Equity Analysis /
Kenya

Safaricom: Fundamentals remain strong amid recent sell-off; Hold

    Tracy Kivunyu
    Tracy Kivunyu

    Equity Research Analyst, Telecoms

    Follow
    Tellimer Research
    24 September 2018
    Published byTellimer Research

    We upgrade our recommendation to Hold from Sell on Safaricom due to the recent sell-off, which we think is unjustified, given that fundamentals remain strong. Safaricom is down by 27% from the April high of KES33 and by 14% in the past month, which we believe has been driven by the government’s recent move to increase mobile money excise. We note that the EM and FM selloff could have been a trigger, with Figure 1 indicating on a technical basis that there could be further downside to the share price. However, fundamentals remain robust, even under a worst-case scenario for mobile money excise. Moreover, recent consensus estimates yield an average FY 19 EPS of KES1.48, implying forward PE of 16.2x, which is at a 17% discount to five-year historical average PE; we thus maintain our target price, pending an update to our FY 19 forecasts.

    Our worst-case M-Pesa excise tax scenario analysis gives 1.5% downside to valuation. The government announced that excise on mobile money transfers will be increased to 12% from 10% for cellular service providers, and that it would increase excise on mobile money transfers by banks, money transfer agencies and other financial institutions to 20%. A lack of clarity in the finance bill has led to reports that telcos will pay 20% excise on mobile money, which we believe is incorrect. Although we remain neutral with a 12% excise tax, we would be concerned about a 20% excise tax as we believe that Safaricom could consequently be hit by a slowdown in person-to-person (P2P) transactions (transfers, deposits and withdrawals), which were 74% of M-Pesa revenue in FY 18. We, therefore, cut our three-year M-Pesa ARPU CAGR ending FY 22 to 5% from 8%, and note a 5% decline in our M-Pesa valuation and a 1.5% decline in our SOTP valuation. However, we would need clarification from management on the actual excise tax to implement such a cut in our forecasts.