Safaricom Announces Half Year Results

Safaricom Limited (NSE: SCOM) announced results for the half year ended 30th September 2015 with the following highlights:

• Sturdy growth on the top line bolstered by the strong growth of non-voice service revenue: Revenue propped up by 22.5% to KES 97.2Bn buoyed by 40.9% increase in mobile data revenue and 24.1% growth in M-pesa revenue. Mobile data ARPU and M-pesa ARPU surged by 15.14% and 4.68% (respectively) driven by the 15% customer growth to 25.1Mn, a 25% growth of the 30 day active data users and 23% surge in 30 day active M-pesa users.

• The giant telecom’s contribution margin improved to 66.23% in H1 2016 from 63.80% as at H1 2015. This was attributable to the robust revenue growth, which heavily outweighed the rise in the direct costs. EBITDA margins were similarly enhanced to 43.8% (H1 2015, 41.2%), by the 12% growth in the service revenue and improved cost containment.

• Net Income accelerated by 23% to KES 18.08Bn resulting in improved profitability ratios. Return on equity stood at 18.70% (16.87%, H1 2015) while the return on assets stood at 10.29% (H1 2015, 9.47%). Earnings per share grew by 21.6% to KES 0.45, deciphering into an earnings yield of 2.96%.

• Gearing ratios were lower for the period under review, following the part repayment of their short term borrowings. Total debt to EBITDA improved significantly to 20.8% from 37.2% previously whilst the total debt to total assets ratio improved to 4.6% from 8.0%. We anticipate further improvement on the gearing based on the maturity of their KES 4.5Bn corporate bond and KES 2.4Bn loan facility in December 2015.

• Liquidity ratios were constrained for the period under review as illustrated by the weakening of their current ratio to 56.6% (H1 2015, 73.7%) and cash ratio to 27% (H1 2015, 48%). The net cash position was KES 13.16Bn, a 27% decline from the previous year.

• The 38.5% decrease in free cash flow was buoyed by payments for accelerated capital expenditure towards the fibre roll out as well as significant supplier payments for the National Police Security Network.

• On the back of better than expected results, trading multiples eased off. The P/E and P/B multiples stood at 17.27x and 6.30x (respectively) against the previous period’s multiples of 19.85x and 5.93x, indicative of some correction on the stock. We maintain our recommendation as BUY based on the current price of KES 15.45, reflecting a 34% upside on the stock based on the half year earnings which fell above our earlier expectations.

Outlook

The outlook for the rest of 2015 up to March 2016 is stable, with projected and continued positive growth on both M-Pesa and data revenue lines. Completion of the National Police Security Project in the course of this month is set to enhance data growth.

We anticipate that the government will launch the M-Akiba platform for government bond purchase in the coming year, hence driving the M-Pesa revenue growth. All this factors will ensure that the telecom operator maintains steady growth on both M-Pesa and data ARPU going forward. A slowdown on SMS ARPU and a continued deterioration on voice ARPUs is also highly probable based on the competition.