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.