Safaricom released a great set of FY 20 results yesterday, albeit within our expectations.
FY 21 guidance was delayed to Q2 (July to September 2020) due to the uncertainties surrounding the extension of isolation and pricing measures implemented to deal with COVID-19.
We retain our Buy recommendation on the stock as we monitor the government's response to Covid-19 in the period to June.
In summary:
EPS grew 18% yoy to KES1.84, boosted by a one off KES3.3bn gain arising from the acquisition of the M-Pesa brand from Vodafone. Headline EPS grew 14% yoy to KES1.78, compared with our KES1.77 expectation. Safaricom declared a DPS of KES1.40, bringing payout ratio to 76%.
Total subscribers grew by 12% to 35.61mn, with one-month active subscribers up by 10% yoy to 28.63mn.
Revenue grew 5% to KES263bn, just off our KES262bn estimate. The key deviation from our estimates was in M-Pesa and fixed data, as seen in Table 1.
| FY 20f | FY 20a | |
|---|---|---|
| Voice revenue growth | -1.1% | -1.4% |
| MPESA revenue growth | 19.9% | 12.6% |
| SMS revenue growth | -10.3% | -12.4% |
| Mobile data revenue growth | 10.7% | 12.2% |
| Fixed data revenue growth | 21.4% | 10.7% |
Looking at half-year like-for-like performance, we note a deceleration in M-Pesa and fixed data revenue growth, and an acceleration in mobile data growth (Table 2).
| H1 20 yoy growth | H2 20 yoy growth | FY 20 yoy growth | |
|---|---|---|---|
| Voice | -1.4% | -1.4% | -1.4% |
| MPESA | 18.2% | 7.6% | 12.6% |
| SMS | -11.1% | -13.6% | -12.3% |
| Mobile data | 4.1% | 21.0% | 12.1% |
| Fixed data | 18.5% | 3.8% | 10.7% |
Voice and SMS weakness to persist in the medium term
Voice and SMS revenue performance was impacted by mobile data cannibalisation as customers opt to use WhatsApp. This dynamic will likely persist in the medium term. Voice traffic continues to slow in the face of Covid-19 and we thus expect single-digit declines in voice revenues to continue into FY 21.
M-Pesa to be impacted by sustained arbitrage on zero-rated transactions
M-Pesa revenue slowed in the second half, attributable to weak economic activity in Q4 20 (January-March 2020) and a sustained decline in betting revenues, which fell by 33% yoy over FY 20. Underlying M-Pesa growth, excluding betting, was 17% yoy. Safaricom has said that this downward trend in betting revenue will bottom out after FY 21.
Revenue growth has been driven by person-to-person (P2P) transfers and new business, which is supported by strong growth in Fuliza (M-Pesa overdraft product) and business payments. Fuliza is now 3.6% of M-Pesa revenue (KES3bn), following its debut in January 2019. Withdrawal revenue is likely to continue to slowdown as business payments increase. This will have a long-term positive impact on M-Pesa's profitability, with the service's EBITDA margin estimated at 52% in FY 20, up from 45% in FY 19.
Safaricom has reported a shift in customer usage in the face of Covid-19 isolation measures, with customer balances in M-Pesa accounts rising by 28%. Although P2P transaction volumes have increased since the reduction of transaction fees, the impact of arbitrage (customers doing multiple KES1,000 transactions to evade transaction fees) has offset these benefits.
Safaricom has lobbied the Central Bank of Kenya to limit zero-rated transactions to five per day, but this is yet to happen. The impact of zero-rated transactions from 16 March to 30 June is a KES5.5bn drop in M-Pesa revenue, with KES650mn of this already factored into FY 20 performance.
Uncertainty remains regarding the extension of the reduction in transaction charges after June 2020, dependent on how long isolation measures continue. If the government pushes for another extension, Safaricom will lobby for less stringent measures, including limiting zero-rated transaction bands to KES500, as well as limiting the arbitrage on transactions.
M-Pesa brand acquisition update: There was a one-off impact of KES3.3bn recorded in FY 20 related to the excess of the market value over the purchase price. The future impact on income statement is not expected to be as significant. The joint venture will be run independently. The interim CEO is the Head of Financial Services, and the search for a CEO is underway. The joint venture will have a board comprising two members from Safaricom and two from Vodacom. The Chairman will be selected in rotation.
Data upside in FY 21 from Covid-19 measures, but could be offset by shrinking wallets
Mobile data revenue rebounded in H2 20 due to the success of the no-expiry data bundles launched in late October 2019. These bundles now comprise 40% of data revenue. The restructuring of mobile data bundles led to a 21% yoy drop in average rate per MB in H2 20, which was offset by a 43% increase in data usage per customer to 1.2GB.
4G devices also registered an 84% growth to 6.1mn, which represents 28% of the active mobile data customer base. Safaricom is piloting device financing for 4G-enabled smartphones, where customers will be able to pay as little as KES20 per day.
There has been a registered increase in mobile data traffic, with the run rate 15-20% better amid Covid-19 measures. However, the impact of the strain on consumer wallets could mute the revenue impact.
Fixed data revenue slowed in H2 due to the expiry of Safaricom's contract with the government to run its security system. Underlying growth excluding this was 17% yoy. 60% of fixed data performance is driven by fibre to the home connections, and this will continue in FY 21 as customers work from home. Safaricom has also prioritised increasing its penetration in the fibre-to-building segment, but the outcome of this strategy will only be visible when isolation measures are lifted.
Sustainable cost management solidifies EBITDA expansion
EBITDA grew 11% yoy to KES138bn. Aside from the positive benefits of IFRS 16 (KES3.1bn), the key metrics that contributed to this include: a 4% drop in network operating costs, a 23% drop in sales and advertising costs; and a drop in M-Pesa commissions as a proportion of revenue from 30% in FY 19 to 28% in FY 20.
Digitisation has been a major factor in realising these efficiencies, from using software to monitor energy consumption to pushing more customer care calls to Zuri, Safaricom's chatbot. In addition, the slowdown in withdrawals and increased business payments has reduced agency commissions for M-Pesa.
Safaricom deems these efficiencies to be sustainable, giving room for EBITDA growth. However, management still continue to caution that the benefits could be reinvested to improve customer satisfaction.
Depreciation and amortisation benefited from a one-off gain of KES2.3bn owing to the retrospective revision of the useful life of network infrastructure.
Capex declined 3% yoy to KES36bn, with capex intensity dropping from 15% in FY 19 to 14% in FY 20. This was achieved through bargains arising from contract negotiations with vendors. Capex is expected to be maintained at KES36bn-40bn in the medium term. Although there may be some logistical issues arising from Covid-19, Safaricom reckons that its significant network coverage (77% 4G and 94% 3G) will tide the company over.
Cash flow generation remained strong, with 11% yoy growth in free cash flow to KES70bn and a 34% yoy increase in cash equivalents to KES27bn.
Ethiopia update: The bidding process for licences will likely be a hybrid of a beauty contest and an auction. Spectrum licences will be for a 15-year period. There is a possibility that the licence awards may be pushed to calendar year 2021. Safaricom will still bid for a traditional telco licence, but see an opportunity for the telco to lobby for regulations to allow telcos to operate mobile payment/transfer services in the future.