Safaricom Records 22.9% Growth in 6 Months Results

Safaricom Limited announced results for the 6 months ending September 2015, recording 22.9% y/y EPS growth to KES 0.45. The results were above expectation (1H16 forecast of KES 0.41, 8.3% above forecasts).

Key highlights

Voice revenue recorded 3.5% y/y growth on the back ofstrong y/y subscriber growth: Safaricom’s subscriber base grew an impressive 14.9% y/y to 21.5m subscribers despite mobile penetration rates registering 83% levels to see Safaricom further secure the largest subscriber marketshare in excess of 67%. Voice ARPU however contracted 9.9% y/y courtesy of lower Minutes of Usage (MoU). SMS revenue grew 11.3% y/y, albeit contracting 8.6% h/h as 2H15, as the Bonyeza Ushinde Promotion spurred 2H15 retail centric SMS revenue growth.

Non-Voice Revenue cumulatively recorded 24.4% y/y growth to account for 46.8% of service revenue: MPESA and data revenue recorded impressive growth, with y/y growth of 24.1% and 40.9% recorded on the back of strong MPESA and mobile data subscriber growth of 10.9% and 24.9% respectively.

Safaricom’s mobile data subscriber base continues to record above industry growth courtesy of its discounted smart phone sale which leverages off its Vodafone’s handset deal. We expect MPESA and data growth to continue registering double digit growth in the medium term as Safaricom’s investment in G-2 MPESA system as well as 3G and LTE roll out continue to spur usage and product innovation going forward.

Impressive EBITDA margins realized (43.7%) despite increased opex intensity (+50bps y/y to 22.5%): Operating expenses recorded 14.7% y/y increase, recording lower growth in comparison with total revenue growth (+22.5% y/y) as Safaricom’s cost management measures continue to yield results.

We note that MPESA top ups (as a % of total top ups) have increased from 37.0% in FY15 to 41.0% in 1H16, therefore reducing top up card production and circulation spend. Despite currently being margin dilutive at approximately 21%, we also believe as MPESA EBITDA margins continue to improve, an organic company EBITDA margin improvement will be noted going forward.

Forex and interest volatility had little impact on Safaricom, with its KES 0.78bn forex loss relating to handset purchase and top up production costs offset by a KES 0.69bn gain on USD denominated bank deposits. Additionally, Safaricom paid down its borrowings (-96.0% y/y to KES 0.2bn) to see it maintain its negative debt position (net cash at KES 13.2bn). We expect Safaricom to further pay down its debt as the last tranche of its corporate bond matures in December 2015.

Safaricom recorded a 38.5% decline in free cash flow stream to KES 13.2bn. This is attributable to capex increase, as 1H16 capex relating to 3G and 4G rollout as well as the National Police Service project increases capex intensity to 22.5%, from 15.5% recorded in 1H15.

Going forward, we expect Safaricom’s focus on increasing 3G coverage to 80%, commercializing 4G network rolled out and increasing the smart phone penetration rate to sustain strong mobile data growth.

Additionally, with MPESA penetration rate at 88%, we believe further MPESA based product innovations and partnerships will aid in P-2-P, P-2-B and B-2-B transaction value growth, further propping MPESA ARPU growth.

Recommendation

On the back of better than expected results further easing Safaricom’s trading multiples (trailing P/E of 16.3%, EV/EBITDA of 7.3x) we maintain our Accumulate (Buy on price dips) at the current price of KES 14.30.