SafariBomb: Too Good To Be True?
So, I was visiting a friend this weekend and she started talking about Safaricom’s share price. Apparently, her brother is a member of this investment group that has bought Safaricom shares and they’re getting nervous because the share price isn’t moving up and they aren’t making any money. According to an article in BD Africa:
“Despite there being no obvious material shift in the telecommunications company’s fundamentals since its listing at the NSE, the share price has been on a steady decline from a high of Sh8.15 attained on June 9, its first day of trading at the bourse“.
Well, according to my friend, this statement from BD Africa, about there not being any “obvious material shift in their funny-mentals, fundamentals is incorrect. Why? because Safaricom apparently “forgot” to report a substantial debt they were carrying on their books(I tried to find the link to the article that mentions this debt, but couldn’t find it (if you have it, please drop the link in the comments section).
I mention this issue of Safaricom’s moribund share price because I think it fits into this wider issue that everyone has been discussing regarding this global financial crisis and the ubiquitous fraud that preceded and in some cases created it.
Yet another article in BD Africa is talking about commercial banks that loaned billions of shillings to consumers who wanted to purchases Safaricom shares and now that the share price isn’t moving, these banks are supposedly getting nervous (they don’t think people will be able to pay back the loans). But are the banks really getting nervous?
I mean, this same scenario happened in Russia: banks gave out all these loans that allowed people to buy shares. When the people couldn’t pay back their loans (because the shares didn’t increase in price), the banks in Russia told them that they could pay back their loans by letting the bank keep their shares. And guess what happened to the share price after the banks re-possessed them? Voila! they went back up and the “bankers” in Russia who now “owned” all those “shares” ended up making a killing.
I think that’s what might happen in Kenya. These banks are going to tell people who can’t afford to repay their loans to give up thier shares. Then, the banks will get together with the brokers and they’ll manipulate the share price so that he shoots up. Once the price shoots up, the bankers and the brokers will end up making a killing (either by selling those shares for a profit or by owning a large chunk of Safaricom shares).
The Nairobi Stock Exchange is teeming with all sorts of conflicts of interests, but nobody wants to talk about Them. Instead, people would rather spend time on Kenyan business blogs, trying to make strange predictions about whether a companies stocks will go up or down. I’ve always wondered what people meant when they said they had a: “companies fundamentals” and thus, could predict where it’s share price would go. It’s all bullshit because nobody knows (well, nobody but the CEO, CFO and the brokers who are in cohots with them).
The game is rigged. Are you a sucker?
**Additional reading on how it all went wrong (Fool me once, fool me twice…)
Safaricom always struck me as an oddity. How else could an 8 year old company make profits of over $300 million? Before you mention “Google!” lets remember that this is a Third World economy with low purchasing power, poor infrastructure and high corruption. Google didnt have to spend so much in order to shoot to the tops. On the other hand, Safaricom had to borrow and spend billions of shillings putting up infrastructure from scratch. How they can then go ahead and make billions is a mystery … Another thing: why doesn’t Michael Joseph want to leave? If I were him – and I’m sure most would agree – I would quit while I was ahead. His contract was expected to end sometime around 2003 in expectation that the company he was setting up would have established itself. Now, we’re in 2008 and counting. I decided not to buy Safaricom shares because something in that company just ain’t right.
Godfrey,
ever heard of the trem “pent up demand”? That could xplain safaricom’s success.
what I find an oddity is your reasoning i.e. the profits generated by safaricom are imposiible since it’s in ” Third World economy with low purchasing power, poor infrastructure and high corruption. ”
As much as there might be some truth to this, this is no reason why profits can’t be made. So long as there’s demand, then the profits would follow.
Also remember that safaricom and Zain were charging premuims for service, they were not cheap even by International standards, basically coz they did not have any competition.
Also, it would not be wise for Michael Joseph to leave, If I were him I wouldn’t. There are other avenues for revenue that have come up since safcom’s inception, especially it’s money transfer biz M-PESA and now it’s ATM, and now they’ll be connected to fiber. There’s alot of room for them to grow.
The mystery of Safaricom is this: how can they make profits in excess of $300 million a year, when their debt is almost equal to or greater than this? Don’t they have provisions for debt in their books? And if so, does it mean that Safaricom’s annual revenue is probably over $500 million? In as much as Kenyans have peculiar calling habits, I don’t think so! Even today, inspite of the fact that most of Kenya is covered, Safaricom still needs to spend tens of billions of shillings on new infrastructure and yet they keep posting profits. Where is the money coming from?
GODFREY,
It may be true that they have that amount of debt, however, they may choose to carry it as Long term debt on their balance sheet. That means that it will not be due for a number of years depending on how they and their creditors/ debtors choose to structure it.
Thus, they’ll only be required to expense the current portion of the debt. Example, if their total debt is $300 million as you’ve mentioned, maybe they’ve decided to pay it in 15 years, and as such only $ 20 million of this amount would be actually paid and recognized as an expense every year, thus still having enough room for recognizing profits.
Godfrey, basically what I’m saying is that as much as they owe 300 million, they are not required to repay it the same year, I’m positive that it’s a long term debt they carry.
The mobile phone business is very capital intensive and as such huge amounts of debt on balance sheets are common.
Personally, I think the most important metric is CASH, not Profitability. They way accounting rules are structured, could mean you have lot’s of revenue but are not necessarily doing well. Cash is king
godfrey & mzeiya: Your economics & accounting are way off… though mzeiya does talk of CASHFLOW being more important than (immediate) profits esp when you are growing as a firm…
DEBT is what a company takes on. The higher the operation profit margins, the higher the ability to take on debt.
Re-payment of DEBT is NOT an expense. It is a balance sheet item. Payment of INTEREST is an expense & shows up in the P&L.
As mzeiya pointed out… safcon & zain had a DUOPOLY. Thus they could charge whatever they wanted. That said… Zain has turned up the heat on safcon. Many users (incl me) have switched over to Zain almost 100%. Forget dual-simming. Zain has helped cut my calling costs by 50% since 2 months ago.
(Its amusing to hear/read about non-residents discussing issues relating to Kenya when they have little knowledge on what’s happening on the ground)
COLDTUSKER,
The reason we’re discussing what’s heppening is coz we love our country and as such, it’s future and where it’s going is close to our hearts.
ARE WE NOT MEANT to discuss kenya’s issues coz we’re abroad ? That is absolutely ludicrous!! my friend.
And your misguided assertion that we don’t have knowledge on what’s happeneing on the ground ? you GUY, What century do you live in ? Have u no idea of what communication is there for ? i.e. phones and internet ?
We may not be as updated as someone living directly in Kenya but we’re not far off. Why do you always have beef with kenyans residing out of kenya ? did u want to venture abroad but things didn’t work out?
Next thing you’ll end up saying is that coz of kenyatta stealing land, you were not able to succeed. xcuses, xcusess all the time…
COLD TUSKER
Point of information: I am IN kenya
coldtusker:
A 50% reduction in your phone bill is an enormous saving in this era of inflation. How can safaricom compete with that kind of price point?
wow you people never fail to amaze me,why should their be a beef between residents and non residents?anyway the rate at which the safaricom share prices is declining is worrying,what is happening?regarding the inside trading brought up by east Africa Portland any culprits arrested?