M-Pesa and text drive Safaricom’s profit to Sh11bn

Telecoms operator Safaricom Tuesday set a new half-year profitability record for corporate Kenya after it declared a Sh11.2 billion net income for the six months to September.

The record-breaking earnings came on the back of 17.1 per cent sales growth to Sh69.2 billion that rode on robust performance of non-voice segment of the business including SMS and mobile money transfer service, M-Pesa.

The telecom service provider’s profit growth was also helped by a slowdown in the growth of costs at 9.8 per cent to Sh30.2 billion.

The half-year results have emboldened Safaricom to upgrade its full-year forecast by margins of more than 10 per cent.

“Based on our financial results in the first six months of the year, we have upgraded our full year guidance,” said Bob Collymore, Safaricom’s chief executive.

The company’s free cash flow is, for instance, expected to close the year at between Sh20 billion and Sh21 billion.

Mr Collymore said non-voice business had delivered strong growth but maintained that voice remains the company’s core business though its contribution to total turnover continued to decline as it diversifies into data, handset sales, and mobile money services.

Standard Investment Bank (SIB) analysts described the results as better than expected.

“The company posted a 47.4 per cent growth in earnings per share (EPS) to Sh0.28, outperforming our estimate of 30 per cent,” SIB said in a statement.

Safaricom did not declare an interim dividend but the performance means its ability to pay dividends has increased significantly as measured by potential dividends on each share or EPS.

The telecom operator declared a dividend of Sh0.31 per share for the year ended March 2013 compared to Sh0.22 the year before.

Analysts at Kestrel Capital said Safaricom has hinted that it will pay up to 85 per cent of free cash flow in the current financial year which grew by 167 per cent to Sh13.7 billion in the half year under review.

This means that the telecoms operator could raise its dividend payout to Sh0.40 per share based on the policy of allocating up to 85 per cent of free cash flow – expected to rise to Sh20 billion – for dividends.

Safaricom announced its results shortly after its stock recorded a slight drop at the Nairobi Securities Exchange where it has rallied to an all-time high of Sh9.90 since December.

Tuesday, Safaricom stock closed trading at Sh9.65 compared to Sh9.70 the previous day. The share’s rally to the current level represents a near-doubling of the Sh5 initial public offer price.

This has been linked to increased investor confidence in the company’s future prospects, especially with its successful diversification into non-voice areas such as data.

The stock’s rally presents retail investors who bought into the firm during the 2008 IPO an opportunity to exit profitably after a long share price stagnation that lasted more than five years.

The Sh11.2 billion net profit Safaricom posted in the half year period represents nearly two-thirds of its Sh17.5 billion earnings in the full year ended March, signalling higher profitability in the current financial year.

Analysts remain bullish about Safaricom’s prospects going forward, attributing their confidence to the firm’s dominant position in the voice business and continued diversification into alternative revenue streams.

Safaricom’s share of the voice market rose to 79.5 per cent in the quarter to March from 77.5 per cent in the three months to December as rival operators ceded ground.

Mr Collymore said Safaricom’s subscriber base had expanded to 20.8 million, translating into a 12 per cent revenue growth in the voice business to Sh41.9 billion.

The non-voice segment, however, grew at the fastest rate cushioning the company’s earnings from price wars in the voice market.

Safaricom’s aggressive expansion of its M-Pesa and data services has helped maintain its profit momentum despite a stagnation of tariffs in the period under review.

Revenue from short messaging services grew at the fastest rate of 49 per cent to Sh6.4 billion, followed by mobile data which expanded by 43 per cent to Sh4.3 billion.

Safaricom sees mobile internet sevices as presenting a huge growth opportunity, with most data services consumed over handsets and other handheld devices.

Mr Collymore called on the government to fast-track the allocation of additional frequencies for Long Term Evolution (LTE) or 4G technology, which offers higher mobile data speeds than the current 3G and 2G platforms.

READ: Regional heads bet on Internet to drive growth

The company has promised to offer free wireless internet to all public schools in return for additional frequencies.

Growth in data consumption has also increased sale data-enabled handsets including smartphones earning the company significant revenues from hardware sales.

Revenues from Safaricom’s proprietary financial services product M-Pesa grew by a fifth to Sh12.5 billion, recording the largest absolute turnover after voice business.

ALSO READ: Vodafone earns Sh1.3bn from M-Pesa charges

Overall, non-voice revenue increased 30 per cent to Sh24.3 billion, surpassing the voice segment whose contribution to total sales now stands at an all-time low of 60.5 per cent.

Safaricom earned 87 per cent of its total revenues in 2008 from voice calls and this share has been declining over the years to stand at 62 per cent in the year ended March.

The decline has been linked to the faster growth in the non-voice business which still has large headroom for growth unlike the voice segment which is nearing maturity and is beset by price wars.

M-Pesa is the biggest component of Safaricom’s alternative business lines that has now expanded to offer banking and payment services.