Business Daily (Nairobi)
Washington Gikunju
17 July 2008
For a majority of the more than 800,000 Kenyans who set aside at least Sh10, 000 to buy shares in the just concluded Safaricom initial public offering, the big unanswered question is when the share will start producing outsized returns.
Many of these investors had been spoilt by the gains in KenGen IPO whose market price shot up by 345 per cent per cent on its first day of trading at the NSE just 24 months earlier.
But 38 days after the Safaricom share was listed at the NSE, the dreams for windfall profits are rapidly fading for many of these short term investors, as the mobile company's share price appears set on a course of a steady decline since the first week of trading.
From a high of Sh8.15 on its June 9 debut at the NSE, the Safaricom share price has known only one movement - south. On Tuesday it touched a new low of Sh6.55 per share, just Sh1.55 above its IPO price of Sh5 per share.
It is unlike what most investors had expected and fresh questions are now being raised over what is actually depressing the share price of a company, which the most influential analysts and sophisticated investors appears to agree has all the fundamentals right.
Safaricom is the region's most profitable company, having returned a pre-tax profit of Sh19 billion last year. It is also the dominant mobile phone company in the country, enjoying a subscriber base of over 11 million against its closest competitor's 2.1 million subscribers.
According to analysts, two theories could explain why the Safaricom share price is falling.
First, is the fact that investors are getting worried over Safaricom's earnings outlook given the fact that France Telecom and Econet Wireless are planning to launch their mobile phone services in September.
The entry of these two firms at a time when Celtel Kenya is fighting Safaricom's stranglehold over the market could make life tougher in the industry. Already, it is clear from Safaricom's latest earnings release that the it managed to race ahead of its rival Safaricom by sacrificing higher profit margins to retain and attract new customers.
According to Safaricom's chief financial officer Les Baillie in a recent interview with Business Daily, that is why the firm chose to go for a lower earnings before taxation, interest charges, depreciation and amortization (Ebitda) margin, which measures the raw potential of a business to produce profits and cash.
If this is seen in the light of the average revenue per user (ARPU), another important acronym that shows how much sales the company generates per customer shows that the firm-and indeed the industry-is starting to dig at the bottom of the pool with every new customer signed up.
The presence of three tough competitors, high inflation and an economy generating jobless growth is unlikely to improve the earnings outlook so much to justify further appreciation in the share price. Sophisticated investors are therefore convinced that the price is right for Safaricom and they just want to take their profit and run to other opportunities.
This is what is happening and probably why the share price might remain depressed for some time, which leads to the second theory. An analysis of the trading patterns on the NSE shows that Safaricom is dominating all the action and by the sheer volume of the money involved, this listing has transformed the market. A closer look however reveals a more disturbing trend.
Most of the transaction volume is sell orders by the foreign investors who were expected to cushion the Safaricom share price from excessive price fluctuations-that are typical when local retail investors corner the market for a particular security. This is the reason the government decided to allocate two billion shares to foreigners despite the huge local demand that saw nearly Sh100 billion returned to Kenyans.
Morgan Stanley angle
A closer analysis of who was allocated the foreign quota shows that a motley collection of some of the biggest hedge funds based in Europe got 65 per cent of the shares and then Morgan Stanley International, the government's adviser on how to sell these shares to foreigners, kept 41 per cent of the shares in its books.
It is unlikely that an investment bank would want to keep such as a big stake in a customer's deals as an investment. Though the company says that it holds some of these shares for its customers, insiders in the market point out that Morgan Stanley could have been allowed to keep such a huge stake worth 815 million shares as a way of paying itself for advising on the deal, after its local partner, Dyer & Blair Investment Bank bid 0.05 cents for the work in order to win.
This however threw the transaction into a crisis at the beginning because Morgan Stanley wanted a fair share of fees from this transaction that sold Kenya the government's 25 per cent stake in Safaricom for Sh51 billion.
If this is the case, Morgan Stanley could be holding a huge block of shares that it must sell wisely at a profit in order to make money. However, the strategy for selling this block of shares could backfire if other foreign hedge funds and institutional investors decide to take profits at the same time. The pattern of huge foreign sales, almost non-existent foreign buys shows that something akin to this is happening.
A steady supply of Safaricom shares, apparently from foreign investors, has created an oversupply of the stock, depressing the market price and raising eyebrows as to what could be behind the alarming slide in market price. So far statistics show that over 2.2 billion Safaricom shares valued at over Sh16.5 billion have traded since June 9, when the company's shares were floated at the NSE.
Data on foreign investor sales and purchases on the Safaricom counter could not be obtained from the Central Depository and Settlement Corporation (CDSC), but joint lead transaction advisor to the IPO Dyer & Blair's co-managing director, Mohammed Hassan, said that foreigners accounted for up to 30 per cent of daily trading on the Safaricom counter.
"We are just seeing a constant supply of shares which has really dampened the market price, we suspect there are some foreign investors who are exiting the market in a big way," said a top stockbroker who did not want to be named.
Fingers are now pointing to the foreign investors pool that benefited from a special reservation of two billion shares, especially after news emerged that Morgan Stanley Investment Bank, the IPO joint lead transaction advisors who were in charge of setting the IPO price in the international pool and allotting shares to all international applicants took up close to half of the shares that were reserved for foreign investors.
Statistics obtained from Image Registrars, the company that keeps Safaricom's register of shareholders, shows that Morgan Stanley International PLC took up 814.3 million shares in their own name, and a further nine million shares were taken up by its affiliate company, Morgan Stanley Investment Management, New York.
The London based investment bank single handedly determined the IPO offer price for international applicants through book building, a form of auction process through which an equilibrium price is discovered based on bids received from potential buyers.
Only Morgan Stanley and Treasury, as the issuers of the shares, had access to the information that was used to set Safaricom's international pool IPO price at Sh5.50 per share, a premium of approximately 10 per cent over the estimated fair book value of Safaricom at the time of the issue.
Contacted for comment, Morgan Stanley in a brief statement said that they did not buy any shares as principals, but on behalf of their third party clients.
"Morgan Stanley did not purchase any shares as principal in the Safaricom IPO. Any shares under the name of Morgan Stanley are held on behalf of, and beneficially owned by, our third party clients," said a corporate communications executive director, Mr Michael Wang.
The international investment bank with major operations in developed world markets however declined to send to us a list of the clients on whose behalf they bought the shares.
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