Our view: We expect SAFCOM's performance in FY 20/21 (1 April 2020 to 31 March 2021) to be affected by the coronavirus pandemic, but we also see the company as the biggest beneficiary of the Kenyan government's measures to prop up the economy. We envisage data and M-Pesa revenue (48% of Safaricom revenue) remaining robust, also supported by Safaricom's commitment to improving its technology offering (we recently wrote about its partnership with Amazon Web Services on cloud services).
We will revisit our estimates as we monitor economic performance through the coming quarter, and retain our Buy recommendation.
Safaricom held a pre-close-period conference call yesterday. Below, are the highlights:
Macreconomic update: Kenya's economic performance was reasonably robust for two-thirds of the financial year, with the remaining period showing a slowdown. Inflation had been stable in the 5-6% range, but started peaking later in the year due to pressure on food inflation, which has since doubled.
Regulatory environment: Things have been quiet on the regulatory front, but the recommendations made by the ICT committee still stand – studies are ongoing on mobile termination rates and the cost of mobile money transactions.
Betting: The betting industry has significantly slowed, with minimal signs of improvement in the near term. Betting used to be 8% of M-Pesa revenue, this has now slowed to 4%. Management expect gaming revenue to remain under pressure.
Airtel and Telkom merger: The merger received approval from Competition Authority, but still awaits approval from the Communications Authority. The merger may now take longer than expected to happen. Safaricom management reiterate that they do not oppose the merger, subject to outstanding interconnection payments due to them being paid and assurances about the equitable distribution of spectrum being made.
Company performance: Due to the economic slowdown, M-Pesa's revenue growth rate declined qoq in Q4 19/20. Although levels of customer growth remained the same, transaction values slowed. Brand scores have improved since Safaricom launched its no expiry data bundles. The 4G strategy is working and mobile data revenue is recovering to the point of offsetting M-Pesa's weakness in Q4 19/20. Safaricom will still deliver on its FY 19/20 guidance. 15% of mobile data customers are on 4G and 13-15mn smartphones are on the network. An acceleration strategy is in place to increase 4G usage, particularly through access to handsets. Management will provide more details after publishing the FY 19/20 results.
COVID-19 update: Retail stores remain open, with safety measures for staff in place. An increase in data usage has been noted. Peak usage time has moved from 6pm to midday. The acting CEO has mentioned that, in developed countries, data usage volumes have increased by 20-25% due to social distancing, which could be replicated in Kenya. Management cut prices by 50% for fibre to the home packages, which represent 40% of fixed data revenue. There may also be upside to airtime recharges via M-Pesa, which are at 60% currently.
M-Pesa after the reduction of transaction charges: The weighted average M-Pesa transaction value per customer is KES1,500 (which incurs a 1.6% of value chargeable on transfers). Safaricom is expecting the decline in transaction charges along with increased usage of electronic payments to drive volumes onto the M-Pesa platform. Although the commitment to cut transaction charges for M-Pesa was for 90 days, Safaricom will re-evaluate the impact of this strategy after a 30-day period. Management will be monitoring the system for arbitrage on the KES1,000 transaction band (customers making multiple KES1,000 transactions to avoid incurring charges).
M-Pesa platform downtime: The recent M-Pesa downtime has been largely self-inflicted, related to hardware-update failures. No software issues have been experienced. Safaricom is in the process of moving the M-Pesa platform from the IT to the financial services department.
Ethiopia: Safaricom is pursuing a licence acquisition in Ethiopia through a consortium of Vodafone, Vodacom and external partners with development finance capabilities. The institution of the consortium is yet to be finalised. Licence decisions have been pushed towards the end of 2020 (at the earliest). Management reiterate that the acquisition structure has been set up so as not to pose a risk to the current business.
Management changes: Peter Ndegwa, the new CEO, starts in the first week of April. Michael Joseph, the founding CEO, will offer guidance during the transition period.