Analysts at SBG Securities have issued a buy recommendation on listed telecommunications firm Safaricom Plc [NSE:SCOM] at the current price levels of Kes 33.00. SBG becomes the first investment bank in the country to issue a recommendation on the stock this year. Under all factors, Safaricom has been perceived to be over-valued with a book value of Kes. 23.50, however, investors are still willing to own a chunk of the most successful company in East Africa at whatever cost.
Safaricom’s share price has risen 15% over the past three months driven by news of its possible entry into Ethiopia and better-than-expected 1H20 results (2% above Bloomberg consensus estimates; in line with SBGS estimates). Looking forward, we expect stronger growth in 2H20e on account of lapping a challenging 2H19 when excise on telco products was increased from 10% to 15% (from 0% to 15% for fixed data) and excise on M-PESA was increased from 10% to 12%. Safaricom also made a provision in FY19 due to confusion over the effective date of the higher taxes. We expect EPS to grow 18% in FY20e, mostly due to a 7% rise in service revenue (was +5% in 1H20) and an improvement in the EBIT margin to 39.2% (was 38.8% in 1H20).
We expect service revenue to grow at a three-year CAGR of 7% driven by MPESA (three-year CAGR of 13%), mobile data (three-year CAGR of 14%) and fixed data (three-year CAGR of 13%): In our opinion, the growth in M-PESA and mobile data revenue will mostly be because of higher ARPU from increased usage while the growth in fixed data is likely to be as a result of more active subscribers. In FY20e, we expect service revenue to grow 7% due to a 16% rise in M-PESA revenues, a 13% increase in mobile data and 19% growth in fixed data.
Safaricom Plc is currently trading at a 12-month rolling forward P/E of 15.9x, 18% below its 5-year average P/E of 19.3x. Analysts at SBG expect service revenue to rise by 7% in FY20e, largely driven by growth in M-PESA (+16%), mobile data (+13%) and fixed data (+19%) revenues. The slight improvement from the current run-rate of 5% (reported in 1H20) is likely to be due to stronger y/y growth in 2H20e from lapping 2H19 when the government increased excise on mobile products. Beyond FY20e, and estimate that service revenue growth could hold at 7% in FY21e before slowing to 6% in FY22e.
At the same time, analysts at SBG believe that revenue from voice will drop by 1% and at a three-year Compound annual growth rate of -1% due to lower effective call rates. We see call rates declining further in 2H20e (declined by 7% in 1H20) due to the 50% call bonus service that was introduced in October 2019.
The analysts at the firm belive that Safaricom’s share price will shoot up to Kes 37.00 on hopes of the company getting licences to operate in Ethiopia, this will widen the scope of mobile money and expand revenue in the highly untapped Ethiopian economy.
