Safaricom Ethiopia business’ viability appears uncertain
However, Safaricom Chief Executive Officer Peter Ndegwa remains upbeat that Ethio telecom will have to adjust the prices in the next three to six months in order to address the concerns
Safaricom Ethiopia business’ viability appears uncertain after it apparently emerged that the company is heavily dependent on state-owned Ethio Telecom and rising prices in order to thrive.
The development comes after Safaricom Ethiopia in December reported it had registered M-Pesa increase in customers by 245 per cent to 10.8 million as at December 2024 from 3.1 million in December 2023 driven by airtime purchases and cross border money transfers.
Analysis by Sterling Capital on Safaricom Ethiopia, reveals that the reason Ethio Telecom should ideally do this is due to the unsustainable nature of the business for both operators at current prices given the devaluation.
According to the analysis, the average revenue per user (ARPU) for Safaricom in Ethiopia is US$0.17 (Ksh 21.99) on voice and US$1 (Ksh 129.5) on mobile data compared to US$1.8 (Ksh 232.83) and US$2 (Ksh 258.70) respectively in Kenya.
“Given the modest size of Safaricom’s Ethiopia business, the telecom is unable to hike up prices at a whim given the high customer churn (shift to the more affordable operator) that would occur,” the Sterling Capital analysis shows.
Due to these concerns, Safaricom Ethiopia would be forced to push forward their earnings before interest, taxes, depreciation, and amortisation (EBITDA) breakeven, as the business remains impractical at current pricing.
However, Safaricom Chief Executive Officer Peter Ndegwa remains upbeat that Ethio telecom will have to adjust the prices in the next three to six months in order to address the concerns.
Concerns around M-Pesa
Another issue of concern in Ethiopia relates to the uptake of M-Pesa. Whereas in Kenya, M-Pesa emerged to solve a cash transfer challenge such as the transfer of cash from one part of the country to another, in Ethiopia, banks had already solved this problem, yet it becomes apparent that while many avenues for cash transfer still exist, the use of cash is still high in the region.
However, over the same period, the total revenue from M-Pesa declined by 74 per cent to Ksh 9.8 million in the nine months to December 2024 from Ksh 38.4 million in the same period in 2023 while total transaction value declined by 30 per cent to Ksh 14.7 billion and volume shot up 1023 per cent to 124.8 million.
Safaricom launched M-Pesa in Ethiopia in August 2023 with Kenya extending its M-Pesa global service to the country to facilitate cross-border money transfers.
In October 2024, Ethio Telecom took its first steps towards privatisation with the government selling a 10 per cent stake in the state-owned telco. The telco offered 100 million ordinary shares to Ethiopian citizens at a fixed price of 300 Ethiopian birr per share. The offer was extended to February 14, 2025.
However, Safaricom management’s view is that M-Pesa will solve the cash payments problem such as reducing the use of cash for transactions.
“This poses an interesting dilemma philosophically, given the fact that while the Government would be greatly incentivised to have cash moved to formal systems such as banks and mobile money for ease of tracking and execution of monetary policy, citizens have minimal incentive to accommodate such a move,” Sterling Capital admits.
In Ethiopia, it is not easy to access the US dollars from banks, which has led to the existence of a thriving black market for US dollars. Removal of the incentive for citizens to take up formal cash payment channels is an uphill task.
“In light of all these factors, it may be a while before the use of M-Pesa becomes a commonality in the region,” Sterling Capital analysis explains.
The operator is set to increase their debt uptake to accommodate the subsidiaries needs going forward. Management stated that they are targeting a 20-80 debt-to-equity split in the medium term, which would be a shift from the current 9-91 split.
Going off the current US$.1.8 billion worth of equity invested into the business, translates to a total debt stock of around US$.400 million in debt over the next few years.
There is also concern that the Central Bank of Ethiopia recently started a central benchmark rate regime and given the state of inflation which is projected to tick upwards given an unwinding of fuel and electricity subsidies means that interest rates should rise quite materially to offset further inflationary pressures going forward.
The foregoing should raise finance expenses quite significantly in the subsidiary – finance costs that are likely to be riddled with FX losses given the country’s current position of increasing money supply to fund the deficit.
Despite all these concerns, we note that the telecom has sought to execute their strategy quite prudently.
“As has been mentioned previously, we note that they are localising larger swaths of their OPEX locally, which will help in reducing their FX related losses. Further, the businesses regional and youth-centered approach toward execution is impressive in our view and will likely yield long-term dividends,” Sterling Capital notes.
The question that remains, however, is how long the entity can persevere through the material macro difficulties to create a sustainable long-term business.
