We recommend a HOLD on Safaricom based on the current market prices. The counter is currently trading at a P/E multiple of 15.35x (at a price of KES 28.55, as at 29th May 2020) a 15.5% discount of over its 3-year P/E average of 18.17x. The company is a market leader in the telecommunications industry with a mobile subscription market share of 64.8% (2Q2019/20).
The key revenue drivers for the company are MPESA and mobile data, contributing 33.6% and 16.2% to service revenues respectively for the FY2020.
In FY2020 the company’s after-tax profits grew by 16.2% y/y in FY2020 to KES 73.7 billion (FY2019: KES 63.4 billion) mainly driven by MPESA and mobile data. See a breakdown of the results of here:
The 12.5% y/y growth in MPESA revenues to KES 84.4 billion was underpinned by 12.1% y/y growth in 30-day active MPESA customers to 24.9 million while chargeable transactions (including betting) grew to approximately 13.0 from 12.0 transactions in FY2019. MPESA’s P2P (Person to Person transfer) and new business grew by 14.6% and 43.4% respectively. The company is focused on increasing P2P use cases to encourage more transactions being done within the MPESA ecosystem (which will result in fewer withdrawals). Savings and Lending (Fuliza, Mshwari, KCB MPESA) was the biggest contributor to new business growth. The company is planning to extend lending to SMEs.
Safaricom is keen to expand MPESA outside Kenya. In FY2020 the company together with Vodacom South Africa purchased MPESA intellectual property rights from Vodafone. This now gives it flexibility to provide MPESA services within the continent in partnership with Vodacom. Proposed regulatory laws on mobile lending (agent to agent interoperability which would quickly grow competitors’ agent networks) and the disruption of the betting industry are some of the challenges the company is facing with regard to MPESA. We are optimistic that the company’s large M-PESA ecosystem (agent network, customers and business vendors) coupled with product innovation (e.g. MALI), better coverage and reliability will deter users from shifting to other networks.
Mobile data (+12.1% y/y to KES 40.7 billion) saw an improvement in Average Revenue per User (ARPU) in FY2020 as the company achieved strong uptake of its new “No expiry” bundle, with 30 day active customers growing by 14.0% to 22.0 million. Customer usage grew by 65.3% to 1,204.0 megabytes with data customers using over 100mbs grew by 23.7% to 9.1 million. We opine that there is room for growth in this segment. In addition, movement restriction will likely lead to increased usage of data as most people work from home.
With the current economic shock owing to the COVID-19 pandemic the company is likely to experience a slowdown in MPESA revenue growth in the short term. Although data usage is likely to increase with most people working from home, spending on bundles may be limited by job losses and pay cuts.