A brief Introduction
Safaricom Group is East Africa's most profitable company. Safaricom is also the regions most valuable company with a market capitalisation of Kes 1 Trillion. Theyre in the telecomunication business..Voice and data etc., where they command a 65.8% market share in Kenya. Safaricom is also the Inventor of M-PESA, a world renown fintech or money transfer product, up until recently they only had operations in Kenya but they have now expanded into Ethiopia. Safaricom has a 55.71% stake in the Ethiopia joint venture. Ethiopia is a country with 115 Million people. Vodacom South Africa and the Government of Kenya are the anchor shareholders of Safaricom Group. The company's stock is publicly quoted on the Nairobi Securities exchange under the ticker SCOM:NSE.
Here is what I picked up from theyre recently released H1 2023 numbers:-
OPERATIONS:
Number of Customers +2.9% y/y to 43.17 Million.
M-PESA value and number of transaction +32% y/y.
Fibre to home customers +13 y/y to 173,240.
In Ethiopia they now have 1 Million customers and offer commercial services in 25 Cities.
FINANCIALS:
Total revenues +4.8% y/y to stand at Ksh 153 Billion powered by M-PESA and Data (fixed and mobile) revenues which grew by +8.7% y/y and 19.5% respectively.
Total revenues were negated by voice and messaging revenues which declined by 3.8% and 7.7% y/y.
EBITDA shrunk 4.3% y/y due to operating expesenses which surged +32.2% y/y.
Diluted EPS declined by 10% y/y to stand at Ksh 0.84.
Net cash generated from operating activities plunged by 28.9% y/y to stand at Ksh 40 Billion. Net Cash at H1 2023 kSH15.9 Billion -39.6% y/y.
Due to the plunge in net cash, net borrowings surged to Ksh39 Billion +91% y/y...thats almost Ksh 1 per share!
No interim dividend was declared
POSITIVES:
They finally launced and moved fast in Ethiopia there was a slight delay.
M-PESA value and number of transactions growing at 32% y/y.
Data revenues are back on an upward growth trajectory
NEGATIVES:
Drop in voice and messsaging revenues.
Slow down in M-PESA revenues.
Plunge in cash flows.
Surge in net borrowings.
VALUATIONS:
At the current price of Ksh 25.50, Safaricom trades on a trailing PE Ratio of 14.5, trailing dividend yield of 5.45% and a Price/EBITDA multiple of 6.7.
CONCLUSIONS:
Safaricom management is bullish on theyre Ethiopian subsidiary, they expect it to be the size of Safaricom Kenya in 12 years! Why would they not be? They have sunk in Ksh 70 Billion so far. I think Ethiopia will be a success but not without pains.
The conflict in the Tigray region is a reminder that there is still alot of nation building to be done. Then there is issue of FOREX shortages. You can make the money but you can not get it out. Ask MTN and Multichoice in Nigeria.
Enough of Ethiopia...Safaricom has lost pricing power in Kenya due to a harsh tax and regulatory environment. The recent cut in mobile termination rate (MTR) has already cost them Billions. There is also a push to regulate M-PESA under the Central Bank of Kenya (CBK). M-PESA under CBK will result in lower revenues due to increased regulatory compliance. Free M-PESA to bank and then bank to M-PESA transactions are already negatively impacting M-PESA average revenue per user.
Huge CAPEX in Ethiopia means Safaricom might need to cut dividends...They cant afford to pay Ksh 55 Billion in dividends at the current rate of Ksh 1.39 per share and fund new Ksh 19 Billion capex in Ethiopia from cash flows unless they borrow massively.
RECOMMENDATIONS:
At Ksh 25.50 per share, Safaricom trades on Price/EBITDA multiples of 6.7, the stock is fully valued. The macro economic and regulatory environment in Kenya has not changed, in fact its getting worse. If I was interested in Safaricom, I think would wait until FY2023 to see how how big EBITDA tumbles and if there is any cut in dividends before making a decision wheather to buy or sell.