Regulation Biggest Factor Limiting Safaricom Growth Trajectory

Subscriber growth

Subscriber growth for Safaricom is still growing despite competition, and even room to step up In FY17: Subscriber growth was 23.4% in FY16 – up from 21.6% in FY15. Safaricom has maintained its brand and reputation, a trend that has sustained its growth in the subscriber base providing it with more headroom for growth from all segments. We estimate a 66.6% market share in FY17 and a 67.0% in FY18. The significant higher bias is justified by our belief that the telco will continue benefiting from the growing population, increased usage of smartphones in addition to the company’s focus in touching lives of humanity positively. The company should also benefit from Kenya’s financial technology growth.

Resilient margins driven by:

The success story on data… Aiming for the Sky? Unquestionably yes!

This has been supported by increased usage of smart phones as well as adoption of 3G and 4G networks. We estimate that data revenue estimates for FY17 will grow by 28.4%. Market share of data revenue currently stands at 63.8% as at June 2016. We portend to see growth on the back of; i) Telco providing data bundles suitable packages for consumers. Currently, the telco provides different bundle packages that fits all individual, SMEs and Corporates; widening its customer base ii) Adoption of 3G and 4G networks are also key drivers for data growth. The 3G base station coverage is 80% (November 16) and the 4G network is presently in 32 out of 47 counties. As at June 2016 total number of internet/ data subscriptions stood at 26.8Mn.

M-Pesa …Is it yet everyone’s cup of Coffee?

M-pesa has now become a lifestyle to numerous subscribers. M-pesa is a mobile money transfer product used every second. Presently, 93.8% of Safaricom subscribers base are M-pesa users. M- Pesa is expected to relentlessly record strong growth from the increasing Lipa na M-pesa payments cropping up from the rising number of merchants. We estimate a 21.3% growth in FY17. This is moreover justified by our belief that there exist more prospects for the super revolutionized product namely;

• School fees payment via M-pesa
• 2017 elections will also present an opportunity for the company to amass a significant share of the spending
• Promotions instigated by the company will also ramp up more business for the company
• More companies/ business integrating their businesses to Safaricom banking services.

Voice plodding will still contribute a marginal growth in revenues as we note a paradigm shift to other segments.

Our view

Data revenue will surge marginally in the near future bringing our estimates for FY16E and FY18E to KES 93.6Bn and KES 96.4Bn (respectively). Our expectations translates to a decline in contribution revenues to 38.5% by FY2020E. The marginal growth will be driven by i) The company’s effort in maintaining its current market share ii) Increasing promotions to entice customers to use more minutes- for instance, the ongoing “storo bonus” where the customer gains more minutes after attaining a set limit. Though, we feel that in the long term, Safaricom has to fight hard to maintain their market share with the current adoption of other call services such as WhatsApp calls and telegram etc.

EBITDA Margin Improvement, Capex waning will propel the company’s bottom line. Steady capital spending, plus free cash flow, will most likely permit a dividend increase of some 20% in FY2017E. This still allows the company to realize a strong net cash position during FY 2017E, leaving it an ample scope to take advantage of the opportunities that may arise or, in the case of additional investments. We therefore expect an upward swing in EBITDA margins from 42.4% in FY16A to 47.o % in FY 17E.

EBITDA guidance by the management ranges between KES 94Bn and KES 97Bn, mainly attributable to cost savings by i) Lower transmission cost ii) Falling network operating cost which includes fuel cost iii) IT operational costs. Based on the company’s unique cost containment measures, we surpass our EBITDA to KES 98.87Bn in FY17E.

Other Developments

Regulations might limit the Company’s growth trajectory. In our analysis, we approach the regulations factor as a key determining factor for the growth of the company. We will focus on 2 key trends that are likely to pose a challenge to the telco operator.

• Communications Authority of Kenya (CAK) published a new requirement – infrastructure- sharing regulation 2016 – on 5th April 2016, compelling telecommunication service providers to share up their infrastructure. The regulation will look into spectrum utilization, quality of service and broadcasting amongst others. The new regulation will likely cause friction among market players. We are keenly looking to see how this will work for the service providers and how it will impact the telco space, especially for Safaricom Ltd which has made huge investments in infrastructure.

Kenya Interbank Transaction Switch (KITS).

• The Kenya Bankers Association (KBA) unveiled Intergrated Payments Service Ltd (IPSL) – the company facilitating direct transfer of money between banks – in May 2016. The transaction cost is expected to be lower than Safaricom fees on M-pesa transactions. We expect that the launch will not have an immediate impact on M-pesa transactions. Most likely, Safaricom will re-price their transactions fees to go a bit lower or they could just match up the transaction fees. Already, this can be explained by Safaricom’s move to eliminate charges on transactions of KES 100 or less, on a recent promotion dubbed “Mpesa Kadogo”.

• Competition from other players in the mobile space. We highlight competition as a challenge to Safaricom as this eats up their market share. One upcoming player that poses that risk is Equity Group Ltd (NSE EQTY) which acquired an MVNO license in 2014. With the huge subscriber base, the bank has been gaining traction. In our opinion, this threat will also take a little bit of time as customers uptake is expected to grow gradually. Equitel, has a current subscription of 7.0% (June 2016).