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Investment Recommendation Report: Safaricom

We recommend a HOLD on Safaricom. The counter is currently trading at a P/E multiple of 16.75x (at a price of KES 23.45, as at 25th January 2019). The company is a market leader in the telecommunications industry with a market share of 64.2%. (3Q2018) of total mobile subscriptions. This represents a 41.9% market lead over its closest competitor Airtel Kenya. The market share gap between Safaricom and its competitors has been supported by the company’s heavy CAPEX spend over the years. Mobile data and M-PESA continue to be a key revenue drivers for Safaricom. The company has continued to leverage on the success of MPESA with new initiatives being based on the money transfer platform. We also note that the company is also pursuing opportunities outside Kenya. For instance, Safaricom is in talks with the Ethiopian government to introduce M-PESA in Ethiopia. In spite of the rising competitive and regulatory pressure (anticipated regulations based on the dominance study) we remain optimistic that the company will remain competitive. Furthermore, even with the recent increase in excise taxes (on mobile money transfer services, telephone and data services), we opine that subscription numbers will not be significantly affected owing to the high costs of switching to other networks. The large M-PESA ecosystem (agent network, customers, business vendors…) coupled with better coverage and reliability will deter users from shifting to other networks. A key risk we see with the MPESA ecosystem is the proposal by CA to enhance and extend the mobile interoperability. This may see the introduction agent to agent interoperability. This coupled with the current wallet to wallet interoperability may help smaller operators grow their ecosystems much faster. Agent to agent interoperability will likely require lengthy and wide consultations to implement and thus will only be a possibility in the medium to long term.

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