Monday, 9 June 2008

Safaricom - First day trading with buyers outnumbering sellers 4:1

The long wait is over. Safaricom had a first day debut in excess of 50% on its first day of trading. Kenya's biggest stock market flotation is clearly a success. Foreign investors were required to pay 10% more than the price offered to Kenyans but we don't think that is unfair. What is moe important is that the sale was oversubscribed by more than 500%. Clearly, investors have appetite for Kenya again.

Kenya's mobile phone market is not saturated, indeed only a third of Kenya's 36 million people own a mobile phone. That said, on every street you can buy a credit for a phone. We believe
Safaricom's strategy of targeting low-income clients like this will boost its customer base.

Safaricom is East Africa's most profitable company, it made profits of $370m last year, and despite the price rise remains attractive and a core holding, entering our model portfolio.


Jenny and Shawn said...

Daniel and team:

Best wishes on the new venture. Do you have any opinions on Telkom Kenya as a competitor to Safaricom? After winning the auction for half the company in November, France Telecom said it was going to roll out mobile services. Is this a threat to Safaricom?

Second, do you know what kind of network (CDMA, GSM, etc) Safaricom uses?

Third, I see from Safaricom's advertisements that the word for "communicate via mobile phone" is "Nokia." Does Safaricom have multiple suppliers of handsets?

Frontier Markets Blog said...

Thanks Janny and Shawn.

Safaricom was born out of Telkom Kenya. Old incumbants rarely prove to be as dynamic. We would be more concerned about Celtel, however Safaricom’s average revenue per user is 2 X Celtel’s and has not dropped in three years.

Telekom Kenya run CDMA. We consider that a weakness. As to mobile phones, Safaricom also supports other suppliers, even though we (based in Scandinavia) believe Nokia is best.

Jenny and Shawn said...

Thanks for the response.

I am not very familiar with Celtel, but it appears to be owned by Zaim (formerly MTC Telecom) out of Kuwait. Like Safaricom, it runs the GSM protocol. I know they have been fighting interoperability, but I think that is silly. They will generate more revenue by expanding their networks by letting subscribers talk to each other.

So if Telekom Kenya is not "dynamic" enough because it is 50% govt-owned, then why is 35% govt-owned Safaricom "dynamic enough," particularly when you could own Zain? Zain is Celtel's parent, which is "only" 25% owned by the Kuwaiti government. Presumably the oil-rich Kuwaitis have deeper pools of capital than Vodafone or the Kenyan govt., and perhaps even than France Telecom (which owns half of Telekom Kenya now).

I disagree that CDMA is a weakness compared to GSM and UMTS. CDMA handles far more phones on fewer cell sites, making it less costly to deploy. Also, it uses less bandwidth than GSM, which is admittedly a bigger deal in developed nations where much of the spectrum is set aside for other uses. Third, CDMA is faster than both GSM and the GSM enhancement EDGE. EDGE is subject to interference and often sluggish, as Apple iPhone users know.

GSM does have an advantage in that users can remove a chip from their phone and put it in another phone and begin using the new phone. This is helpful for users who upgrade their phones frequently, but I doubt a lot of Safaricom customers are frequent upgraders.

Lastly, I am concerned with Safaricom's ownership structure, which I discovered in my research. The Kenyan govt floated 25% and keeps 35%. VOD has been forced to admit it owns 35%, not 40%, and 5% is owned by a mysterious offshore firm Mobitelea Ventures. Safaricom's CEO Michael Joseph claims not to know who the 5% owner is. This is troubling in itself.

More troubling, however, is the research by the British press and American investigative firm Kroll Associates that the 5% Mobitela stake is controlled by Daniel Arap Moi, former Kenyan president. Moi has been linked to financing the ongoing war in Dem. Rep. of Congo by smuggling out gold and selling it at inflated prices.

I am not certain if I would invest in a firm that didn't know who owned 5% of it, or that was 5% owned by a war criminal. Perhaps this is a "typical challenge" when investing in frontier markets, and my USA-centric view is too used to greater transparency.

After all, our American CDOs, investment banks and hedge funds are extremely transparent! :)

Full disclosure: I am long Qualcomm, which owns most CDMA patents.

Frontier Markets Blog said...

Jenny and Shawn,
That is an lot of detail for a public blogsite, even if it is the blogsite of a hedge fund! We are all for transparency. Do you have a source reference for the comment you posted relating to Daniel Moi? That's quite an allegation for an anonymous posting.

I think we are just going to have to disagree on the merits of CDMA and GSM. Time will prove the arbitrator. As to being long Qualcomm, take a look at how they recognise sales by estimation! Now that is what we call 'frontier market stuff (joke).

Jenny and Shawn said...

Link to UK's Daily Telegraph story on Mobitelea, 5% owner of Safaricom:

Probe by the UK Serious Fraud Office:

Copy of Kroll report (source is Wikileaks, admittedly, but at 101 pages and this level of detail, it's hard to imagine it's a 100% fraud, but could be inaccurate):

Link to Wikipedia entry on Mobitelea:

As far as QCOM's revenue recognition by estimation, as far as I know, they are in compliance with SEC rules on revenue recognition.

Disclosure: long QCOM, no exposure to VOD or Safaricom