STARCOMMS CLARIFIES LOSS SITUATION

Starcomms on Wednesday 17th September, held a stakeholders forum aimed at providing insight to the company’s performance for the half year ended 30th June 2008. Contrary to our expectations, Starcomms had posted a half year net loss of N1.014 billion on the back of turnover of N8.965billion. A swift market reaction to the result announced on August 14 saw the stock shedding 23% of its value, thus resulting in a need for the company to throw more light on its operational and financial performance.

We present below major highlights of the forum pending our equity note on the stock:

· Management reiterated that the result was adversely impacted by exogenous factors, mainly attributable to a spike in power costs (owing to sharp increases in diesel price during the period), and exchange rate related losses as a result of foreign currency debt. Diesel expenses as at end of Half year 2008 was approximately N583million, an increase of 82.7% over management’s budget figure of N319million. Management also stated that losses due to foreign exchange were approximately N233million.

· Management also stated that it made debt provisions of N172million in respect of Interconnect charges owed by four telecoms operators during the period.

· At the end of June 2008, Starcomms had an estimated net debt position of $26million, and cash balance $229 million, implying total balance sheet debt of $255million.

· It was affirmed that the company’s ownership structure remained intact, as the core investor (SN Communications Holdings ltd) increased its equity stake in the company to 29%. Management stated that the huge volumes observed upon listing was in line with the Nigerian Stock Exchange (NSE) rules on listing by introduction, which stipulated that the issuer offered 5% of its outstanding shares (approximately 350million) to the market to provide liquidity for the stock.

· Current subscriber base is estimated at 1.5million with average daily activations of 10,000 subscribers, while Average Revenue per User (ARPU) at $19 per user remains solid, and well above competitors ARPU; MTN $16/ user, Zain $12/ user and Globacom$ 14/user.

· The company’s network expansion plan is very much on course. Starcomms effective coverage now extends to 21 major cities in the country. The company’s coverage is expected to extend to 31 major cities by the end year. Management also stated that revenue projections were also on target.

· Starcomms intends to adopt the Co-location of base station infrastructure with competitors with a view to reducing costs. It is expected that this measure would greatly reduce capital investment costs on network development.

· Key strategies being employed by management in meeting its year end forecasts include, Aggressive growth of its higher margin data business, driving volume growth in its tele-centre business segment and development of product lines to cater for corporate customers.
While management has expressed great optimism in meeting its full year earnings forecast, we tend to adopt a more cautious stance in view of the company’s recent results. It is our view that the results for the next few quarters would be very crucial in determining management’s ability to meet key performance indices as stated in its offer prospectus. We will be publishing our recommendation on the stock once we get the required input for our financial model.