A happy roar from Kenya

Something to cheer about although it is not from Malaysia but I think we could use some good news anyway. I am sure many of us have been feeling worried, unhappy and down right angry lately with the latest government's 'policies' to fight spiralling inflation. My comments are in RED.

TheEconomist: It is something for Kenya to cheer, at last. The flotation of a quarter of Safaricom, Kenya's leading mobile-phone company, on Monday June 9th was generally reckoned to be a great success. The initial public offering (IPO) carries much weight in East Africa—although it is tiny by the standards of stockmarkets in more affluent parts of the world—and the 10 billion shares on offer were massively oversubscribed. During the course of the first day's trading they leapt by over 60% above the offer price, giving the firm a value of some $4.5 billion. Safaricom's impact on Kenya’s stockmarket is impressively vast: its shares alone will make up some 40% of Kenya's titchy market.

Safaricom's share was oversubsrcibed by 532%. It was offered to individuals at 5 shillings while corporates were offered at 5.5 shillings. The share price went up to 8 shillings on the IPO date. (1 shilling = rm0.08, so 5 shillings = RM0.40). Correct me if I am wrong. As a rough figure, Kenya's stock market capitalisation is USD11.25b or about 1/28 the size of KLSE's market capitalisation. This Safaricom is not negligible or small if compared to the capitalisation of TMI of USD8b or Digi.com of USD5.8b . It is even bigger than TMI's and Sri Lanka's largest mobile company Dialog whose capitalisation is only USD1b.

This is a gratifying vote of confidence by investors in a country that has suffered a slew of troubles in recent months. Violence after an election at the end of last year claimed 1,200 lives and the country narrowly avoided a calamitous breakdown. Nonetheless the appetite for risk remains strong: many retail investors reportedly took out loans so that they could grab a slice of the action. Such is the excitement among ordinary Kenyans who have managed to snap up an allocation of shares that the company is considering holding its next annual meeting in a pair of Nairobi’s football stadiums to accommodate the expected crowds.

This is great. The shareholders turnout could be even more than Warren Buffett's Berkshire Hathaway Annual General meeting in Omaha, Nebraska. The total number of Safaricom's shareholders amounted to 860,000! I don't think even 10 football stadiums of 80,000 capacity each is enough. A world record?

Kenya's government is happy too. It has raised 52 billion shillings ($818m) from the sale of a 25% stake in Safaricom. Mwai Kibaki, Kenya's president, even turned up at the Nairobi Stock Exchange to ring the bell that signalled the start of trading on Monday. He took the opportunity to praise his policy of privatisation which had resulted in the slice of Safaricom going on sale. The government holds another 35% in the firm, with the remainder in the hands of Vodafone, a British mobile-telecoms giant.

Inevitably some controversy surrounds the IPO. Kenyan opposition politicians want an explanation for the 5% of Safaricom that is indirectly held by Mobitelea, a firm with unknown owners registered in the Channel Islands. Some suspect that the stake somehow enriched people close to the previous government.

Hai ya! This type of issue is nothing new la. It is very common even in developing and emerging countries like Malaysia.

But that lingering doubt has not dampened the IPO’s party atmosphere—hundreds of small investors turned up at the stock exchange to witness the start of trading. The good cheer is not without justification. When Michael Joseph, the chief executive who is largely responsible for the firm's good fortunes, arrived at Safaricom in 2000 the company had 20,000 customers. Vodafone's bosses reckoned that the Kenyan market would top out at 400,000 customers. Now Safaricom has 10.5m and room to grow further. It is the most profitable business in eastern and central Africa, earning profits of $223.7m in the financial year to the end of March, up 16% on the previous year.

Safaricom's customers base is very strong and growing indeed. If you look at Kenya's registered mobile phone users of 10.5m and population base of 37b people, the penetration rate is only 28% as compared to matured markets in Malaysia of 86% or 23.3m customers.The customers base for Digi is 6.4m while Celcom is 7.2m. As per the Annual Reports, Digi earning profits is USD303m(RM1b) while Celcom's is USD280m (RM925m). You can see that due to growing in an untapped market, net profit margin for Safaricom is a healthy pink!

Mr Joseph quickly decided to go after “pay as you go” customers, who pay for mobile airtime in advance, and therefore do not pose a credit risk to the operator. He introduced billing by the second—a big deal for those earning pennies. And he revamped the firm's brand, reasoning that the poorest customers are the most price-sensitive, and that a strong brand can help keep them loyal. His most enduring achievement is likely to be M-PESA, a pioneering service that lets Safaricom's customers send money to each other by text message.

Neat. Do we have such package here in Malaysia? No need to rely only on Mayban2U etc anymore?

Safaricom must fend off competition. Not from Celtel, Kenya's second provider, which seems content to earn dividends in Safaricom's shadow, but from France Telecom, which recently bought 51% of Telkom, the state fixed-line monopoly, and Econet, a new Indian-owned network.

The other big telco big players in Africa which are doing well are MTN(market value USD33b) of South Africa and other fixed line operators like MarocTelecom.

Investors, especially Kenyans new to playing the stockmarket, will hope that Safaricom can shrug off such rivals. The hefty premium at which shares traded as soon as markets opened might suggest that the government undervalued the stake that it sold—perhaps to ensure a successful debut for Safaricom. Possibly the exuberance of small investors or stock flippers, who purchase shares in a hot IPO and sell them as soon as they start trading, may be playing a part. But even if Safaricom's shares turn gently back towards earth as profits are taken, they have already shown a winning bet on Africa.

* China's inflation rate is expected to slow down to 7.7% in May according to people familiar to the data. The average estimate by analysts is 8%. Will we be seeing the change of monetary policy stance soon?

* The Shanghai market dropped more than 7% today as investors sold off banking shares in view of the further credit tightening, inflation worries and a weaker US market. China Central bank yesterday proposes the bank's reserve ratio to be increased to 17.5% by June 25.