Safaricom’s Dominance at NSE Minimises Portfolio diversification – Cytonn

Investors and Portfolio managers are being advised to take caution on equities market dominance by Safaricom, and in constructing a portfolio.

According to Cytonn Investments, “The allocation to Safaricom in line with its contribution to the NSE causes a risk, and minimises portfolio diversification.”

Cytonn Investments who examined the evolution of Safaricom’s share price and market capitalisation, its effect on the performance of the NSE, its performance in comparison to other listed Telcos in Sub Saharan Africa, and how it is likely to affect portfolio construction decisions note that Safaricom continues to be a key part of Kenyan equities portfolios because:

“Its size and stability anchors the value of local equities given that it has contributed to 54.7 percent of the YTD performance of the NSE, and its performance is also relatively unaffected by market performance. During periods in which investors in Kenyan banks and large cap non-financials lost value, Safaricom’s value remained steady. In the year 2017 to date for example, Safaricom shares have gained 39.7 percent while the Nairobi All Share Index has gained 29.1 percent.”

However, Cytonn says investors and portfolio managers “Should be cautious of the equities market dominance by Safaricom, and in constructing a portfolio, should look for ways to discount allocation to Safaricom to something lower that the 44 percent it represents in the market, in order to achieve a portfolio that objectifies performance and risk diversification.”

Safaricom, which is Kenya’s largest technology firm, accounts for 44.0 per cent of the Nairobi Securities Exchange (NSE) capitalisation.

Further, the  telco is the most liquid counter at the NSE, and has dominated on both the turnover of trade and also in determining the direction of the market given its weight, liquidity and the number of free float shares.

“Safaricom is currently trading at a trailing P/E of 21.2x as compared to an SSA average of other listed Telcos of 19.2x. In comparison to the Kenyan banking sector, which is trading at a P/E of 8.2x, Safaricom may seem overpriced,” according to Cytonn Investment Analysts.

In comparison with with the listed Telcos in SSA faced with the dilemma of great returns and diversification, investors in Naspers, a broad-based multinational internet and media group company listed in the Johannesburg Stock Exchange sought for a solution.

Naspers accounts for 20.5 percent of the FTSE/JSE All Share Index, 24.5 percent of the Top 40 Index and 24.8 percent of the Shareholders Weighted Index (SWIX), which are the top 3 indices used as benchmarks for investors.

“To maintain diversification and address the dominance by Naspers, portfolio managers in South Africa are now shifting their benchmark to the Capped SWIX, which was introduced in November 2016.

This variation rebalances every quarter to cap stocks at 10 percent of the index, creating less single-stock concentration. Such a variation is probably necessary for investors in Kenya’s equities market looking to safely have Safaricom on their portfolio,” notes Cytonn.