- Julians Amboko spoke with Safaricom CEO Peter Ndegwa on a range of issues, including political and currency risks in Ethiopia as well as the valuation of the company.
On May 21, the Ethiopian Communications Authority announced that the Global Partnership for Ethiopia, a consortium led by Safaricom Plc #ticker: SCOM, had obtained a license to operate in Ethiopia’s telecommunications sector as part of the efforts liberalization of the economy.
Safaricom said the consortium, in which it has a 55.7% stake, intends to start operations in 2022 with the deployment of a voice and data network.
Julians Amboko spoke with Safaricom CEO Peter Ndegwa on a range of issues, including political and currency risks in Ethiopia as well as the valuation of the company.
You are venturing into Ethiopia at a time of considerably high political risk considering the situation in Tigray and the upcoming elections. Are you worried about this?
Of course, there are risks that we have to take into account as part of the overall investment, but we have to look at Ethiopia as a long term investment. In Ethiopia we see a huge population, an extremely favorable demographics, and a country that is eager to move forward.
It is the only country that has a telecommunications operator and there is not another country that offers the potential and opportunity that Ethiopia offers. The political risk is present like in any other country, but the business case is actually positive.
Still on political risk, have Safaricom and its consortium sought a form of multilateral insurance, for example from the World Bank’s Multilateral Investment Guarantee Agency (MIGA), as a safety net in light of the risks? downside potential?
One of the reasons we have structured the investment vehicle like we did in the Netherlands is that the Netherlands has a bilateral investment treaty with Ethiopia.
One of the things that such a treaty helps you is to manage some of the broader risks you may face as an investor. Of course, we plan to take the appropriate insurance.
We did not make this decision as we were still awaiting confirmation of the license, but you would expect us to take out appropriate risk insurance to secure the business.
Currency risk is a major challenge in Ethiopia. Has the Ethiopian government made any concessions on this front that anchor your confidence in something like your ability to repatriate dividends when the time comes?
It is true that there are liquidity problems and currency fluctuations in Ethiopia. The government has made it clear that it is embarking on a process of economic liberalization, which includes the foreign exchange market. By 2023, the government estimates that foreign exchange will be largely liberalized.
Just to be clear, can we then make a deduction here that the earliest dividend we expect from the Ethiopian company is 2023?
Since this is an investment that requires significant capital outlays to start with, you don’t expect dividends to arrive early. We have every confidence that when we need to start processing dividend payments to shareholders, we expect liberalization to be on the line.
What do you think the average revenue per user landscape might look like in the medium term at least, given that you are entering a market that already has one player with the benefit of the former?
In thinking about Ethiopia’s business case, we compared ourselves to the region. Each country is at a different stage of development and at a different level of penetration and competitiveness.
The penetration of mobile communication is just over 40.0%. One would expect that once the market has two or three players, that number could reach 90.0% and more in a few years. Remember we also have market regulator population coverage targets as part of the licensing requirement.
So what we can say is that we intend to accelerate the deployment of our network for both voice and data to achieve the share of the population that our assumptions suggest we can achieve.
Unfortunately, we cannot disclose this at this point. The average revenue per user (ARPU) will be determined by the intensity of the competition, the speed at which we get to mobile money and other issues.
Away from Ethiopia, two months after the start of 5G trials, how is it going?
We are currently on around twenty sites and are targeting between 150 and 200 sites by the end of the fiscal year, when we will have been able to test several use cases.
What are some of the challenges, if any, that you have encountered in deploying 5G?
One of the challenges of deploying 5G relates to handsets. Remember, for example, the penetration of 4G compatible handsets in Kenya is only 40.0% and this is what we have tried to accelerate through Lipa Mdogo Mdogo through which we add a few million handsets 4G compatible every year.
So when do you think you have reached the “critical threshold” for the deployment of 5G in Kenya?
To accelerate 5G, we first need handset penetration to reach the right level. In three or four years, the penetration rate is expected to be around 70.0 percent.
Sometimes I look at the Safaricom share price and my valuation suggests that there might be a growing discrepancy between how the market is valuing the company and what the fundamentals suggest the valuation should look like. Do you want to know what you think?
While I can’t comment on where Safaricom is rated, what I can do is make as much information about the company available as possible to enable investors to assess the business.
There are three aspects to how someone assesses the prospects for a business. First, the growth opportunities that look to the future.
The second aspect is about returns and that’s where something like the dividends we pay come in. Safaricom is actually quite a diverse company compared to a typical telco.
Our intention is to continue to provide acceptable returns to shareholders. The third important aspect is therefore the way in which we manage the risks, be it cyber risks, regulatory risks, etc.