Safaricom’s Valuation drops by 7.50 Percent to 21.12 shillings Per Share

Financial analysts, Genghis Capital, have revised their estimates on the valuation of Safaricom to a target price of 21.12 shillings per share, down by 7.50 percent from 22.83 as estimated earlier.

Safaricom posted a 22.2 percent jump in earnings per share (EPS) in FY17A to 1.21 shillings below Genghis’ FY17E EPS of 1.26 shillings.

Genghis has now projected an 11.6 percent EPS growth in FY18F versus the previous estimates of more than 16.7 percent attributed to a reduction in EBIT by 4.7 percent (FY18F) from their previous estimates and a 12.8 percent reduction (FY18F) in the net financing cost estimates.

According to Genghis, MPESA is Safaricom’s bread and butter. The analysts say that Mpesa as a standalone business has turned into a major revenue contributor for the telco business.

“The Mpesa business keeps surprising us, at 25 percent of total revenues (FY17A), a 10 percent in 4 years. CAGR from FY13A and revenues growing from 17.6 percent to 25.9 percent in FY13A-FY17A. We forecast c. 16.1 percent 5 yr. CAGR growth in M-PESA revenues over FY18-FY22,” Genghis said in their statement.

The overall penetration by Safaricom and also increasing penetration (66 percent active Mpesa users of Safaricom’s customers) of Mpesa among Safaricom’s customers (+14.6 percent to 19Mn in FY17A).  At 71.2 percent overall market share in FY17A and a 67.6% Mpesa market share, indicating there is potential for further growth for the telco.

Genghis notes that there is an increased number of transactions per user and a rise in the average value of each transaction of M-PESA. FY17A, M-PESA ARPU (+15% y/y) and subscriber growth (+18.2% y/y) were the contributors of the growth to see M-PESA revenue grow 32.7% y/y.

Genghis further said that Safaricom has a higher bet on data. “The telco business has contributed the highest share (FY17A: 75%) to Safaricom’s revenues in the past years. Interestingly, a look at the numbers portend the same trends between Safaricom and its peers with regards to declining voice and SMS segment with data taking up the lead.  We expect data usage to continue increasing ( FY18E: +28.%) noting that the company is in the process of increasing the largest  4G sites work in the region currently covering  25% of Safaricom’s network while 3517 3G sites are covering Safaricom network,” read part of the statement from the analysts.

The analysis of Genghis of SSA telco market implies that Safaricom trades 7.1x FY17E EV/EBITDA (at a 5 percent premium to the sector average) and 14.9x FY 17E P/E (+5 percent premium)  to Bloomberg’s MESA universe of the Middle East and African listed telecom.

The analysts believe that Safaricom’s premium valuation over peers stems from:

• A higher ARPU expansion and EBITDA margin improvement
• A fair competitive environment
• Steady Cash flow facilitating a good pay-out
• Strong market positioning

The higher weighting in the NASI ( 60 percent of the overall market) makes it very liquid and attractive to domestic and international investors.