Executive Summary
We have updated our valuation for Safaricom with the fair value estimate for the GSM business coming in at KES 14.35 (down from KES 15.16 in FY24) while that of the financial services business comes in at KES 22.03 (up from KES 17.99 in FY24). Since surpassing the telecommunications business in 2019, the financial services division has continued to do the heavy lifting, now contributing 60.6% of our total valuation. We started valuing the two businesses separately in 2014. Combined, the fair value estimate for Safaricom Group is KES 36.38, representing a BUY recommendation with 82.8% upside potential from the Price: KES 19.90 current price levels.
Outlook
Kenya
We maintain the view that maturity in Voice and SMS will show in the medium term, and that customer-focused price propositions (though commendable) may not be able to sustain revenue growth in the long run – given the shift of consumer trends to over-the-top technologies (like WhatsApp) and the deepening of smartphone penetration in Kenya. While we expect data revenues to augment as smartphone penetration deepens, a potential disruption from satellite internet players is a key medium-term risk. For the financial division, license acquisition into the broader financial services segment may be the next growth frontier as the mobile money ecosystem matures – although the current multi-tenant structure seems to serve the firm well.
Ethopia
We see significant opportunities for mobile data growth, given that a bulk of the population is offline. The low smartphone penetration gives Safaricom a unique opportunity to deliver low-cost devices through EADAK (25% stake) and other providers. On voice, we opine revenue growth as the telco gains critical mass. Further, the downward revision of MTR rates in Ethiopia might see more affordable pricing by the subsidiary for voice services, driving usage and lowering costs that the company would have otherwise absorbed to remain competitive. We are hopeful about the long-term prospects of M-Pesa in Ethiopia, which we believe may gain traction as it expands to offer financial services products like overdraft facility.
Consilient Viewpoint
There is a compelling case for telcos to partner with satellite network operators (like SpaceX, OneWeb, Telesat, and Amazon’s Kuiper). First, such partnerships will aid in coverage expansion (with satellites acting as base stations in space) to rural areas that have low population density and tend to have highly unfavorable network economics. Secondly, better coverage may considerably reduce churn, thus boosting subscriber spend within the network. Thirdly, as mobile and IoT device technology advances, direct compatibility of devices with satellite internet will be ubiquitous over time, which may see satellite operators competing directly with telcos at a retail level, unless partnerships that will have telcos owning customer relations and satellite operators receiving a fee for connectivity take root earlier. We highlight the risk around policy changes and their potential impact on the reversal of M-Pesa transactions to cash, more so for merchants, as a key concern. Recent trends suggest that it is reasonable to expect policy changes (on personal data information for integration into the electronic tax management system) at some point as the government consolidates its efforts to ramp up revenue collections.
