Airtel faces losing battle in Kenya, can still win a larger Nigerian prize

Higher Kenyan taxes on airtime and data give market leader Safaricom the chance to expand its dominance at the expense of second-placed Airtel Kenya, analysts say.

Kenya increased its excise duty on airtime and telephone services from 15% to 20% on 1 July, leaving mobile data and SMS charges unchanged. The market’s three largest players, Safaricom, Airtel and Telkom Kenya, have increased their prices as a result, while leaving the cost of their bundles of services unchanged.

The higher taxes are more likely to affect low-income earners as demand for airtime and data is highly inelastic, says Sarah Wanga, head of research at AIB Capital in Nairobi.

Kenyans are likely to respond by making greater use of bundles, where prices are unlikely to increase as much, she says. Bundles from Airtel and the third-largest player Telkom are cheaper, “but people prefer Safaricom because of the quality of the network,” Wanga says.

Safaricom has the broadest national coverage and in March became the first provider in East Africa to launch commercial 5G trials.

Dominance of mobile-money transfers creates a formidable defensive moat. Many of its customers have little reason to switch sides after a court challenge in 2019 led the company to offer airtime and data bundles without expiry dates. The amount of unused airtime, SMS and data in the year to March rose 24% to a record KSh5.7bn ($53m).

Even before the current excise duty changes, Airtel Kenya was losing ground to Safaricom, says Boniface Oyunge, an analyst at Mwango Capital in Nairobi.

  • Safaricom raised its mobile subscriptions market share from 63.6% to 64.4% between December and March, while Airtel retreated from 27.2% to 26.6%.
  • Telkom Kenya, meanwhile, held steady at 6.2%.
  • Airtel is “likely to lose even more customers by the next quarter,” Oyunge says.
  • The company and Telkom ended discussions over merging in August 2020, which would have led to the creation of a strong rival for Safaricom.

Nigeria prospects

Overall prospects for the Kenyan market remain strong. Mobile-money tariffs have been subjected to tax in previous budgets with minimum impact on usage, says Renaldo D’Souza, head of research at Sterling Capital in Nairobi. “Mobile phones are a necessity rather than a luxury item, and they will continue driving financial inclusion.”

But Kenya is the African market where Airtel Africa has struggled the most. In Africa as a whole, Airtel’s earnings before interest, tax depreciation and amortisation (EBITDA) margin trails that of Safaricom and MTN, due mainly to the dilutive impact of its East African operations, according to research from Tajudeen Ibrahim at Chapel Hill Denham in Nigeria. The company’s prospects in Nigeria are much brighter, Ibrahim argues.

  • Airtel’s EBITDA margin of 54.2% in Nigeria alone is ahead of Safaricom’s overall margin.
  • Nigeria contributed 40%, 49% and 48% of Airtel’s revenue, EBITDA and operating free cash flow, respectively, in the first nine months of 2020.
  • Chapel Hill Denham rates Airtel’s Nigeria-traded stock as a “buy” and has a price target of N1,228.21 ($2.99), more than double the current share price of 601.
  • The analyst’s valuation model for Airtel uses a 50% weighting for Nigeria, 33% for East Africa, and 17% for francophone Africa.
  • The research sees regulation as the biggest danger to the outlook, as unpredictable fines could hurt earnings. Weakening currencies in Airtel’s main markets are a further risk, it adds.

Bottom line

Airtel Africa is becoming ever-more geared to the growth prospects and risks of the Nigerian market.

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