Why Safaricom rates Ethiopia market entry as better choice

On May 21, the Ethiopian Communications Authority announced that the Global Partnership for Ethiopia, a consortium led by Safaricom Plc #ticker:SCOM, had been awarded a licence to operate in Ethiopia’s telecommunications sector in view of the efforts to liberalise the economy.

Safaricom has indicated that the consortium, in which it commands a 55.7 per cent stake, intends to start operations in 2022 through the rollout of a voice and data network.

Julians Amboko talked with Safaricom CEO Peter Ndegwa on a raft of issues, including the political and foreign exchange risks in Ethiopia as well as the valuation of the company.

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You are venturing into Ethiopia at a time of considerably elevated political risk if you consider the situation in Tigray and the forthcoming election. Does this worry you?

Of course, there are risks that we need to consider as part of the overall investment but we need to look at Ethiopia as a long-term investment. In Ethiopia, we see a huge population, extremely favourable demographics and a country that is keen on advancing.

This is the only country that has one telecoms operator and there isn’t another country which offers the potential and opportunity that Ethiopia offers. Political risk is present like it is in every other country but the business case is actually positive.

Still on political risk, has Safaricom and its consortium sought any form of multilateral insurance, say from the World Bank’s Multilateral Investment Guarantee Agency (MIGA), as a safety net in light of the potential downside risks?

One of the reasons we have structured the investment vehicle the way we have through the Netherlands is that the Netherlands has a Bilateral Investment Treaty with Ethiopia.

One of the things such a treaty helps you with is managing some of the broader risks that you may face as an investor. Of course, we plan to take appropriate insurances.

We have not made that decision because we were still awaiting the licence confirmation but you would expect us to take appropriate risk insurance to secure the business.

Foreign exchange risk is a major challenge in Ethiopia. Has the government of Ethiopia given any concessions on this front which anchors your confidence in something like your ability to repatriate dividends when the time comes?

It is true that there are liquidity challenges and currency fluctuation in Ethiopia. The government has been clear that it is undertaking a process of economic liberalisation, which includes the foreign exchange market. By 2023, the government believes foreign exchange will be largely liberalised.

Just to be clear, can we then make an inference here that the earliest we expect dividends off the Ethiopia business is 2023?

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 liberalisation will be in play.

What’s your sense of how the average revenue per user landscape could look like at least in the medium-term considering you are entering a market which already has a player with the first mover’s advantage?

In thinking through the Ethiopia business case, we benchmarked against the region. Each country is at a different stage of development and level of penetration and competitiveness.

The penetration of mobile communication is just over 40.0 per cent. You would expect that once the market has two or three players, this could rise to 90.0 per cent plus in a few years. Remember, we also have population coverage targets from the market regulator as part of the licence requirement.

So, what we can say is that we intend to accelerate the roll-out of our network across both voice and data to realise the share of the population which our assumptions suggest we can get to.

Unfortunately, we cannot disclose that at this point. Average Revenue Per User (ARPU) will be determined by the competitive intensity, how fast we get to mobile money and other issues.

Away from Ethiopia, two months into the trials on 5G, how is that panning out?

We are currently at about 20 or so sites and are targeting having between 150 and 200 sites by the end of the financial year by which time we will have been able to test a number of use cases.

What are some of the challenges, if any, you have encountered in the rollout of 5G?

One of the challenges around the rollout of 5G is handsets. Remember that, for example, penetration of 4G enabled handsets in Kenya is only 40.0 per cent and that is what we have been trying to accelerate through Lipa Mdogo Mdogo through which we are adding a few million 4G enabled handsets annually.

So, when do you feel you will have realised the ‘critical threshold’ for 5G rollout across Kenya?

For us to accelerate 5G, we first need handset penetration to get to the right level. In another three or four years, the penetration should be at about 70.0 per cent.

Sometimes I look at the Safaricom share price and my assessment suggests that there could be a widening divergence between how the market is valuing the company and what the fundamentals suggest the valuation should look like. Keen to know what your thoughts are on this?

While I can’t pronounce myself on where Safaricom is valued, what I can do is to make available as much information about the company as possible to allow investors to value the business.

There are three aspects on how someone evaluates the prospects of a business. First is the growth opportunities looking into the future.

The second aspect is returns and this is where something like the dividends we pay comes in. Safaricom is actually a fairly diversified business compared to a typical telco.

Our intention is to continue providing acceptable returns to shareholders. The third important aspect then is how we manage risk, whether they are cyber risks, regulatory risks and so on.