
• [00:28:43] – Revised FY22 Guidance & outlook

Introduction

Stephen [00:01:03]: Good morning ladies, and gentlemen. Welcome to Safaricom’s half-year 2021-2022 financial results announcement. On behalf of the Board of Directors, the management team, and staff of Safaricom PLC. We thank you very much for making time to join us virtually for this event. I’m glad that thanks to technology which is the foundation of our business, we can virtually connect and engage this morning. We hope that you’re all keeping safe, masking up, washing your hands, and observing the required precautions to help manage the Covid-19 pandemic. Most importantly, we hope that you have been vaccinated or are planning to get vaccinated in the coming days. 

We’ll start off with remarks by Safaricom PLC Chairman of the Board of Directors, Michael Joseph. Safaricom PLC CEO Peter Ndegwa and Chief Finance Officer Dilip Pal will then take us through the financial performance and results for the period under review. Should you like to keep your social media followers updated on our proceedings this morning, our hashtag today is #SafaricomHYResults. In staying committed to our promise on diversity and inclusion our sign language interpreters this morning are Leonida Kaula and Victor Mwania. It is now my pleasure to invite Safaricom PLC Board Chairman, Michael Joseph to make his remarks.

Chairman’s Remarks

Michael [00:02:24]: Thank you for joining us for the half-year 2022 results announcement. The past 18 months have been as we all know a difficult period for everyone with far-reaching changes and extraordinary circumstances. However, despite the difficult circumstances, the country has found a way through adversity. Kenyans are resilient people who have found a way to cope in difficult economic times despite the challenges of these times. The management and staff have shown similar resilience in adjusting to these challenges as will be seen later in this announcement. 

The Board is encouraged by this resilience especially from a business point of view and the recovery trajectory which we are witnessing by a return to near normalcy. As Peter will share shortly, we’ve noted improved business sentiment with strong service remedy recovery, a strong balance sheet, a diversified portfolio, and improved consumer confidence. Following the President’s recent announcement lifting the nationwide curfew that has been in place since March 2020, it is a noted gradual reopening of the country and hopefully the economy.

As Peter will share shortly, we’ve noted improved business sentiment with strong service remedy recovery, a strong balance sheet, a diversified portfolio, and improved consumer confidence.

However, the vaccination process is slower than expected despite the availability of vaccines throughout the country. For a population of over 40 million Kenya has administered just over four million doses of the Covid-19 vaccine so far. Ladies and gentlemen, a well-vaccinated country is a prerequisite for a fully open economy as we adjust to the new normal. We welcome the government’s efforts to procure more vaccines and we call about Kenyans to get vaccine vaccinated no matter where they may be. Let me now turn to the regulatory space.

Ladies and gentlemen, our regulators have been very supportive of our efforts in supporting our customers navigate through the tough unprecedented period, and for this we are grateful. Through the allocation of extra frequency by the Communications Authority, we were able to meet the increased demand for data by our customers working and learning from home. A conducive regulatory environment is important for the growth of our business and the sector at large especially considering the rapidly evolving technologies and needs of our customers and society.

Through the allocation of extra frequency by the Communications Authority, we were able to meet the increased demand for data by our customers working and learning from home.

However, there were some headwinds on the other hand.  We saw an increase in excise duty on telco products from 15 to 20% that took effect from July 1, 2021, which contributed towards an increased pressure on the consumer wallet in a period witnessed by reduced income and rising inflation. The Board is aware of the upcoming general election period which is usually characterized by depressed economic activity and reduced investments as businesses and investors adopt a more cautious approach due to the associated political risk.

Ladies and gentlemen, I will now speak about Safaricom’s efforts and the Board’s commitment to supporting Kenyans through various initiatives. I am proud of the work that the CEO and his team have done in ensuring the well-being of our staff customers, and other stakeholders. Through Safaricom and M-Pesa Foundations we stood with our communities investing over Kshs 810 Million through different programs in the first six months of this financial year. 

Through Safaricom and M-Pesa Foundations we stood with our communities investing over Kshs 810 Million through different programs in the first six months of this financial year. 

These projects include amongst others a staff program dubbed Pamoja initiative, Ndoto Zetu, Maternal & Healthcare program called Uzazi Salama and these have benefited over 2 Million Kenyans. During this period, we also sponsored various sports events across the country which included the 2020 Tokyo Olympics, The World Rally Championship, The World Athletics under 20 Championships as well as the Magical Kenya Open Golf Tournament. Beyond sports, through the Lewa Marathon, we raised significant funding for wildlife conservation and community development. And we also continue to support the Safaricom Youth Orchestra amongst other projects.

In conclusion, ladies and gentlemen, The Board will continue to work with management to deliver value to our shareholders. Most importantly, we’ll work to ensure that Safaricom continues to transform the lives of our customers, employees, business partners, and communities in Kenya and beyond. We fully support Peter and his team as he executes the business strategy to become a digital-first and insights-led organization unlocking our next phase of growth whilst delivering a sound return to our investors including our new investment in Ethiopia. 

The Board would like to extend its deep appreciation to the CEO, the management, and all members of staff for the efforts and commitments during a very challenging year. Looking into the future we firmly believe that our business is well cushioned to support our customers to rebound stronger and to build back better. With those remarks, I now take this opportunity to invite our Chief Executive Officer, Mr. Peter Ndegwa to share the highlights of our business for the period under review. Thank you very much.

CEO’s Remarks

Peter [00:07:31]: Fellow shareholders, representatives of the investor community, The Board, management and staff of Safaricom PLC, members of the media and the online community, good morning. Thank you for joining us for the half-year financial results announcement. As Michael has mentioned, Covid-19 Pandemic altered the environment for all businesses and ours was no exception. In responding to the Pandemic we’ve remained true to our purpose of transforming lives, a guiding light in our effort towards supporting and helping the country. 

These efforts are paying off in building resilient individuals, resilient communities, and businesses especially now as we gradually begin to experience near-normalcy. To start us off, let me take you through how we have built a sustainable business, standing together to grow value across the ecosystem, what we call “Standing Together and Going Beyond”. During this period, we reiterated our commitment to continue connecting people to people, connecting people to knowledge, and people to opportunities. 

During this reporting period, we also celebrated 10 years of the sustainability journey. Our 10th Sustainable Business Report showcases how we leverage technology to build sustainable products and services in line with the sustainable development goal. The Pandemic has made a strong case for ensuring a resilient sustainable and more responsible business model. We remain committed to supporting our stakeholders navigate through this period, sustaining over a million jobs in the last financial year. 

The Pandemic has made a strong case for ensuring a resilient sustainable and more responsible business model. 

In our sustainability agenda, we remain focused on our impact on climate agenda and building an inclusive business that meets the needs of our customers but also reflects the diverse nature of our society. Let me now recap on our strategic focus as showcased by strategy house. As you can see at the top of the house we have Transforming Lives, which is our purpose and the guiding light of everything we do. We are now one year into a five-year strategy, which spells out our vision of becoming a purpose-led technology company by 2025. 

In order to bring this vision to life, our mission is to establish a customer-obsessed, digital-first organization by the year-ending financial year 2022. Customer obsession is our main effort towards adding value and delighting our customers with superior experiences more so now as we venture into Ethiopia and expand customer obsession to new geographies. Our enablers in our strategy are aiding the business in deepening customer engagement and experience. For instance, we’ve used our customer value management tools to transform the way we interact with our customers, creating a personalized relationship with our voice data and M-Pesa services. 

Our mission is to establish a customer-obsessed, digital-first organization by the year-ending financial year 2022.

We will continue to use these analytics to gain more valuable insights that will advise our initiatives’ products and services in order to serve our customers better. Our agile transformation journey is also delivering early wins fostering collaboration among staff leading to quicker decision making, increased efficiencies, and faster resolution bringing us closer to our customers. Allow me now to call out our progress so far in our strategy execution as you can see on the screen as we pivot towards a technology company. 

Ladies and gentlemen, our strategy is working. We are happy with the performance of the four transform transformative pillars which are crucial in our strategy execution. We continue to double our efforts to democratize data-driven by access to network with 4G coverage now at 96% smartphone penetration and content aggregation. We are focused on driving access to affordable smartphones to harness the power of technology. This will in turn help build stronger digitally connected and inclusive societies. 

We aim to become a digital-first, insights-led organization that enables platforms and ecosystem partnerships. Our digital channels have helped us to improve our consumer digital experiences and empower our micro and SMEs who are the backbone of the economy. M-Pesa super app had close to four million downloads within the first three months of launch. We’ve also integrated 17 mini-apps and 65 are currently under development with the aim of providing a one-stop solution for our digital consumers.

We aim to become a digital-first, insights-led organization that enables platforms and ecosystem partnerships. Our digital channels have helped us to improve our consumer digital experiences and empower our micro and SMEs who are the backbone of the economy. M-Pesa super app had close to four million downloads within the first three months of launch. We’ve also integrated 17 mini-apps and 65 are currently under development with the aim of providing a one-stop solution for our digital consumers.

Beyond payments we are enabling micro and small businesses with products such as bill manager that provides end-to-end solutions like digital invoicing easing their business operations. A strategic pillar to winning in digital ecosystems focuses on digitizing verticals, scaling Digi-farm into a commercially sustainable manner, partnering with Circle Gas Limited to provide clean energy, using IoT,  which is the internet of things, and our financial services tools, and driving health care inclusion through partnerships. During this period we managed a Kshs 2.3 Billion OPEC savings, thanks to initiatives such as smart procurement and planning helping the business to be more efficient while delivering more value to our customers.

Ladies and gentlemen, I will now give an update on our investment in Ethiopia. As you are all aware Safaricom Telecommunication Ethiopia PLC is now a subsidiary of Safaricom PLC. We are currently in the process of setting up our operations, preparing detailed plans for operational readiness amongst other requirements ahead of our commercial launch in 2022. We are in contact with the relevant authorities in Ethiopia, updating them as per our license obligations. We are confident and looking forward to launching commercial operations as projected whilst cognizant of the current evolving situation in Ethiopia, and as we proceed with our plans adapting and assessing the situation as it evolves.

For now, our priority is the safety and security of the small number of employees that had already joined the organization. We hope for a fast and peaceful resolution to the current situation. We remain committed to taking telecommunication and digital services to the people of Ethiopia. The opportunities are immense as shown in the Simcard penetration rates as well as projected GDP growth rates, as such the task ahead is ambitious and speaks to the country’s focus and determination to nurture innovation and bolster the economy.

Looking at our Ethiopia investment in a bit more detail now. The global partnership for Ethiopia was awarded a unified technology-neutral telecommunication services license. This includes an appropriate spectrum and rights to deploy a world-class network and services that will support our ambition of contributing to Ethiopia’s digital transformation objectives. We are forecasting a CAPEX investment of between USD 1.5B- 2B over the next five years to meet the licensed coverage obligations. Together with our partners, we have availed funding to support this new venture which we anticipate breaking even by year four of operations. 

The global partnership for Ethiopia was awarded a unified technology-neutral telecommunication services license. This includes an appropriate spectrum and rights to deploy a world-class network and services that will support our ambition of contributing to Ethiopia’s digital transformation objectives. We are forecasting a CAPEX investment of between USD 1.5B- 2B over the next five years to meet the licensed coverage obligations.

Ladies and gentlemen, our break-even targets may be significantly impacted by the impact of the current conflict on the launch of operations which we target by mid-2022. Sources of funding for this venture include a mix of debt and partners equity. The projected growth will be enabled by network development through own-build and infrastructure, sharing world-class digital services, and availability of affordable devices in the market. 

Ladies and gentlemen, within the investment there are risks and uncertainties. We are aware of and have mapped out possible risk areas and scenarios ranging from implementation of market liberalization and the new regulatory frameworks, the ongoing political conflict, forex availability amongst others. However, the opportunities outweigh the risks in our view and the uncertainties, largely because the telecom market liberalization has been unquestionably positive and of value for countries across the world. From our experience in Kenya and across the region, we know that the liberalization of Ethiopia’s telecommunication market will be of value in increasing connectivity, creating new digital services and businesses, and generating new jobs for citizens across the country. 

So how are we prepared to launch operations in Ethiopia? In readiness to launch operations, we’ve appointed Anwar Soussa as the Safaricom Ethiopia Telecommunication Managing Director. We’ve also appointed the senior leadership team to lead the establishment of the business and preparation for launch. We’ve launched a recruitment drive to hire a significant number of Ethiopians including a Graduate Management Program where we are committing to hire 150 graduates every year which aims to recruit and train future leaders within the organization.

We are following closely the development in Ethiopia as we gear up for launch as per our license obligations. The team is now preparing for the deployment of network and IT equipment to provide world-class digital services across all regions in Ethiopia. To reiterate, we are committed to taking digital and telecommunication services to Ethiopia, to improve the lives of millions, and are continuing our preparation for commercial launch whilst working remotely. I’ll now welcome our CFO to take us through the results before I come back and conclude and give our revised guidance.

CFO’s Remarks

Dilip [00:18:54]: Thank you, Peter. Hamjambo,mabibi na mabwana. I wish to welcome you all to our FY22 half-year results announcement.  I hope you are all keeping safe and thank you for taking the time to join us this morning. Before I start I would like to remind you that the presentation materials will be available shortly on Safaricom’s website. I will now take you through the numbers in a bit more detail. We have seen solid performance in H1 with service revenue posting 16.9% year-over-year growth. This was supported by strong execution, improved consumer confidence, and business activity in the economy coupled with a return to charging of zero-rated transactions from Q4 of the last financial year.

We have seen solid performance in H1 with service revenue posting 16.9% year-over-year growth. This was supported by strong execution, improved consumer confidence, and business activity in the economy coupled with a return to charging of zero-rated transactions from Q4 of the last financial year.

In the same breadth, EBIT has grown 28.8% year-over-year supported by the recovery of the top line. We’ll unpack this in a little bit more detail in the subsequent slides. I’m happy to note that due to our continued effort to optimize our CAPEX expenditure through our cost leadership pillar, we were able to invest in a capacity upgrade, customer experience while maintaining our CAPEX investment at Kshs. 22.8 Billion in the first half of the year. I’m delighted to also report that our free cash flow has grown 45.8% year-over-year driven by strong performance in operating profit. 

We continue to grow our customer base through great value propositions. Our one-month active customers have grown 4.7% year-over-year to 32Million. Now looking at service revenue in a bit more detail, the chart on the left demonstrates that growth in service revenue was mainly attributed to M-Pesa revenue. We have also seen growth in mobile data, voice, and fixed business. M-Pesa revenue grew 45.8% year-over-year in the period, supported by a return to charging, improved business activity as mentioned earlier. 

Fixed enterprise and FTTH revenue grew 20.1% and 23% year-over-year respectively driven by growth in customers. The graph on the bottom left of the slide illustrates voice performance over the last three halves. In H1 of last financial year, voice was under significant pressure. Through our strong CVM offerings, we were able to yield a much stronger performance enabling us to grow 3.2% year-over-year. Moving across to the right of the slide, you can see our service revenue profile. 

M-Pesa now accounts for 37.8% of our service revenue up from 30.3%  last year after return to charging of previously zero-rated transactions and also economic recovery. The chart on the bottom right shows the continued recovery in service revenue and we are encouraged by the growth as we move into the second half of the financial year. Now to look at the M-Pesa in a bit more detail, growth in revenue was driven by transfers which grew 89.5% year-over-year driven by a return to charging.  

Our fintech solutions continue to be a growth pillar of the M-Pesa ecosystem growing year 43.7% year-over-year. Fintech solutions now account for 32.2% of M-Pesa revenue. Withdrawals have grown 18.8% year-over-year supported by the improved business environment. Now moving over to the graph to the right, you will note that our strategic priority to be a financial services provider is bearing fruit. Growth in fintech solutions is driven by payments contributing to more than 50% of the growth. 

International money transfer continues to perform strongly growing 22.6% year-over-year enabled by the growth in remittances. Lending and savings have grown 17.2% year-over-year driven by Fuliza. Looking at M-Pesa this time from the perspective of values and customers, we are delighted to report that customers have grown 7.1% year-over-year to close at 28.7Million as demonstrated by the graph on the left. Customers transacting behaviors influenced by free fees introduced last year have sustained post return to charging.

Chargeable transactions per customer grew 91.9% year-over-year to 18.1 transactions per customer per month from 9.4 transactions in a similar period last year. Value of M-Pesa transactions continued to grow closing at Kshs 13.7 Trillion up from Kshs. 9 Trillion in a similar period last year. Bank to wallet transactions remain zero-rated and account for 18.1% of HY22 total value of M-Pesa transactions. Innovation in digital financial services has been a key growth driver for M-Pesa. We continue to leverage technological innovation to enhance access to financial services for consumers and enterprise customers.

I’m happy to report that we launched a Consumer Super App in July 2021 and now have 3.9Million downloads and 2Million active customers since launch. We also rolled out the Business Super App and now have 322k organizations currently using the app. In the middle of the slide, you can see the growth opportunities within the M-Pesa fintech ecosystem. We remain committed to meeting the evolving needs of our customers and merchants through innovation to enhance digital financial services. Just to note more details on M-Pesa performance can be found in the results booklet which will be on our website shortly. 

Let me now move on to mobile data. Mobile data revenue grew 6.3% year-over-year weighed down by price rationalization and absorbed tax from increased excise duty from August 2021. There was also a lapping effect of accelerated growth recorded in H1 of last financial year that was largely driven by a shift of working and schooling from home. Looking at the bottom left of the slide usage per customer grew 47.8% year over year to close at 2Gigabytes in the period. This was attributed to CVM initiatives that were aimed at unlocking latent potential in data usage. 

Rate per MB declined 27% year-over-year impacted by price rationalization. Looking at the box on the top right, you can see that whereas overall one-month active customers have grown 4.7% year over year, the one-month active bundle customers grew faster at 8.1% year over year. Similarly, you will also note that active 4G devices and data customers consuming over 1GB grew at a much faster pace of 37.3% year-over-year and 26.67% year over year respectively thus highlighting the opportunity to drive usage.

Ladies and gentlemen, moving on to fixed service, we are delighted with the strong acceleration of our fixed business as a result of growth in customers. FTTH customers grew 17.2% year-over-year while enterprise customers grew 38.3% year-over-year. Looking at the top right side of the slide, you can see that the FTTH closing customers have grown to close at 153,000 up from 119,000 in a similar period last year. And the conversion rate closed at 63.9% up from 53.5 last year. On the bottom right side of the slide are the key fixed enterprise highlights the closing customers have grown to close at 45,000 up from 32,000 last year.

As I had called out earlier EBIT or earnings before interest and taxes recorded a 28.8% year-over-year growth. I’m happy to also report that the EBIT margin grew 3.3 percentage points compared to H1 last year. The business continues to focus on cost leadership as part of our company strategy in the period we are able to achieve Kshs 2.3 Billion of OPEX saving which helped us to mitigate the impact of adverse cost movement in energy and IT-related cost in the period.

Our borrowings closed the period at Kshs. 77 Billion with Kshs. 43 Billion relating to the expansion to Ethiopia and the rest of the borrowing used to fund working capital. Lastly looking at CAPEX we continued with our sustained investment in our network and systems with our capital additions for the period at Kshs. 22.8 Billion. Close to 80% of this CAPEX was spent in growth areas with the aim of sustaining growth in revenue. We continue to enhance our network in support of capacity upgrade and experience as well as investing in our IT capability.

Ladies and gentlemen,  thank you for your time. Let me now hand you back to Peter for revised FY 22 guidance and concluding remarks.

Revised FY22 Guidance & Outlook

Peter [00:28:40]: Thank you, Dilip. Ladies and gentlemen, we are pleased with the solid performance delivered in H1 of FY2022. We remain committed to protecting shareholder wealth and putting our customers first.  During the FY2021 announcement, we gave guidance based on the projections that guided the outlook for the year. At the time, we hadn’t won the telecommunication license in Ethiopia. The outlook of the economy has improved with Kenya staging partial recovery from a depressed performance last year.

In view of this and expansion to Ethiopia, we expect earnings before interest and tax as you can see on the screen in the financial year 2022 to be in the range of Kshs. 97-100 Billion and CAPEX which is capital expenditure to be in the range of Kshs 70-73 Billion inclusive of Ethiopia. On an underlying basis excluding Ethiopia, we revise our earnings before interest and tax guidance given back in May 2021 from Kshs. 105-108 Billion to the range of Kshs. 107-110 Billion, and maintain the CAPEX guidance given before at Kshs. 40-43 Billion for the financial year 2022. 

In conclusion, ladies and gentlemen,  looking into the future we firmly believe that our business is well-positioned to support our customers and provide technology solutions as we turn the business into a purpose-led technology organization. Our future is based on our brand promise “To Go Beyond”. To go beyond for our customers, to go beyond for our products and services.

I would like to thank our Board for the support accorded to me and my leadership team. To Safaricom staff, thank you for all the hard work you put in during a tough and uncertain period which together we’ve managed to accomplish the big milestone of winning the telecommunication license in Ethiopia. To all our stakeholders, I thank you for your confidence in Safaricom. We are excited about the possibilities and the opportunities that lie ahead. Ladies and gentlemen, thank you for joining us virtually this morning. I thank you for your time and keep safe.

Vote of Thanks

Stephen [00:31:21]: Thank you, Michael, Peter, and Dilip. Ladies and gentlemen, we have now come to the end of our half-year results announcement. The members of the media and bloggers present today will have an opportunity to ask your questions at a separate virtual press conference which will take place shortly. Invites for this event have already been sent out to you.

On a personal note, I would like to mention that this will be my last investor briefing engagement as Safaricom’s Chief Corporate Affairs Officer as I transition to take up my new role at Vodacom Group. As a shareholder, I look forward to future presentations and I wish Safaricom every success as it continues to implement its vision of transforming lives. Once again, we appreciate you all for making time to join us today on behalf of the entire Safaricom family I say, Asante sana. Have a good day and stay safe.

Important Links:

Presentation:

Press release:

Booklet:

Safaricom recently released details on the structure of its entry into the heavily state-dominated Ethiopian telecoms market, outlining the vehicles it would use in this venture, the license it has been granted by the Ethiopian Communications Authority, and how it expects to operate in the most populous country in Eastern Africa. The Global Partnership for Ethiopia (GPE), a consortium that Safaricom is part of, won one of two New Telecommunications Licenses – a 15-year license that comes with the right to apply for a 15-year extension. The partnership consists of Safaricom (Kenya), Vodafone Group (UK), Vodacom Group (South Africa), CDC Group (UK), Sumitomo Corporation (Japan), and Development Finance Corporation (US-DFC). The bid for the license pitted the GPE against an MTN Group Limited-led consortium that had the Silk Road Fund and a Chinese Investment Fund as members

Consortium Composition

Following the award of the license, the consortium paid an $850M (Kshs 91.72B) fee to the Ethiopian Government through the National Bank of Ethiopia. To position itself for entry into the market dominated by the state-owned Ethio Telecom, Safaricom has subsequently formed a series of consortium companies. According to a recent public announcement, Safaricom has formed a special purpose vehicle Vodafamily Ethiopia Holding Company Limited (the SPV Company), a limited liability company incorporated in England. The SPV Vehicle is 90% owned by Safaricom, 10% by Vodacom International Limited, and 1 share by Vodafone International Operations Limited.

This SPV will own the majority shareholding (61.9%) of the Global Partnership for Ethiopia BV (GPE), a holding company incorporated in the Netherlands. In an interview with Julians Amboko, Safaricom CEO Peter Ndegwa noted that the move to incorporate GPE in the Netherlands is influenced by a Bilateral Investment Treaty between the Netherlands and Ethiopia – which provides the consortium with some advantages that may accrue resulting from tenets of the Treaty.

This holding company in turn owns Safaricom Telecommunications Ethiopia PLC – a company incorporated and registered in Ethiopia. The Ethiopian Communications Authority granted the company a nationwide full-service Unified Telecommunications Service License effective July 9, 2021. The company’s shareholding is Safaricom (55.7%), Vodacom (6.2%), Sumitomo Corp. (27.2%), and CDC Group (10.9%).

The creation of these entities is subject to approval by shareholders in an AGM slated for July 30, 2021. The final legal vehicle for entry into the Ethiopian market excludes the US Development Finance Corporation – an original member of the consortium during the bidding process.

In an official visit to Ethiopia, Kenya’s President Uhuru Kenyatta witnessed the formal issuance of a telecommunications license to Safaricom’s consortium. While the President was in the country for other bilateral issues, the issuance ceremony also reflected the interest of the Kenyan Government in the transaction given that it has a 35% shareholding in the telco. It further highlights how significant the entry into the Ethiopian market by Safaricom is. The high-level engagement around this process could also be a harbinger of Ethiopian authorities’ reception towards Safaricom’s entry into the market and a sign of Ethiopia’s commitment to the economic reform and liberalization process.

Today’s ceremony is the first step in an exciting and rewarding opportunity for Ethiopia. Kenya has seen the great gains and opportunities unleashed by Safaricom across the entirety of our socio-economic landscape. Ethiopia now stands at the cusp of making even greater strides in Safaricom’s areas of strength; which include digital presence, mobile money, telephony, data and fibre connectivity, and business solutions.

Kenyan President, Uhuru Kenyatta

The Global Partnership for Ethiopia (GPE) has also recently appointed Anwar Soussa as the Managing Director of the Opco in Ethiopia, effective 1st July 2021. Anwar, who is currently the Managing Director of Vodacom DRC and the Chairperson of Vodacash (M-PESA), is tasked with the execution of the consortium’s goal to bring about transformational economic and social impact in Ethiopia and positively enhance the lives of its people. He will report to the Board of the Ethiopia entity and Safaricom PLC CEO.

Mobile Money and Data Pricing Dynamics

The license awarded to the consortium does not include a license to operate mobile money, one that would have allowed Safaricom to roll out its jewel M-Pesa in the Ethiopian market. In the last financial year, M-Pesa’s revenues accounted for 33% (Kshs 82.65B / $765.96m) of service revenue (Kshs 240.84B / $2.23B), and 31% of total revenue (Kshs 264.03B / $2.45B). Voice revenue numbers averaged 33% (Kshs 82.55B / $765.08m) of service revenue, or 31% of total revenue. These numbers are available from their statements here. 

This shows how significant voice and M-Pesa are as revenue drivers to Safaricom in the Kenyan market. The Ethiopian market presents different dynamics for Safaricom. Prices for voice are well below what Safaricom charges, which could have a bearing on revenues depending on Ethio Telecom’s delivery of services (Safaricom has had an exceptional run in this regard in its local market). Below is a table showing the comparison of prices charged by Ethio Telecom and Safaricom for voice and data for the Ethiopian and Kenyan markets respectively.

Ethio Telecom’s lower prices would effectively undercut Safaricom. However, as demonstrated in the Kenyan market, while pricing may seem to be an attractive selling point, service delivery is likely to be the determining factor for consumer choice and preference. Of concern is whether Safaricom will be able to access the robust state-controlled infrastructure considering that Ethiopia, as of now, does not permit the setting up of third-party tower operators.

Ethio Telecom’s flagship mobile money service, Telebirr, which was launched earlier in May has given consumers incentives in a bid to shore up its usage and increase adoption amongst Ethiopians. The promotion shown below illustrates how Telebirr has been incentivizing customers to adopt the mobile money service.

The service has outlined plans to recruit 21m users in 1 year and 33m users in 5 years. Projections indicate that 40-50% ($38.37B – $47.96B) of Ethiopia’s $95.91B GDP will be transacted on the platform, a significant change from the current status where over 70% of utility bills, wages, and Government-to-Person transfers are transacted in cash. After more than a decade of M-Pesa’s operation in Kenya, recent disclosures show that an equivalent of 214.28% of the GDP was transacted on the platform in the last financial year. This shows that mobile money can cause massive shifts in transaction modes.

Telebirr will have a head start in Ethiopia, but over the long haul, customer choice and preference might shift based on the innovations of the mobile money products, should Safaricom get a mobile money license to operate there. Notably, innovative products anchored on M-Pesa, e.g M-Shwari, Fuliza, and Bank-M-Pesa facilities have contributed to the entrenchment of M-Pesa as a product in Kenya through easy availability and network effects.

For Safaricom to replicate this in Ethiopia, it will require massive cooperation with State Agencies, something that Ethio Telecom looks likely to win over quickly based on its State backing.  Telebirr has already made strides in regards to bank integration and linkages, with the mobile money service announcing that users can transfer funds from their bank accounts to their Telebirr accounts in two banks – the Commercial Bank of Ethiopia and the Bank of Abyssinia. These banks have integrated their systems with Telebirr, with other banks expected to follow suit.

Capital Expenditure

The Director-General for Ethiopia Communications Authority hinted at a 6 to 9-month pre-operational period, with the Kenyan Telco fully operating in Ethiopia in early 2022. Safaricom’s operations in Ethiopia will require significant capital investment in the early years for setting up operating infrastructure, with  Ethiopia’s Prime MinisterAbiy Ahmed Ali indicating a Foreign Direct Investment to the tune of $8B – the single largest FDI into Ethiopia to date.

In YoY terms, Safaricom’s FY21 CapEx declined 3.2% to Kshs 34.96B ($324m). Its FY22 guidance outlined CapEx spending in the region of Kshs 40 – 43B ($370.71m – $398.52m). With the move to Ethiopia, we expect that there will be a reversal in this trend with capital expenditure increasing in response to initial investment requirements in the Ethiopian market. Massive initial capital outlays also mean that there are no dividends to be expected soon from Ethiopian operations.

Because this is an investment which demands significant capital expenditure at the start, you don’t expect that dividends will be coming through in the early stages. We are quite comfortable that by the time we need to start transacting on dividend payouts to shareholders we expect the liberalization will be in play

Safaricom CEO, Peter Ndegwa

The expansion into Ethiopia may, however, not have implications on dividend payouts for local operations.

Our dividend payout which is 80% of net income for the year remains unchanged. We have enough balance sheet flexibility to be able to support a dividend policy, which is what we have been paying so far. So, the dividend policy doesn’t change and that will remain in force going forward.

Safaricom CFO, Dilip Pal

Our SWOT Analysis

Strengths

• Experience – Safaricom has a wealth of experience in telecommunications. It is, in large part, responsible for the digital transformation that Kenya has experienced in communications and mobile money transactions. With this experience and key learnings along the way, Safaricom has an edge in its rollout into the Ethiopian market.

Weaknesses

• Localization – Safaricom’s telecommunications operations have been untested in other markets. Despite its impressive and successful run in the Kenyan market, the company is likely to face headwinds due to uncertainties around rolling out operations in a foreign market.

Opportunities

• Population Size – We are looking at a 117m population with over 56% aged 15 years and older. This is a massive market. Scale and network effects can provide Safaricom proper footing to establish a competitive presence in that market.

Source: Statista

• Mobile Money License – Ethiopia’s Prime Minister Abiy Ahmed has noted that mobile-based financial services would be open to competition starting May 2022. In his official visit to Ethiopia, Kenya’s President Uhuru Kenyatta also urged the authorities there to open the market to mobile money services. This could unlock more opportunities for Safaricom to increase its products and offerings in that market.
• Mobile Communication Penetration – With the penetration of mobile communication is just over 40%, the Safaricom CEO expects that the entry of new players in the market would push it to over 90% in a few years.

Threats

• State Involvement – State-owned Ethio Telecom has government backing. Subsidies and other related actions would mean market players operating under unequal terms of engagement. It is likely that the State will engage in such practices to protect its interests. 
• Political Instability – Ethiopia has a history of political turmoil. The war in Tigray has destabilized the political environment and consequently attracted international scrutiny and sanctions from the US government. US economic sanctions against Ethiopia have threatened to put the US International Development Finance Corporation’s $500m financing deal to the consortium in jeopardy. Safaricom acknowledges the political risks it faces in the country but views entry into Ethiopia as a long-term investment.
• Capital and Foreign Exchange Risk – The State controls the movement of capital and foreign exchange in the country, which might hinder optimal operations if not liberalized. Cross-border money transfers on the platform might be subject to government policy. Importation of crucial technical equipment to set up operations will require foreign currency. Over the long term, repatriation of profits will need forex outlay. State involvement in the forex market, therefore, remains a key area of concern in Ethiopia. However, the Safaricom CEO notes that the Ethiopian government is undertaking foreign exchange liberalization which is expected to ease the FX market by 2023. In relation to other downside risks it faces, he noted the company would be taking appropriate risk insurance to secure the business in that market.

More Entrants?

It is likely that the Ethiopian government will issue a second license, with speculation around the possibility of the license allowing the operation of mobile money. If this happens, South Africa’s MTN Group, whose consortium was outbid by Safaricom’s due to a lower $600m bid, has shown interest in bidding again if mobile financial services are included in the license.

For us, it will really be important to see mobile money in that opportunity to put forward a bid and if it’s not there then probably we wouldn’t even bid. We really wanted to have seen mobile money in the licence regime, so we adjusted our bid for the lack of mobile money.

MTN Group CEO, Ralph Mupita

While a third entrant into the market means increased FDI for Ethiopia and a better chance at challenging Ethio Telecom, it would also mean increased competition for Safaricom. In an effort to liberalize the economy, Ethio Telecom has also launched a tender process to sell a 40% stake to private investors. The stake sale will see the government retain 55% of the telco. 

It is 40% to all interested bidders and 5% will be dedicated to Ethiopians. The 55% will remain with the government of Ethiopia.

Senior Advisor at the Ministry of Finance, Brook Taye

In sum, whichever way this entry goes, it will a defining moment for Safaricom.

Footnotes

*The USDKES rate used in computations in the article is $1 = Kshs 107.90.

Have you filed your 2020 tax returns? Here are some last-minute tips

The filing of annual tax returns for the year 2020 for individuals and corporate entities with a December year-end is due on or before 30th June 2021. The returns are to be filed through Kenya Revenue Authority’s (KRA) online iTax platform.  

As of June 20th, 2021, over 3.8 million Kenyans had filed their returns successfully, translating to over 20 percent growth compared to the 3.1 million who had filed their returns by the same period the previous year. KRA Marketing and Communication Deputy Commissioner Ms. Grace Wandera attributed the increase in the number of returns filed to the current stability of the iTax system. 

For submission of returns through iTax, taxpayers with employment income only can use the web-based pre-populated income tax return, labeled ‘ITR for employment income only’. Individual taxpayers with other income in addition to employment income are required to download the excel income tax return to make their declarations. Persons who did not earn income in the year 2020 are reminded to file a Nil Return.

Following the Covid-19 pandemic that has led to restricted physical visits to public facilities, KRA has put in place measures to virtually support taxpayers who may need assistance during the filing season. Taxpayers are advised to seek KRA’s support through the Contact Centre by calling 0711-099-999 or 020 4 999 999, emailing requests to callcentre@kra.go.ke or using our official social media pages for assistance. KRA has also been running aggressive campaigns on both broadcast, print and social media platforms providing step-by-step guidelines on filing the tax returns. 

Many Kenyans still procrastinate when it comes to filing their tax returns. As you make a last-minute dash, remember that failure to file by the due date attracts a default late penalty of twenty thousand shillings and two thousand shillings for a company and for an individual respectively in line with Section 83 of the Tax Procedures Act, 2015.

A guest post by Davis Gathinji