November 2, 2018 / 6:58 AM / 9 months ago

UPDATE 2-Kenya's Safaricom warns that higher taxes could hit demand

* M-Pesa and data services drive service revenue growth

* Holds talks with government on impact of higher taxes

* Shares head higher after the results (Rewrites throughout)

By Duncan Miriri

NAIROBI, Nov 2 (Reuters) - Kenya’s Safaricom Plc warned on Friday that steep increases in taxes on mobile telephone and mobile internet access services could slow its momentum in the second half.

The company, part-owned by South Africa’s Vodacom and Britain’s Vodafone, said its core revenue for the first half to the end of September rose 7.7 percent to 118.21 billion shillings ($1.16 billion).

The increase was driven by fast growth in its mobile financial services business M-Pesa and mobile data, as well as fixed internet access to homes and offices. Analysts said the growth in M-Pesa beat their forecasts.

But the outlook for Kenya’s biggest mobile operator was clouded by taxes on its main services, which went up by half in September as the government sought to shore up its revenue, forcing Safaricom and other operators to increase prices.

“We are concerned that this will impact the momentum of the business,” Chief Financial Officer Sateesh Kamath told Reuters after presenting first half results.

Safaricom has begun talks with the government to discuss the tax increases, Chief Executive Bob Collymore said, adding the firm believed the taxes were adding pressure on consumers.

The Finance Ministry did not immediately respond to requests for comment.

The company is the dominant operator in the East African nation, commanding a huge lead over the other two operators, Bharti Airtel and Telkom Kenya, which is controlled by Africa-focused, London-based investment fund Helios.

M-Pesa allows people to send each other money and make payments at the touch of a button. In a country of 45 million people, about 21 million people actively use the service.

Revenue from that service jumped 18.2 percent to 35.52 billion shillings, compared with 14 percent growth attained in the same period last year.

Faster growth in M-Pesa revenue was driven by cash transfers between users of the service and new businesses signing on to accept payments for goods and services through the platform, Kamath said.

Users of M-Pesa, who can already borrow cash from local banks that partner with the service, will be able to access an overdraft facility on their accounts next week to enable them to pay for goods and services and repay later, Safaricom said.

“It will solve the problem that Kenyans have today, that is, having to complete a transaction and falling short of money at that moment in time,” Kamath said, adding it was too early to determine the impact of the new M-Pesa overdraft product.

Revenue from mobile data services and fixed internet services increased by double digits. Safaricom maintained its full-year free cash flow guidance of 85 billion to 89 billion shillings.

Its shares jumped 4.26 percent after the results were announced to trade at 24.50 shillings each. The shares have fallen 13 percent this year so far, but have fared better than the benchmark Nairobi index, which is down 24 percent.

$1 = 101.5000 Kenyan shillings Editing by Maggie Fick and Edmund Blair

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