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Safaricom Plc (NSE: SCOM) reported a 14.1 percent y/y growth in FY18 EPS to KES 1.38, slightly above our FY18E estimates of KES 1.35.

Similarly, falling in line with our estimates was operating earnings (EBIT) which stood at 79.2 billion shillings against analyst’s estimated EBIT of 79.0 billion shillings.

Total revenue rose 9.8 percent y/y to 234 billion shillings against 237 billion shillings in-house estimates. This was supported by increased usage across all revenue segments (voice 2.3 percent, SMS 6.2 percent, mobile data 24.1 percent, fixed data 27.3 percent and M-PESA 14.2 percent).

Directors recommended the payment of a final dividend of KES 1.10 per share. This was in line with our estimate of 1.08 shillings.

“We maintain our HOLD recommendation against our target price of 26.27 shillings. This represents a 7 percent downside potential against the latest market price of 28.25 shillings,” said analysts from Genghis Capital.

Positives:

Service revenue edged up by 10.0 percent y/y to KES 224.54Bn. This was driven by robust growth in M-Pesa (+14.2 percent y/y), mobile data (+24.1 percent y/y) in addition to a 27.3 percent y/y growth in fixed service revenue.

Growth came as a result of both subscriber base expansion, as well as ARPU improvement, with the operator’s total customer base and blended ARPU increasing by 5.1 percent and 0.4 percent y/y, respectively.

On the other hand, voice revenue grew by 2.3 percent y/y contributing 42.6 percent of service revenue while SMS revenue grew by 6.24 percent y/y, contributing 7.9 percent to service revenue.

Looking ahead, we expect an 11.9 percent y/y growth in service revenue to KES 251.37Bn in FY19F.

This will be driven by;

M-Pesa Revenue; The newly launched products (e.g. Safaricom App, One Tap) in addition to growing Lipa Na M-Pesa will increase convenience and ARPU.

“In light of this, we expect M-Pesa revenue to record a 3-Yr CAGR of 23.2 percent in FY18A-FY20A,” said Genghis.

Following the FY18 financial performance, M-Pesa revenue was up 14.2 percent y/y in FY18A to KES 62.9Bn. M-Pesa contribution stood at 28.0 percent of service revenue in FY18A with contribution expected to grow to 32.3 percent in FY19F.

The telco has over time increased M-Pesa penetration to 83.5 percent of its total customer base. 30-day active customers grew by +8 percent to 20.55Mn while the 30-day M-Pesa ARPU rose 3.6 percent y/ to KES 306.11.

Moreover, growth was supported by increased Lipa Na M-Pesa transactions which increased by 63.6 percent y/y after a 50 percent reduction of the Lipa Na M-Pesa merchant fees.

Mobile data revenue and fixed service revenue. We noted the robust growth in mobile data revenue (+24.14 percent y/y) and fixed service revenue (+27.29 y/y). This was on the back of fast growth in active mobile data customers (FY18A: +6.2 percent y/y) and mobile data ARPU which grew 13.0 percent y/y.

“We expect mobile data revenues to grow by 26.45 percent y/y in FY19F. On the other hand fixed service revenue 3Yr CAGR growth (FY19F: +21.34 percent y/y) will be boosted by increased fiber network roll-out and connectivity to homes. The fiber network currently passes by 141,000 homes and connecting 15,000 businesses,” Genghis said.

EBITDA margin improved by 40bps to 48.3 percent in FY18A. The improvement is in line with our estimate of 48.5 percent. This was as a result of cost savings from;  i) lower transmission costs ii) falling network operating cost which includes fuel cost and iii) lower IT operational costs.  Notably, EBIT stood at KES 79.3Bn against our FY18 estimates of KES 79.0Bn which was also ahead of management guidance (KES 71Bn-KES 75Bn).  We expect EBITDA margins to clock 50 percent in FY19F driven by our anticipated stronger revenues (M-Pesa and Mobile Data) and also as capex intensity reduces.

Dividend Yield up to 3.9 percent y/y: The board has recommended a dividend of KES 1.10 per share – an increase of 13.4 percent, but slightly above our expectations of KES 1.08 per share: The implied dividend yield is 3.9 percent for FY 18A, vs. our expectation of 3.8 percent.

Risks: