EXPENSES EAT UP SAFARICOM'S PROFIT AS PROFIT BEFORE TAX DOWN TO 18.36 BILLION

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Safaricom today released its results for the year ending 31^st March 2011.

Revenue went up by 12.9% to Kshs. 94.832 Billion after receiving a boost from Data Revenue which went up 57.1%.

Mobile and Fixed data registered the highest growth rate of the 3 forms of data. It went up by 80.3 percent to Kshs.  5.368 Billion.

M-PESA continued its phenomenal growth by increasing by 56% to Kshs. 11.784 Billion.

SMS Revenue went up to Kshs. 7.544 Billion, a 45.3 percent gain.

Not surprisingly, voice revenue was down, albeit a marginal 1.7%. This was expected as voice tariffs have more than halved during the year in review. At Kshs. 63.5 Billion, it still contributes 66.96% of total revenue. This has reduced from the previous year’s contribution of 76%

But it is the increase in expenses that will have most investors chewing their nails.

Operating expenses increased to Kshs.  45.795 Billion, an increase of 25.3% from the previous Kshs. 36.554 Billion. Meanwhile Selling, General and Administrative expenses had a jump of 23.2%, to Kshs. 13.314 Billion

Operating profit was down 14.2% to Kshs. 19.39 Billion.

Profit Before Taxation (PBT) for the year stood at Kshs. 18.361 Billion from the previous year’s nearly Kshs. 21 Billion

Profit After Tax (PAT) was down 13.1% to Kshs. 13.159 Billion, ultimately leading to Earnings Per Share (EPS) falling to 0.333/=. Dividend was maintained at 20 cents per share.

It was not all gloom and doom though.

Customer numbers went up to 17.183 million, up from 15.793 million, an 8.8% jump

Registered M-PESA users went up to 13.8 million users, a 45.5% jump. This explains the 56% jump in M-PESA Revenue.

Fixed Data connections went up by a whopping 466%, to 4,483 connections.

Mobile Data customers increased to 4.9 million from 2.641 million. Data penetration will continue exponentially increasing in the coming years.

Safaricom’s churn has grown slightly by 3.6%. Churn refers to people leaving for other mobile networks. Mobile Number Portability (MNP), may give this figure a slight bump next year.

Earnings Before Interest Taxation Depreciation and Amortisation margin fell to 37.7 percent from 43.6%.

Operating Margin went down to 20.4% from almost 27% last year.

The reduction in PBT and PAT was not really a surprise. What was a surprise was the manner in which expenses shot up.

The humongous growth in data was expected and will most likely be replicated in the current financial year.

Safaricom only had a slight decrease in revenue. It is important to note that the voice price wars were for only half the financial year and that SMS, which contributed Kshs. 7.544 Billion in revenue, started being 1 shilling only towards the end of the financial year.

With this in mind, the current financial year will be a sterner test of Safaricom’s mettle. As the MNP system is refined, majority of porters are expected to move away from Safaricom, though this number is not expected to be large enough to significantly impact its performance. Nevertheless, an increase in customer numbers is not expected to be forthcoming again.

The resilience of Safaricom is mainly down to their many streams of revenue. They showed this when they recently clinched a deal for electronically clearing cheques by the Kenyan Bankers Association.

Data will take up a greater percentage of profits next year as Voice Revenue will be hit again. There will be an interconnection fee cut in July from 2.21/= per minute to 1.44/= per minute. There will be further cuts as the years go by.

Safaricom’s rivals have yet to launch their 3G Internet, for which there is expected to be another vicious price war. Can Safaricom do it all again?

It will take some time for Safaricom’s profit wagon to be really on the move again.

At Wednesday’s closing price of 3.90/=, the share is trading at a Price to Earnings Ratio of 11.82 and a dividend yield of 5.13%