Safaricoms growth compares with big league operators in India, Latin America By STAFF WRITER THE EAST AFRICAN A rush for Safaricom Ltd shares by foreign investors is expected as sophisticated international punters keen on a foothold in high-growth mobile telephone markets in Africa chase a piece of the action in the largest flotation in the history of East Africas capital markets. Excitement and irrational exuberance, especially among retail investors, will also be a factor. But the sophisticated and more calculating international investors will be attracted by Safaricoms growth profile. A share in an emerging market wireless operator with Safaricoms growth profile is a must-have for the contemporary international punter. In terms of fundamentals, Safaricoms performance compares very well with the performance of its peers in Africa mainly mobile operators with exposure to high-growth emerging markets such as MTN, MTC, Millcom and Orascom. Safaricom Ltd is in the same league with mobile operators in India and Latin America, markets with very high growth and a similar experience. The South African conglomerate MTN is a good example. Like Safaricom, this company has benefited a great deal from a positive market environment with high profitability margins, strong subscriber growth and earnings that exceed estimates. MTN has subsidiaries across the continent, including in South Africa, Ghana, Nigeria, Uganda, Ivory Coast, Swaziland, Congo, Rwanda, Zambia, Benin, Sudan and Cameroon. Because of its strong capital structure across company subsidiaries and low gearing, MTN has in recent times been mentioned regularly as a merger and acquisition target. Another player in the same league is MTC. Many of its subsidiaries have outperformed their peers on the back of strong growth in its footprint particularly in sub-Saharan Africa, through the brand Celtel, which it acquired in 2005 for $3.4 billion. The potential listing of its international operations in London has also given MTC more exposure. Recent acquisitions of assets in Saudi Arabia and Iraq have raised the companys gearing making it difficult to fund additional acquisitions with cash. MTCs African footprint includes Burkina Faso, Chad, Congo, DRC, Gabon, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda, Zambia and Sudan. Yet another peer of Safaricom is Orascom of Egypt. One of the fastest growing mobile operators in Africa, Orascom has maintained a rapid subscriber growth. However, recent regulatory problems in its Algerian operation have been weighing on the performance of its stock. It has operations in three countries Algeria, Egypt and Tunisia. Another peer of Safaricoms on the continent, Millicom Ltd, has also been expanding rapidly in terms of subscriber growth in the past four years. Today, the stock of the company is perceived by most investors to offer exposure to high-growth markets. Millicom has pursued a disciplined approach to growth, a well-diversified portfolio of countries and mergers and acquisition potential. Still, given Safaricoms geographical location, profitability levels and growth expectations, MTC, Orascom and MTN are the companies against which potential investors will compare the Safaricom offer. Apart from comparing Safaricom with its peers, sophisticated institutional investors will also want to look at fundamentals. According to contemporary thinking, the most important valuation multiple for telecom investors is what is referred to in industry parlance as EBITDA (Earnings before interest, taxes, depreciation and amortisation). The international investors do not focus on PE (price-earnings) multiples for telecom companies. This is especially true with respect to valuation of high growth emerging markets telecom operators such as Safaricom. According to a valuation conducted in November last year by investment bankers Morgan Stanley, it was estimated that Safaricom was worth between Ksh218 billion and Ksh282 billion ($3.3-4.2 billion). Indeed, the Safaricom IPO has come against a background of growing foreign investor confidence in the Nairobi Stock Exchange. Foreign investor confidence soared after the inception of the central depository system (CDS), which is supported by international banks such as Stanbic Bank and Barclays Bank of Kenya. As a matter of fact, the biggest complaint of the active foreign investors on the NSE has been about the dearth of large listed companies and the lack of shares to buy. Existing active foreign investor funds in Kenya together manage billions of US dollars and have the capacity to support the IPO without the participation of any new offshore foreign investors. Kenya has a fully liberalised foreign-exchange market that has matured greatly over the years and foreign investors can freely and easily move their funds into and out of the country. Investors from Uganda, Tanzania, Rwanda and Burundi will be treated as local investors for the purposes of the listing. This means that all citizens of member states of the East African Community will be allocated shares equally and will buy them at a discounted price of Ksh5 (7.57 US cents) per share. All other foreign investors must compete against each other and pay a premium price to be determined through a book building process managed by investment bankers Morgan Stanley, among other advisers.