Safaricom's parent company is feeling the effects of its startup investment and operational costs in Ethiopia, seven months after its successful launch. The costs are negatively reflected in the Group's financial statements, highlighting the challenges of expanding into new markets.
Safaricom's parent company has reported a 10.6 percent drop in net profit to KSh62 billion (USD 454.5 million) compared to the previous year, as costs in Ethiopia continue to rise.
The Group's financial statement is negatively impacted by the increasing initial investment cost in the country, despite Safaricom's enthusiasm over its growing market penetration in Ethiopia.
Safaricom Ethiopia's performance was included in the Group's annual report presented to shareholders in Nairobi, Kenya on May 11, 2023. The 12-month decline in profits is the highest in over a decade for the Group.
The Safaricom Group's earnings before interest and taxes (EBIT) fell by 22.1 percent. Peter Ndegwa, CEO of the Group, Anwar Soussa, CEO of Safaricom Ethiopia, and the shareholders appear unnerved by the loss but optimistic about Ethiopia's potential.
"The potential for Ethiopia is immense. More penetration is challenging but also a potential market," Ndegwa said. "We experienced headwinds, including rising inflation and depreciations."
Safaricom Ethiopia's total revenue was USD 13.4 million during its seven-month operations, while Safaricom Kenya's total revenue for 2023 fiscal year was USD 2.2 billion. Safaricom Ethiopia spent about USD 146 million on operational costs, while Safaricom Kenya spent around USD 391.3 million.
"This indicates two things. The size of the operation in Kenya is much bigger than Safaricom Ethiopia. On the other hand, the investment and operating costs in Ethiopia are surging because of the rollout costs in the new market," Abdulemenan Mohammed (PhD), a London-based financial analyst, explained.
Abdulmenan asserts that Ethiopia's performance will continue to determine the profit or loss of the Group.
"If Safaricom Ethiopia profits, the Group in Kenya also profits, and vice versa. For now, it is too early to judge Safaricom Ethiopia's performance. But three years from now, it will be perfect to analyze Safaricom's market in Ethiopia."
According to Dilip Pal, Chief Financial Officer (CFO) of Safaricom, the company expects to breakeven in its fourth year.
Together with a consortium of international investors, Safaricom Group anticipates that Safaricom Ethiopia's capital expenditures will reach between KSh40 and KSh45 billion in 2024. This amount corresponds to Safaricom Kenya's planned capital expenditures for the 2023-2024 fiscal year.
To date, shareholders of the Safaricom consortium have invested a whopping USD 1.2 billion in Safaricom Ethiopia. Safaricom Kenya forked out USD 690 million of this total. The first five-year plan is expected to allocate up to USD two billion.
The Group anticipates 3,000 network sites by the end of 2024 and up to 12,000 network sites in 10 years, compared to approximately 1,300 network sites at present. Safaricom Ethiopia will construct half of the network sites, and ethio telecom will co-locate the remaining sites. Currently, Ethio telecom has 7,000 network sites, while Safaricom Kenya has 6,000. Construction is currently ongoing on 379 sites for Safaricom Ethiopia.
Safaricom Ethiopia raised its 90-day voice customers to two million, its data customers to 1.4 million, and its messaging customers to 700,000. However, data services generated four times more revenue than voice data services. It intends to reach 10 million customers by the end of the fiscal year 2023-2024.
Although the Ethiopian market has yet to generate a profit, it has resulted in unexpected gains for Safaricom. According to the financial report, Safaricom Ethiopia recorded a hyperinflation net gain of KSh10.3 billion (USD 75.8 million).
In a statement issued on April 25, 2023, the Accounting and Auditing Board of Ethiopia (AABE) stated that Ethiopia's economy is not hyperinflationary. Eyob Tekalign (PhD), state minister of finance, and chairman of AABE, signed the statement.
However, Safaricom officials disagree.
"Safaricom Group complies with the IFRS standard. The International Accounting Standard Board (IASB) declared Ethiopia a hyperinflationary economy in December. So we comply with that. That is how we adjusted and prepared our financial report," Pal said when asked about the issue by The Reporter.
"We do not look at the hyperinflation impact as a major issue. The ups and downs of hyperinflation will not affect our shareholders. We focus on increasing the investment profile in Ethiopia and executing our plans."
Abdulmenan concurs that the Ethiopian government made a grave error in issuing the statement denying the existence of hyperinflation. He asserts that hyperinflation is a financial term and not an economic one.
"From an economic standpoint, Ethiopian officials misunderstood it. Since inflation has been above 34 percent for the past three years in a row, the three-year cumulative is above 100 percent," Abdulmenan said, explaining that according to international standards, if the three-year cumulative is above 100%, hyperinflation exists.
He asserts that Ethiopian officials are politicizing the issue while the facts are readily available. "But after all, it is an accounting gain just on paper. There is no tangible money that went to Kenya."
The Group also anticipates adding new shareholders, including the International Finance Corporation (IFC), to its shareholder roster.
"We have been negotiating with the IFC for quite some time. Currently, we are in the final stages of negotiations. They expressed interest in investing in equity as well as debt," Pal said. The IFC had planned equity funding of up to USD 157 million and debt funding of USD 100 million, but the deal is not yet closed, according to Pal.
"They will come in as a minority shareholder. Hence, the shareholder structure will dilute," added Pal.
Safaricom secured a license for MPESA at a cost of USD 150 million this week for a duration of 15 years. The Group, the largest shareholder in the Safaricom Ethiopia consortium with 55.7 percent ownership, contributed 55.7 percent of the USD 150 million required to obtain the license.
In the coming months, MPESA will launch its service products on the Ethiopian market, where it is expected to face stiff competition from the government-owned telebirr.
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"Our team has been preparing for the MPESA Ethiopia. The technology platform required to launch the MPESA Ethiopia products is already ready," Ndegwa said.
According to him, the company was only awaiting registration and payment of the license.
"Now, we can go to agreements with various partners. This includes banks, distributors, and others. Mobile money starts by creating networks. That will allow people to deposit, withdraw, and transfer money. International money transfer, merchants, and other value-added products will be launched," Ndegwa explained.
MPESA products, according to him, will be tailored to the values of the Ethiopian population.
The performance of Safaricom Ethiopia has also been negatively impacted by the government's social media Internet blockades.
"Regarding the social media blockade, there is no denying there are interruptions in Ethiopia. The government is trying to manage it. It is not up to us, the private players, to question the government's decision. We have to comply. They have chosen to block some of the social media sites. It is not a total blockade, and a lot of people are using VPNs," Soussa said.
Business, according to him, will go back to normal once the blockade is over.
"It will not affect us to a huge degree. Obviously, these things slow you down, but it is not a huge shock by any standard. It will not hold us down, but it is a little headwind. We believe it is something manageable until the tensions calm down," Soussa explained.
